Earnings Transcript for 6501.T - Q4 Fiscal Year 2022

Unknown Executive: [Interpreted]

The presentation meeting by Hitachi Limited. On the consolidated financial results for the year ended March 31, 2023, and the progress of the midterm management plan 2024. :

Ladies and gentlemen, thank you very much for taking the time out of your busy schedule to attend this meeting. :

First of all, CFO Kawamura, will explain the financial results. And then after that, President Keiji Kojima will make a presentation on the progress of the midterm management plan 2024 Which will be followed by Q&A session. :

As for the presentation materials, they are available from our website, IR side of Hitachi Ltd as well as news with the slide. Please check these website for the materials. :

Now to present today's speakers. Keiji Kojima, President and CEO of Hitachi Ltd.; Yoshihiko Kawamura, Executive Vice President and Executive Officer, CFO. Tomomi Kato, VP, Executive Officer and Deputy CFO. :

So these are the 3 speakers who will be presenting today. And first of all, CFO, Kawamura will give you the outline of the consolidated financial results. And please wait a little while to prepare the presentation material. :

Yes, the floor is you is Mr. Kawamura. :

Yoshihiko Kawamura: My name is Kawamura, the CFO of Hitachi Ltd.. Thank you very much for taking time out of your busy schedules to join us. We appreciate the large turnout.

For the first 20 minutes, I would like to report on the consolidated financial results for fiscal year 2022 and provide a forecast for FY 2023. If you could please look at Page one of the material, you will find the content of today's presentation. :

First, I would like to deliver the key messages of the financial results, FY 2022 results. Secondly, so the financial performance for the year that has ended. And then forecast for this fiscal year, fiscal year 2023, that will be the order. :

Now if you could proceed to Page 3, there are 4 key points, key messages, a point number one. FY 2022 announced on a consolidated basis. Our total revenues was JPY 10,881.1 billion year-on-year 6% increase. And our most important KPI, adjusted EBITDA was JPY 884.6 billion, up JPY 29.2 billion year-on-year. :

And equally important, our core free cash flow was JPY 416.4 billion, up by JPY 126.3 billion year-on-year. All of these targets were met. As a result, net income came to JPY 649.1 billion, up by JPY 65.6 billion year-on-year. :

So JPY 649 billion. Our announced target was JPY 630 billion. So net income overachieved the target that we had. :

As stated below, fourth quarter saw an increase in revenue and income. And on Page 19, there are details, please look at them later. :

Number two, our portfolio reforms and transformation is progressing quite successfully as it's written here. Sequential share sales of Hitachi Construction Machinery,has been completed. It's down to 25%. And so it's fully deconsolidated. Hitachi Metal and Hitachi Transport System, our stake is 0 right now for these 2 entities. So there are completely independent of Hitachi. :

And regarding Hitachi Astemo, we made an announcement about Astemo in March. Our stake is to be down to 40% and Honda and JIC will increase their stakes in Hitachi Astemo newly joining. So because of our take of 40%, it will be deconsolidated. It will be an equity method affiliate in September 2023. So portfolio transformation is progressing well. :

Number three, what to do with our shareholder returns under those circumstances. On an annual basis, our dividend payout is JPY 145 million. Interim dividend was JPY 70 per share and year-end dividend is planned to be JPY 75. :

And after the results are audited by the auditors, AGM held in May will determine this officially. But at this moment, our year-end dividend planned is JPY 75.:

And share buyback for FY 2022, we connected JPY 200 billion buyback. For FY '23, we're considering doing JPY 100 billion, which was resolved by today's VOD. So that is the shareholder return we have in plan. :

And number four. So what is the full year forecast for FY 2023. The 3 sectors will be referred to as consolidated businesses, inclusive of Astemo. We have deconsolidated businesses as opposed to consolidated businesses. So we use this term consolidated businesses. :

Forecast revenue is JPY 7,840 billion, a 3% increase year-on-year. Adjusted EBITDA planned JPY 800 billion, up by JPY 75.1 billion year-on-year. Net income JPY 496.0 billion, Y-o-Y down JPY 145.7 billion. This is going to be transient. We are transforming portfolio. So net income will see a decline to JPY 496 billion. But this is not necessarily relevant to the earnings that we have as part of our BAU. That was the outline. :

If you could please look at Page 5, I would like to provide you with the details. This is a review of business environment on Page 5. :

As is stated, in the upper half, a semiconductor shortage, in particular, automotive industry is continuing an impact ensues for Astemo and electricity rate as well as part price -- material prices are also continuing to be high. so semiconductor Shortage, sorry, material prices, transportation costs, so in electricity price. Ukraine and Russia was also plotted on the horizontal axis before, but after a year, we have been able to have quite a bit of control. There's very little financial impact from the world. And so we have excluded that. :

Now semiconductor shortage at the bottom, you see that Hitachi Astemo is seeing a major impact we're expecting recovery, but because not much investment goes into semiconductors for automotive industries, so supply and demand continues to be tight. And so in material prices, transportation cost is impacting Hitachi Astemo especially wire harness, electrical steel sheet as well as electricity wires, copper and so forth. The cost is rising. Procurement costs as well. And electricity price increase is impacting our plants and factories especially a business on Hitachi Astemo. :

Now green energy and mobility in the middle of the table, in the power grid business, electrical steel sheet supply continues to be tight, so the impact from that is severe. That is part of the general business environment. :

So if you could please go to Page 6. The numbers I gave you above front are broken down here. Please look at the captions. The 3 sectors. This is a review for FY 2022. So we do not use consolidated versus deconsolidated. We still use the 2 and 3 sectors. So consolidated results Hitachi Astemo and listed subsidiaries as we have done conventionally. :

Now a JPY 108,811 billion revenue. Adjusted EBITDA, JPY 884.6 billion. Its ratio, 8.1%. Net income JPY 649 billion (sic) [ JPY 6,491 billion ]; EPS JPY 684; core cash flow, JPY 416.4 (sic) [ JPY 4,164 ]; ROIC, 7.6%. All targets are met. :

Please have a look at the 3 factors to the right. Third from the top. Adjusted EBITDA ratio. On a consolidated basis, it was 8.1%, but 3 sectors, it's 9.5% and below net income, JPY 641.7 billion (sic) [ JPY 6417 billion ] for 3 sectors. EPS, JPY 676 up by JPY 134 per share. :

Now to the right, please have a look at Astemo business. Revenue at the very top, JPY 1,920 billion (sic) [ JPY 19,200 billion ]; adjusted EBITDA JPY 73.4 billion (sic) [ JPY 734 billion ], both revenue as well as income increased. Last fiscal year, Astemo was suffering under a very severe environment, so revenue as well as profit both increased for FY 2022, but net income is still negative. As is in the tax, there were one-off losses. So risk sharing pension plan was introduced, that was a one-off loss. Factor an impairment occurred. So impairment occurred -- so impairment loss was also included. :

As a result, Astemo's net income was negative. Net loss was posted. :

On the far right, listed subsidiaries, Hitachi Construction Machinery and Hitachi Metal. :

Page 7. Now the numbers on Page 6 are further broken down by sector. Digital systems and services, green energy and mobility, connected industries at the very bottom. :

First at the top, Digital Systems & Services. FY 2022 revenue, JPY 2,389 billion (sic) [ JPY 23,890 billion ] adjusted EBITDA, JPY 293.7 billion (sic) [ JPY 2,937 billion ]. In terms of the ratio, 12.3%. So very high ratio was posted. :

And on the right year-on-year, both revenue as well as the profit increase for Digital Systems & Services. In particular, GlobalLogic did well. Please have a look at this column, it's going through high growth. So adjusted EBITDA of JPY 45.2 billion (sic) [ JPY 452 billion ]. Its ratio, 20.3% You can see that adjusted EBITDA as well as revenue increasing for GlobalLogic as well. :

In the middle Green Energy & Mobility, our revenue, [ JPY 24,925 billion ]. And adjusted EBITDA, JPY 132.7 billion (sic) [ JPY 1,327 billion ], 40.4% ratio, revenue and profit grew. :

Hitachi Energy, in particular, revenue of JPY 1.413 trillion (sic) [ JPY 14,139 billion ]; adjusted EBITDA, JPY 101 billion (sic) [ JPY 1,010 billion ]; 35.7% revenue, 31% increase, both revenue and increased [indiscernible]. :

Connective Industries, revenue, JPY 2.975 trillion, adjusted EBITDA, JPY 312 billion (sic) [ JPY 3,121 billion ]. So both revenue and profit grew for this sector as well. :

Building systems, Measurement & analysis systems. Hitachi High-Tech, they account for a large share within the connected industries. :

So for Building Systems, revenue, JPY 891 billion (sic) [ JPY 8,910 billion ]; adjusted EBITDA, JPY 83.6 billion (sic) [ JPY 836 billion ]; revenue up 8%; adjusted EBITDA ratio, JPY 13.8 billion (sic) [ 13.8% ]. :

Measurement & Analysis Systems. Hitachi High-Tech is JPY 674.2 (sic) [ JPY 6,742 billion ] and 92.6 (sic) [ JPY 926 billion ], 17% up ratio of 32.8%. :

And Hitachi Astemo because of semiconductor shortage, JPY 1,9200 billion of revenue; JPY 73.4 billion (sic) [ JPY 734 billion ] of adjusted EBITDA. It's tough, but revenue increased by 20%. EBITDA ratio, 11.1%, and the consolidated numbers are at the verry bottom. :

Please have a look at Page 8. So FY '21 to FY '22, how it has evolved. What is the cash trajectory between FY '21 to FY '22. At the bottom, revenue rather at the top -- revenue at the bottom -- adjusted EBITDA, take a look at revenues. :

On the far left, FY '21, it started off with a revenue of JPY 10.264 trillion (sic) [ JPY 102,646 billion ] and GlobalLogic acquisition impact associated Hitachi Construction Machinery and Hitachi Metal divestiture impact came in, and there's a ForEx impact, quite large, which was around [ JPY 800 billion ] , lifting the number and organic growth was also pursued. :

And so on the far right, FY 2022, revenue was JPY 10.881 trillion (sic) [ JPY 108,811 billion ]. :

And now take a look at the bottom, adjusted EBITDA. On the far left, FY '21, starting with JPY 855.3 billion (sic) [ JPY 8,553 billion ] with the GlobalLogic acquisition impact. HCM and Hitachi Metals were divested and a ForEx impact of plus [ JPY 73 billion ] . And there were changes in the business scale with positive JPY 7.1 billion (sic) [ JPY 71 billion ] , resulting in JPY 884.6 billion (sic) [ JPY 8,846 billion ] in FY 2022. :

Please have a look at Page 9. So adjusted EBITDA to net income, what is the trajectory. So at the top, FY '21 at the bottom, FY 2022, have a look at FY '21. :

On the far left, adjusted EBITDA, JPY 855.3 billion (sic) [ JPY 8,553 billion ]. That was the starting point. :

With acquisition, goodwill was amortized down JPY 76.6 (sic) [ JPY 766 billion ] billion. And business reorganization, JPY 102.1 billion (sic) [ JPY 1,021 billion ]. On the right, there are breakdowns and structural reform expenses down by JPY 43.8 billion (sic) [ JPY 438 billion ]. There's interest costs, extraordinary gains and losses and income tax is JPY 168.4 billion (sic) [ JPY 1,684 billion ], which is normal and noncontrolling interest, JPY 87.3 billion (sic) [ JPY 873 billion ] negative. :

And then the result was JPY 583.4 million (sic) [ JPY 5,834 billion ]. At the bottom, FY '20, 2022. So adjusted EBITDA of JPY 884.6 billion (sic) [ JPY 8,846 billion ]. There was acquisition-related amortization and net gain on business reorganization. So HCM and Hitachi Metals divestiture as well as Hitachi Transport sales versus came in. :

Actual reform expenses, JPY 139.2 billion (sic) [ JPY 1,392 billion ] as a cost, interest cost of JPY 25.6 billion (sic) [ JPY 256 billion ]. Others, JPY 113.6 billion (sic) [ JPY 1,136 billion ]. Income tax is JPY 106.1 billion (sic) [ JPY 1,161 billion ]. The rate was 14%. Usually, it's 25%, but a reduction by 10 percentage points because of utilization of DTA and deemed dividend, which was not taxed and so tax efficiency rose and noncontrolling interest, net income. On the far right, JPY 649.1 billion (sic) [ JPY 6,491 billion ]. :

Please go to Page 10. So on the single sheet, we show the financial position and cash flow. In the gray, in the middle, please take a look at that column shows as of the end of March 2023. :

So as of March, the Astemo business is fully incorporated. And the asset total is JPY 12,501.4 billion (sic) [ JPY 125,014 billion ]. That is for total assets. :

What is noteworthy is all the way down to the interest-bearing debt and at the end of 2022. :

Of the JPY 2,213.3 billion (sic) [ JPY 22,133 billion ] so compared to the previous year-end, more than [ JPY 900 billion ] , this amount has been reduced. So [indiscernible] borrowed for the processing of the Astemo. And the repayment has already been over. So that has been the negative impact to push up this number. :

And looking at the cash conversion cycle. So 58.1 days. So they remade recovery improvement by 28 days. The Hitachi Construction Machinery had some impact on these days. But now it is not included. So that was positive. :

And also the total Hitachi Limited shareholders' equity ratio is up. We are building up the equity up to the ratio has come up to 39.5%. The ratio is [ 0.58x ] at the end of last year. However, well, now we have come down to the list and the 0.5. Now it is [ 0.41x ] and cash flow, all the cash flow numbers are improving. :

The operating cash flow, JPY 827 million (sic) [ JPY 8,270 billion ], which is an improvement of JPY 97.1 billion (sic) [ JPY 971 billion ]. And the cash flow from investing activities also improved significantly. :

So the far right on JPY 199.9 billion (sic) [ JPY 11,999 billion ] improvement year-on-year. And free cash flow also improved JPY 978.1 billion (sic) [ JPY 9,781 billion ]. :

So core cash -- free cash flow, which is the most important and one of the most important KPI is also improving JPY 416.4 billion (sic) [ JPY 4,164 billion ]. So the so much and so far, I talked about the results of the fiscal '22. :

Now I would like to talk about the full year forecast of 2023. And please take a look at Page 12, which is the highlight of our full year forecast of 2023. At the top, please note some bullet points. So the addition some of the assumptions for this full year and the forecast. :

Well, because of the competitive low conservation, it has been delayed, which is about the acquisition of Thales' Railway signal-related to business. We are expecting this to be completed by September. So this will be incorporated in the second half of the year. :

Astemo is different. So in September, this company will become the equity method affiliate in September this year. So you see on the left-hand side, you see total the column ending in the middle, continuing consolidated business. So we do not use the 3 success businesses, but we changed the naming of the businesses. :

So in the middle, please take a look at the medium column. Continuing consolidated businesses, revenue, JPY 7.840 trillion (sic) [ JPY 78,400 billion ], 3% increase here. :

And on the left-hand side, you see percentage in parenthesis. This is the number raising the impact of the foreign exchange, which is 4%. And adjusted EBITDA, JPY 800 billion (sic) [ JPY 800 billion ] increased by JPY 35 billion (sic) [ JPY 350 billion ]. And the adjusted EBITDA ratio, 9.5% on the left-hand side. But we are looking at the continuing consolidated business, it will come up back to double-digit, 10.2%. So this ratio has been improving. :

And the net income, JPY 496 billion (sic) [ JPY 4,960 billion ] ; EPS, JPY 529. And looking at the [indiscernible] side, the nonconsolidated, it is [ JPY 45 billion and JPY 4.5 ] . So the -- altogether, [ JPY 500 ] beyond. So that is the target which we would like to announce. :

We're looking at the consolidated -- the column. Core free cash flow, JPY 310 billion (sic) [ JPY 3,100 billion ]; ROIC, 7.5%. So these are the other targets that we have set. :

Exchange rate is moving quite rapidly and that is impactful. On the right-hand side at the bottom, you see assumption. JPY 130 to the dollar is the assumption for the dollar. :

And the ForEx sensitivity by the change of JPY 1. The positive and negative are the same, but the revenue impact will be JPY 13.5 billion. Adjusted EBITDA impact is JPY 1.5 billion. This is the sensitivity. :

Please go to Page 13. So as I mentioned earlier, this is the break -- broken down analysis by sector. :

First of all, at the top Digital System & services. Revenues JPY 2,450 billion (sic) [ JPY 24,500 billion ] adjusted EBITDA, JPY 308 billion (sic) [ JPY 3,080 billion ] , 12.6%, which is quite high. Y-on-Y, year-on-year basis, 3% increase for the revenue and the adjusted EBITDA increased by 14.2%. So both revenue and the profit increased. :

And then you see the breakdown by the businesses like front business, IT service and services platform. 9.8% for the servicing platform, which is not double digit. But we are making efforts in order to push this up to double digit, we are taking various improvement measures. :

Next section, Green Energy & Mobility JPY 2,580 billion (sic) [ JPY 25,800 billion ]. Adjusted EBITDA of JPY 173 billion (sic) [ JPY 1,730 billion ]. So year-on-year, the increase both in terms of revenue and the profit. So the JPY 2.5 trillion of revenue, that is the size of this business. And then you see breakdown by the company. Hitachi Energy, JPY 1,362.5 billion (sic) [ JPY 13,625 billion ] revenue and JPY 112.5 billion (sic) [ JPY 1,125 billion ] profit, 8.3%. :

So there was a risk of demand. And we are investing in the facility so that we'll be able to respond to the increasing demand. :

But we are somewhat slow in terms of the automating the production capability to respond to the demand. :

There was an increase of the adjusted EBITDA and the related cost, JPY 28.7 billion (sic) [ JPY 287 billion ]. So this is -- this includes IT and the acquisition-related costs for JPY 28.7 billion (sic) [ JPY 287 billion ] for these purposes. :

Below that Railway Systems, revenue, JPY 907.3 billion (sic) [ JPY 9,073 billion ] and the adjusted EBITDA, JPY 56.8 billion (sic) [ JPY 568 billlion ], 6.38% (sic) [ 6.3% ] increased by JPY 9.3 billion (sic) [ JPY 93 billion ] and increased by 23% for the revenue. :

Please go to Page 14. This is about the connected industries. Here, well, this section, reaches JPY 3 trillion (sic) [ JPY 30,000 billion ] revenue level and adjusted EBITDA, JPY 330 billion (sic) [ JPY 3,300 billion ] , 11%. And on a year-on-year basis, 1% for the revenue and JPY 17.8 billion (sic) [ JPY 178 billion ] increase for the adjusted EBITDA. :

So increasing revenue and profitability. :

So starting from Building, 10% that is the EBITDA ratio for Building; and 11.4% for GLS and 12% for Hitachi High-Tech and 11.6% for Industrial Digital; 11.1% for Water & environment and 10.9% for the Industrial Products. :

So in this sector, the EBITDA ratio is double digit. Looking at the building system, the revenue is down by 6%, it is because of the ongoing adjustment base of the Chinese real estate market. And High-Tech and Measurement & Analysis, minus 1%. It is because last year was very blooming year for the semiconductor production equipment, and this is because of the repercussion from last year. However, profit-wise, it is very solid. And please go to Page 15. :

These are about the affiliated companies. I would like to talk about the Astemo, which is at the top. This may include first quarter and second quarter only. So year-on-year will be 1/2. :

So 3.6% for the adjusted EBITDA. So the mainly software, but the business is quite tough due to the semiconductor situation. :

Now this page, Page 16 shows the trajectory of adjusted EBITDA and revenue. Revenue starting from '22 and far right 2023 forecast. Adjusted EBITDA and the comparison between fiscal '22 and the '23 forecast. The major difference between year '22 and '23 is the impact of exchange. Well, in the last year, '22, the exchange rate was positive. However, in 2023, the impact of the exchange rate will be negative for both the revenue and the EBITDA. :

Well, it was JPY 135 to the dollar. There was an assumption for last year. But this year, '23 is going to be JPY 130 to the dollar. :

Adjusted EBITDA, far right. In 2023 on the JPY 835 billion (sic) [ JPY 8,350 billion ]. And the next page, Page 17 shows the Lumada business. In the circle, you see percentage of the adjusted EBITDA. From this to right, you see fiscal '21, '22, '23, 12%, 14% and 15%. :

So the profit profitability is rising according to the plan. And the other revenue, [ JPY 2.1 trillion ], that is on our expectation. :

And on the right-hand side, the new Lumada business ratio is indicated. So out of the total business, here, how much Lumada business accounts for in the total. So on the left-hand side, the revenue in 2023, it's going to be 29% nearly 30%. Adjusted EBITDA-wise, far right, it will go up to nearly 40%. So certainly, the portion of Lumada business is expanding. And below that, you see the bar, which shows the different business compositions of Lumada. :

And then we have some of the appendix, and I'd like to give you a flash Page 19, the only focus is upon the fourth quarter number. :

And then Page 20, Far left gray shows the fourth quarter '22 and in the middle of fiscal '22 full year. So starting from revenues to adjusted, the operating income, EBITDA and the adjustment was made and then it goes down to EBIT, you see flow. And then the net income is [ JPY 649 billion ] . Far right is the 2023 forecast. And what I'd like you to see is in the middle of fiscal 2022 and others below adjusted EBITDA and the JPY 113.4 billion negative. It is because of the transition of the new pension system. :

Page 21 is the region on the revenue by market. And the new trends are emerging here. I'd like to call your attention to consolidated, the total year-on-year second from the bottom, how much percentage increase is seen in North America, 21%, this is the fast growth. :

Next to that is Europe, 18%. And as a result, at the bottom, you see ratio across these regions, Japan is lower than 40%. :

Next, North America, 17%. And China, 12% right now. So there are some changes and reshuffling of these regions. :

Next, on Page 22. This shows the orders results by business segment. '22, on the right-hand side, please take a look at the gray. On the Building Systems and the other is 16% to 12%, 8% or 20%. So you see increase. Green Energy & Mobility, the Nuclear Energy and the Energy are negative, but the Hitachi Energy and the Railway, 64% and 65%, respectively. So the order level is quite high for these businesses. :

On the right-hand side, connective industries, and the Smart Life and also Measurement & Analysis, these are negative, but all the other businesses are positive in terms of the order placement. :

This concludes my presentation. Thank you very much. :

Next, our President and CEO, Mr. Kojima will give progress on midterm management plan 2024. :

Kawamura-san thank you. So next, on midterm management plan appropriate Mr. Kojima will speak. We're going to switch the material. Over to you, Mr. Kojima. :

Keiji Kojima: So this is Kojima speaking. So I would like to explain the progress of midterm management plan 2024. The taming points I would like to convey to you today. Number one, in view our FY 2022 financial performance, I wish to once again explain how Hitachi positions its FY 2024 [indiscernible] management plan. Secondly, describe how we're looking to enhance Hitachi's enterprise value through our social innovation business. And thirdly, to describe the status of our sustainability management to support growth.

So let me explain this 3 points one by one. First, on the position of our FY 2024 midterm management plan. Following the management crisis in the wake of the global financial crisis, Hitachi made a decision to concentrate on the social innovation business and embark on a transformation of its business portfolio with the aim of becoming a global leader in the social innovation business. :

As a result, as of FY 2022, Hitachi actually no longer retained any less subsidiaries and also announced that Hitachi Astemo would be deconsolidated to be an independent company, targeting to achieve IPO. :

Now that Hitachi has completed a portfolio of transformation. For now, we will shift our management focus to sustainable profit growth. :

2024, therefore, marks an important training point for us to make a model shift from business portfolio transformation to organic growth and to accelerate efforts to enhance Hitachi's enterprise value under One Hitachi. :

Let me briefly review the track record of our business portfolio transformation efforts so far. To expand the social innovation business globally, since 2013, we have acquired necessary assets worth revenues of JPY 3.1 trillion. :

In parallel with that, we have also transferred or divested business assets worth revenue of JPY 5 trillion that we believed would grow even further if made independent from Hitachi. :

Two optimal partners that we have chosen. This has portfolio transformation drastically globalized Hitachi's assets. :

In Europe, in particular, assets were mainly acquired in green areas such as those for electricity and rail, whereas in the U.S., large asset increases occurred in digital, green and industrial domains. :

Going forward, we will be looking to drive our businesses organically, primarily utilizing our augmented assets in the United States. :

On this slide, I will briefly explain about the major acquisitions we have made, including Hitachi High-Tech, Hitachi Energy and GlobalLogic. :

After their integration and integration is complete for all 3 entities, all of these companies are operating as engine for Hitachi's global growth. Hitachi High-Tech as Kawamura-san earlier explained, achieved a record high profit in FY 2022, while Hitachi Energy is vastly increasing its order intake, helped by a tailwind from the GX market. :

GlobalLogic is maintaining high growth benefiting from the tailwind of the GX market, which is growing as well. We are increasing the investments into these 3 companies to further drive growth. :

With great progress made in FY '22 business portfolio transformation, large entities, including listed subsidiaries and Hitachi Astemo will be deconsolidated during the MMP 2024 period. :

to reflect the impact of the deconsolidation , we are updating the major KPIs for MMP 2024. More specifically, we will subtract the revenues, profits and cash flows of our listed subsidiaries and Hitachi Astemo from our actual and planned performance for FY '21 through '24 and add equity in earnings from these affiliates after deconsolidation. :

Of the major KPIs, those on revenue growth, profit margin ROIC, R-O-I-C and EPS will remain unchanged. Targets for these will kept. But core free cash flow and shareholder return will be revised, reflecting reduction in operating cash flow following deconsolidation and also cash inflow increased from asset sales. For these such changes, I will provide you with further details later. :

Next, I would like to discuss how our social innovation business will contribute to enhancing our enterprise value and its strategy. :

First, let me again explain Hitachi's Social Innovation business. Hitachi defines its social innovation business as a business that leverages Hitachi's IT, OT and products that a strength for Hitachi to solve social issues together with customers. The purpose of this business is through our data and technology to work with customers to build a sustainable society, supporting people's happiness and quality of life. :

We will seek to harness the 3 major trends of digital, green and connective that would dramatically change our society and industry. As drivers of transformation to expand our social innovation business in a broad range of areas. Lumada is a social innovation business, customer co-creation framework to drive further growth, leveraging digital technology. :

The basic part of the global growth strategy for our social innovation business is to utilize the customer footprint that we have obtained through large acquisitions. Leverage Hitachi's diverse capabilities and to expand Lumada business under One Hitachi. As I have already described, large-scale global M&As have brought about considerable additions to our human resources and customer footprints in different regions around the world. :

We will put them to full use so that we can provide together with our customers' solutions to high priority social challenges that each of these regions around the world faces. :

I will now explain where our Lumada business is at this moment, given that this is key to elevating our enterprise value through social innovation business. As the graph on the slide shows, expansion of Lumada business is the engine behind Hitachi's overall growth. :

On the back of the tailwind from the growth in the DX market, Lumada has been expanding successfully and is now accounting for a greater share of Hitachi's total revenue and profit. :

In FY 2024, Lumada is expected to account for 1/3 of Hitachi's total revenue and over 40% of the entire profit of Hitachi. Lumada business is also the driver for Hitachi's profit margins or profitability as well. Lumada's customer co-creation framework has generated a large number of use cases and solutions. When these use cases and solutions are increasingly reapplied and reused, that leads to higher profitability. :

Growth in digital engineering upstream with high profitability and managed services with high recurring rates are also contributing to lifting profit margins for Hitachi. :

As shown on the previous slide, increased the share of Lumada as a percentage of our total business is what is driving Hitachi's profitability overall. :

In the PDS restructuring phases, the bottom line was unstable due to significant onetime effects such as gains from asset sales and large losses from business exit. :

Going forward, the impact of onetime gains from large asset sales will decrease. :

On the other hand, unexpected risks such as pandemics and the geopolitical instability will continue to emerge. And we will strengthen risk management to minimize such onetime losses. :

On the slide, we listed some of the potential risk access, and we intend to minimize them. so that we will be able to move into the stable bottom line growth phase. This shows the capital allocation policies for our sustainable growth. While cash flow from asset sales will increase to JPY 1.1 trillion due to the sale of our portion of Hitachi Astemo shares. :

Core free cash flow will decrease to JPY 1.2 trillion due to the deconsolidation of Hitachi Astemo. So the total is expected to remain unchanged at JPY 2.3 trillion. Among the allocations, growth investments will be made with a focus on Digital Green and innovation, we will be implemented by strictly applying financial decision criteria. :

When there are attractive growth investment opportunities, we will flexibly utilize financial leverage using a net debt of EBITDA multiple of 1x to 2x as a guideline. :

And today, we announced that we will increase our dividend to JPY 75 per share and the repurchase JPY 100 billion of our own shares. And as for total amount of shareholder return, we intend to increase it from JPY 0.7 trillion, which is 50% of core free cash flow in our initial plan to JPY 0.8 million to JPY 0.9 trillion taking into consideration the guideline of 60% of net income. :

So I have explained about the top line growth, higher profitability and also bottom line stabilization and the cash generation described so far will lead to EPS and the CFPS growth in order to generate the higher shareholder return level. :

And as for the top line, we will capture the tailwind of DX and GX and achieved sales growth of 5% to 9% going forward. :

For higher profitability, we will achieve 12% or higher adjusted EBITDA margin by expanding Lumada business. :

We will also stabilize the bottom line with adjusted EBITDA to net income conversion rate of over 60%. :

Furthermore, by further enhancing cash generation, we will increase conversion from a net income to core free cash flow to over 80%. As a result, we aim to achieve EPS of over JPY 600 and core free cash flow per share of over JPY 500 in fiscal 2024. :

Next, I will explain Hitachi's progress regarding sustainability management that supports growth. First of all, I will describe the status of the capital strengthening of the human capital in the midterm management plan have set 3 important goals: acquiring and developing digital talent, promoting DEI and improving engagement. We are making steady progress in strengthening our digital human resources by utilizing global logic recruitment and development scheme. DEI is also evolving steadily. We're selling acquired through global M&A playing an active role. So we are making steady progress here.

And as for the importance of engagement as of fiscal 2022, there are 68 engagement score that was the target set, but we were able to achieve the targets set in the midterm management plan ahead of schedule. And the IT is now up to 68%. :

Going forward, we will aim for higher level and with One Hitachi in mind. :

Next, I will discuss progress on contributing to decarbonized society. Hitachi aims to be carbon neutral by fiscal 2030. We are making progress at the pace far exceeding the target set in the midterm management plan 2024 and expect to achieve a 64% reduction compared to 50% reduction target for 2024. We aim to contribute to the decarbonization not only within Hitachi Group, but also the carbonization of our customers as well through our energy steel pipe, energy conservation and electrification businesses. This is expected to exceed the target set in mid-term management plan 2024 of 100 million tons of CO2 emission reduction contribution per year. And we expect to reduce approximately 120 million tons of CO2 emission. :

We are also working actively to contribute to the circular economy. On the left hand side of this slide, those, you see some of the activities within Hitachi Group to promote secular economy, and we are making steady progress towards the goal. And we are also promoting various activities from the first table of contributing to society as a whole. We established the secular economy collaboration lab with AISC last October and we are promoting room for formation and the social implementation in collaboration with global research institutions. :

And for example, Hitachi GLS has the vacuum cleaner, for example. And also the compressor from Hitachi Global Air Power are just a few examples of our efforts on this slide, which contribute to solving the social issues and the through products and solutions in all of our businesses. :

Lastly, I'd like to talk a little bit about the situation regarding the strengthening of governance. The composition of our Board of Directors is rich in diversity. And we are constantly engaged in lively and diverse discussions on management reform. :

In particular, highly effective measures for monitoring the progress of the midterm management plan, the deliberation of investment and loan proposals and CEO succession plan are formulated and promoted based upon discussions among discussions with in the board -- among the board members. :

Last year, in recognition of these activities, we received the Grand Prize of the corporate governance of the Year 2022 Award from the Japan Association of Corporate Directors. And as announced the day before yesterday, we are also revising the executive compensation system linked to the enhancement of enterprise value. :

We will continue to strive to improve our corporate value by evolving our governance as a global company centered on our Board of Directors. This is going to be the last page of my presentation. today, I gave an overview of the progress of the EBITDA management plan 2024 under the theme of model change from the pathways of business portfolio reform to sustainable growth. :

And we are planning to organize a Hitachi Investor Day 2023 on the 13th of June and 4 Executive Vice President explain the businesses more in detail. :

So Green, Digital and Connective, so specifically, we will talk about them. We intend to show how each sector is expanding its business with One Hitachi using Lumada's customer co-creation framework. :

In their respective fields under the 3 transformational trends of Green, Digital and Connective. We look forward to actively discussing with you and investors at this forum, and we hope you will join us. :

This concludes my explanation of the progress of the medium-term management plan 2024. Thank you very much for your kind attention. :

Unknown Executive: Mr. Kojima, thank you very much. At this moment, we would like to start questions and answers. [Operator Instructions]

We will take questions first from the Japanese channel and then on to the English channel. We have members that are present institutional investors as well as analysts, we would like to take questions from all of you. :

So I'll let taking questions from those of you on the Japanese channel. Those of you with the questions. please pass the hand raised button. :

Unknown Analyst: I have 2 questions. For the over consolidated the business plan, I have a question regarding the revenue plan. So all 3 main segments, the increase in revenue plan seems to be low. So 3%, 4%, 1% increase in revenue for the 3 sectors, respectively. In the prior year, it was 11%, 12%, quite high. So planned revenue increase seems to be lower than what I expected. So what are the reasons that if you could share your thoughts as well as the background.

Overall, is demand slackening? Is that what is expected or Hitachi's room for growth or a room for share increases that are starting to be limited. What are the reasons? So what are the reasons? And why are you planning a smaller revenue increase for the 3 main sectors. :

Kojima talked about 5.5% to 7% growth for MMP. I think it was one of the slides, 5.7% -- 5% to 7% growth. Compared to that, revenue increase planned is rather low. :

Now in a 3-year plan, the concern is that the growth rate will start to taper over the 3-year span. But is that a relevant and correct thinking? So that's my first question. My second question is as follows. :

About Hitachi Energy, order intake is growing very rapidly. According to the revenue plan down 4%. That is what is planned. And Kojima earlier talked about the gap I believe. But if you could please elaborate on the details as to why revenue decrease is planned? And when do you think revenue will start picking up once again, given the order intake is growing. And together with that, PMI cost, JPY 28.7 billion was down before the new fiscal year. So why the PMI cost for Hitachi Energy is so high? What are the activities? And do such a large number required going forward. So with respect to Hitachi Energy, if you could please elaborate on that as well. :

Unknown Executive: So thank you for the questions. Kawamura will answer. Regarding MMP, Kojima Kusuma will respond. For detailed numbers, Kato will supplement.

Yoshihiko Kawamura: First, FY '23, our revenue increase that is planned seems to be slow. That was what was pointed out in the question. In terms of our earnings, given the portfolio composition, I don't think that our revenue earning capability has gone down. It's because of the external environment, I think we are being conservative in budgeting.

Well, share market is doing well, but real economy is still struggling. Well, ForEx, if we look at ForEx, I think today, a yen is a little cheaper at JPY 134 to the dollar. It's still uncertain. And BOJ monetary policy is considered to change, it's expected to change. So what will happen to the interest rate and global environment economy because of security issues is still unstable. :

So in the second half and onwards, our assumption is that there will be increased uncertainties. And it's not that the portfolio earnings capability is down. We are reflecting largely the macro economic environment that we are expecting and thus these numbers. :

With respect to Hitachi Energy, as I mentioned earlier, to be a little more specific, FY 2022 March end. Orders were around JPY 2.7 trillion. A year ago, JPY 1.7 trillion. So in just a span of one year, order buildup of JPY 1 trillion, which is amazing. :

As Kojima have said in the energy area, there's been tailwind. So the business is very robust. But actually, orders once received have to be manufactured because of the pandemic in the last 3 years, there has been employee furlough and CapEx has to shrink -- so compared to order intake growth, the manufacturing capacity development is somewhat delayed. :

So specifically, as of the end of September 2022, 2.7 trillion of orders. :

Unknown Analyst: In FY '23, what percent of the orders would be reflected?

Yoshihiko Kawamura: 50%, and that will be reflected in our revenue. A year ago, the rate was 55% to 57% because order is going so fast, manufacturing is not catching up, so down 5%. And in FY '25, somewhere around 30%, it will be down to 30%. There is a time lag between order intake and manufacturing. And so that is kicking in, in a major way. For Hitachi Energy, we are planning to increase CapEx. We have instructed CapEx increase. So once that is done, the reflection rate of 51% to profit and loss, the number in FY '23, that will start to go up. So year-on-year negative growth will be alleviated somewhat. PMI cost is very high, you pointed out. And certainly, on Page 13, JPY 28.7 billion is being planned. Actually, this is largely IT integration cost.

By the end of FY 2022, IT system migration from the old ABB system to a new system, that migration was supposed to be concluded, but there's been delays. So FY '23, it's still continuing. So this migration cost is pretty large. :

The majority is IT migration costs. And in the process of migration, ABB's old system has to be used and usage fees have to be paid to ABB that's because the TSA, transitional service agreement and fees must be paid. But according to our plan migration, we'll end in FY '23. So this cost will go down quite sharply thereafter. So that will be all for me if Kojima-san has additional comments. :

Keiji Kojima: Well, thank you very much for the questions. So 5% to 7% growth planned in the new MMP. As I said in my presentation, FY '21, JPY 6.7 trillion. That will be the number for the consolidated businesses. That FY 2022, this was a very low JPY 7.6 trillion, largely because of ForEx impact. So it was growing quite substantially.

So FY '24 MMP, in light of that, because FY '22 and the [ Q2 ] number was large, the overall planned number is somewhat lower. So FY '23 revenue target may appear very conservative. I agree. :

Unknown Executive: FY '23, how will the economy evolve?

Keiji Kojima: We cannot forecast However, evolve, we're being quite conservative as to the economic outlook. And with respect to such energy, if I may add, as Kawamura-san earlier said, from order backlog to revenue ratio is around 50%. And so FY '23 revenue is already covered by orders already taken.

So in that regard, we have been extremely conservative. But on the other hand, if we are to raise profitability, that's important. :

So low margin projects. We do not want to blindly go after low-margin projects. We would like to be very selective in choosing projects. :

Given the current business environment, we are able to choose projects rather than going after revenue line, we would like to make sure to raise profitability. That's what we would like to focus on. But as I said earlier, I think the revenue in nationality will be larger than this number. :

And with respect to PMI, as Kawamura-san explained, in order to raise productivity, we made a major shift in our IT systems and such new systems are being deployed in different countries, and there are several countries which are struggling and that is where the delay is. And we would like to completely conclude migration so that there will be no more costs incurred next fiscal year and onwards. So that's all for me. [indiscernible] no further comments about numbers now. :

Operator: Mr. [indiscernible] please unmute and please ask your questions.

Unknown Analyst: Yes. My name is Yasui. Can you hear me?

Keiji Kojima: Yes. Please go ahead.

Unknown Analyst: I have 3 questions to Mr. Kojima on Page 14. Well, the shareholder return ratio and amount is larger, but the value creation is not changed. So the idea behind the shareholder return has changed? That's my first question.

And second question, on Page 10, the growth area. So the North America is expected to grow -- it drives growth. But now in the midterm plan. Well, there are some areas that are doing quite well in the other areas that are not performing so well. Could you give us more details. :

Number 3 is about Astemo and the hondas holding has increased. And Hitachi portion or the holding will go down to 0 in the future. So please give us some more details about the future holding over Astemo. :

Keiji Kojima: Thank you very much. So the -- first of all, I would like to respond. First of all, shareholder return. The idea behind the shareholder return -- maybe I can say that we changed our idea about the shareholder returns. Well, this is also related to Hitachi Astemo. But so far, we conducted the structural reform of the business and the we reshuffled the businesses. We sold some businesses. And the huge amount of cash and the inflow was realized as a result of that. And we were supposed to return those -- the benefits to the shareholders. However, we decided to use it for the reshuffling of the business to acquire new assets, to change Hitachi significantly. And as a result, that will enhance the value that we can create as Hitachi to be returned to the shareholders.

So that is the idea, and I believe that we want your understanding on this point. But as I mentioned today, we are changing our mode towards more growth. So now when we have a cash inflow, first of all, we have to return such the cash to the shareholders. So core free cash flow, 1/2 of that, 50% already a onetime -- if and the net income increase is because of the onetime gain from the sale of the assets, then that the gain shall also be distributed to the shareholders. So that is the idea. :

So in terms of net income, the JPY 500 billion is our yield mark and the 50% -- or the 50% TSR. So that means the JPY 250 billion -- so the -- so that's going to be a little less than JPY 250 billion, meaning that the additional JPY 100 billion is to be used for the share buyback. So when we divest the business, then we have the income in cash, and that will also be used for the distribution of the return to shareholders. That was the idea we applied. So the 50% of the net income or-- so we need to consider that as well here from the viewpoint of shareholders. And that is the idea behind what I have written on the slide. :

And the second question is about the growth of North American business. There in North America, the business is doing quite well because GlobalLogic, Hitachi energy and the railway business, these businesses are doing quite well. in North America, and that led to the significant amount of the other orders and the GlobalLogic is growing significantly. However, at the same time, Well, the industrial-related businesses, that's what we'd like to accelerate furthermore Hitachi Global AirPower, JRA. :

So we have these assets as well and augmenting those assets. So the -- together with GlobalLogic we'd like to generate more synergy in these areas. So we would like to further accelerate these businesses as well. And the third question is about the holding of Hitachi Astemo Well, it's going to be a long story. But first of all, it used to be the auto-related business. Within Hitachi, we used to have a business division. So that was used to be one business unit within Hitachi. But the -- we knew that it's not going to be larger. And the size or scale was important. So we put this company together with another company and we created the independent company, and we made it larger and they're getting closer to the mega supplier in order to survive the business. So the -- well, we emerged with the 3 affiliated companies of Honda. And this was consolidated because well, we try to make this larger while separating this business in the future. :

So the challenge was, well, we needed to do the PMI merging 4 different companies into 1, which is quite challenging. And the Hitachi to put these 4 companies into 1 with our responsibility. So that's the way we conducted a merger and the integration. And this industry is moving quite rapidly. So the car OEM, we need to capture what they are thinking about the business. And as the established supplier, we need to create the established deep relationships with automotive OEM. And in that sense, it is better for Honda to take an initiative for this company. So the -- in order to achieve the IPO in the future and we also invite [indiscernible] and the Honda and the Hitachi. We try to maintain the good balance and we allow Honda to have more control over this business.:

So the Well -- EV market is moving quite rapidly. And in order to win the competition in this highly competitive on the EV market, we needed to augment this company. So Hitachi holding, it is not that we are going to reduce our holding ratio rapidly. We would like to make sure together with Chip and the Hitachi and our partners to keep the strength this Honda Astemo business until IPO is possible. Thank you very much. :

Operator: Next, Hiroi-san.

Unknown Analyst: This is Hiroi speaking. Can you hear me?

Keiji Kojima: Yes.

Unknown Analyst: Hitachi Astemo is deconsolidated. You have 3 sector structure. Is this the end game? Or do you plan to add or subtract anything? Are you planning to add any more? And you have a number of global competitors with the structure in place, how do you go about differentiating yourself against competition?

Now, MMP presentation, Page 21. JPY 960 billion is the EBITDA plan. There is a major increase. How are you going to realize that? And in order to meet the targets under MMP '24, I'm sure there are a number of risks that you have to overcome. What are the risks? Semiconductor or geopolitical risks? If you could please comment on that. I started asking a lot of questions. :

Keiji Kojima: Thank you for your questions. Allow me to answer your questions. So 3 sector structure or framework or the so-called consolidated businesses. So what is lacking? I don't think there's anything lacking in any major way. So with this framework in place, we would like to utilize assets, build the Lumada business and expand our business globally. As we grow, we may require more digital personnel. So in order to strengthen each of the businesses, investment may be called for, for example, in terms of GlobalLogic, Romania. Well, they have acquired companies through bolt-on acquisitions. And so such moves, maybe May, but very large-scale M&A to acquire large assets. During MMP 2024, we're not thinking of having such very large acquisitions.

So how do you differentiate ourselves against competition, that was part of the question. Well, actually, around the globe, Hitachi Energy, a Railway business, GlobalLogic, we now have a number of assets in place for us. Now as we conduct our business activities utilizing these assets with IT/OT and products, we can provide total support to our customers. There are not a lot of players like us who can do so. So the more we draw on our strength, I think the more we will be able to differentiate ourselves against competition. And for example, customers DX requirement or greening requirements. On a global basis, we are such comprehensive inquiries. And so DG had GX and these are arising. And so we are an IT/OT product player providing all of these to meet such customer needs, and that's how we would like to differentiate. :

And you also add about profitability. FY 2024 the target EBITDA is JPY 960 billion. The hurdle is pretty high. You mentioned -- what becomes basically important is for Lumada to generate profit and to grow solidly. As you can see, I'm sure -- so at the bottom, the Lumada portion, we're trying to lift it up by JPY 90 billion or so. So in that regard, 0.9 so that's about JPY 900 billion. JPY 900 billion will come through Lumada's growth and the remainder of JPY 60 billion will come from Hitachi Energy's green business railway. And by so doing, we will like to achieve JPY 960 billion. So with Lumada achievement of JPY 900 billion, I think we will be able to achieve JPY 960 billion in total. :

What are the risks that we're seeing? That was another question that you asked. Well, there are so many new risks arising all the time. So what is the biggest risk for us, FY '23 without a doubt, a risk of recession. That's what we're looking at. So are there issues with related to banks as well as interest rates here in Japan as well, somewhere exit strategies, I'm sure, potentially will be discussed with BOJ and such changes will it for the better for the worst both will happen, but no doubt there will be changes continuing to happen. :

So how can we minimize and mitigate risks for us? That's the most crucial point. So recession risk in FY '23, if that's going to be pro recession is going to be prolonged. It will be the greatest risk if it continues into FY '24, it will affect our MMP24. So through various measures, we would like to mitigate such recession risks. :

Operator: Next, Mr. Okada.

Unknown Analyst: My name is Okada. Thank you very much. So the -- this is related to a previous question about the risk. So in recession concern is what you mentioned. So specifically, what kind of the background or are you referring to when you talk about the recession risk? And that risk factor, well, which business line is more susceptible to such risk of recession.

And another question from a different point of view, related business. And you talked about the acquisition of the business of Thales. I believe it was the target year used to be 2022, but it has been delayed. So could you please explain about that? And in the midterm management plan, by 2024, you are trying to achieve the record high revenue for the railway business. And does this delay have any impact on that target? :

Yoshihiko Kawamura: Thank you very much. This is Kawamura. And I'd like to respond to the first question about the risk. And then Thales and the meta management plan related to questions will be answered by President Kojima. So first of all, risk access, as was mentioned at the beginning, First of all, the recession and also the interest rate and the is the related factor. And the balance sheet was explained in my presentation. Interest bearing debt of this company exceeds JPY 2 trillion if the interest rate goes up to the 1 by 1%, it will be the impact of JPY 20 billion. So interest rate is what we are focusing upon, the dollar rate is coming up. And we have been able to absorb that.

But -- well, in the future, well, the Yen and the interest rate accounts for 70% of our borrowings. So the other is what we are looking at closely. And second point, I mentioned about this in my presentation. But Well, we are procuring and purchasing various materials and the prices are rising sharply. For example, semiconductor-related and also electric steel sheet and the copper wire harness and the automotive sheet steel sheet. So the -- in the past few years, well, the price today is 3 to 4x higher than what it used to be. And the power the charge power price is also coming up sharply. So we are discussing among ourselves as to how to cope with this. But we are back in 2022 Yes, our procurement cost of 40% to 50% of those, the price increase, cost increase. :

Well, the has been passed through to the customers' pricing will be through negotiation. We hope to raise this ratio pass-through up to 90%, possibly nearly 100%. Of course, we have to negotiate and talk with customers. So to what extent we can shift the cost increase to the selling price increase. That is what we need to look at. So the interest rate and the inflationary response to what extent we can do this. Well, the price pass through is the ultimate measure. But these 2, what we are looking at closely and particularly among the business lines, the asset base is large in -- in those areas, the impact will be larger or the interest rate increase will impact some of those businesses because the WACC will increase and return expected will be higher. :

So that's going to be a risk. So in that sense, Hitachi Energy and Railway business, well, they have the asset of more than JPY 1 trillion. So the impact for these business lines will be particularly big. So that's my response to the first part of your question. Next, I will ask President Kojima, to talk about the reason behind the delay of the Thales acquisition and the impact on the outcome. :

Keiji Kojima: Thank you very much, Mr. Okada, for your questions. Thales, there are 2 -- well, 2 authorities, the regulators. We are currently discussing with them. This is related to anticompetitive and the consideration in the negotiation with the 2 regulators. Originally, EU and U.K., it used to be EU that was the center of the issue. There was no -- not much overlapping in the business. We didn't -- we were not concerned about that. However, once the situation became clear, EU and also U.K. the -- there are 2 phases, Phase 1 and Phase the anticompetitive or the antimonopoly exercise. Well, the Phase 1 is over quite quickly. However, Phase 2 requires a lot of work like a submission of a documentation and others, and it's going to take time. And it will start in the U.K. So it is taking time. And I believe that the situation will wind down in the EU. But the issue is the U.K. and the Phase II response in the U.K. that will last until September this year. So that is the reason for the slow progress. Particularly towards fiscal '24, including fiscal '24.

What is the impact of that delay? So if we can complete this by September. So September is the target that we are looking at in making the plan for '23 '24. So if we can do this it will be okay. How this is the carve-out from Thales. So when we talked about Hitachi Energy, I talked about the IT system and others. How about has the risk of its own -- we need to take various measures. And yes, so that -- if it is a totally standalone business and the start, the PMI is going to be easier. So the -- no, it's been delayed. We would like to enhance the carve-out process. And that is what the Hitachi Energy and the Thales are talking about. So that -- to facilitate the PMI process. So there is a delay, but that means we have time to prepare for that. So we'd like to make sure that this doesn't have much impact on the 2024. And the Thales portion, Mr. Kato, could you please talk a little bit about Thales? :

Tomomi Kato: Yes, first of all, the first question related to interest rate. Well, Page 20 of the financial results. Well, the 2023 on the interest and the numbers are shown here. '22 to '23, JPY 9 billion, that is the increase that we expect. And the domestic and the borrowing is based upon fixed rate. And the foreign currency is also based upon fixed rate. So even if our market rate increases, it doesn't mean that our borrowing will be subjected to a sudden increase in the interest rate.

Operator: Next, Ayada-san.

Junya Ayada: Yes. Ayada, JPMorgan, speaking. I have 3 questions. as well. Question number one. On Page 17 of the earnings presentation about the Lumada business, there were a lot of numbers that are very helpful. But if you could please provide commentary as to how the numbers line up over time. Top left, year-on-year, 42% increase. But in the first half, there was a substantial growth. So if you look at the fourth quarter only, what was the growth? According to my quick calculation, it must be around 20%. So is that correct? And this fiscal year, plus 16%. So what is the significance of 16%? Is that because of the impact from the business cycle? And perhaps, the hurdle is becoming higher. It's business that can grow another 20%, 30%. So what is the nuance behind this number, 16%?

And my second question, with respect to Thales that was discussed earlier, this fiscal year, railways adjusted EBITDA last year was 5.5%. But this year, it's to be down to 3.7%. And so what's the reason behind that? I would like to know. And Thales, according to the explanation on a consolidated basis, I think the Thales number is based on consolidation consideration. So revenue and adjusted EBITDA for Thales this year, what would be the numbers? And Mr. Kojima talked about PMI is at the cost of depreciation, amortization is that IT migration costs, it seems that some costs are reflected. So if you could give numbers around that as well. So that's the second question. :

And I'm sorry for being lengthy, but my question number 3 is as follows. MNP adjusted EBITDA margin is 12%. That remains unchanged. Last year, it was 9.5%. This year, on a consolidated basis, 10.2%. And so from that level next year, 12%. So a major jump up for next fiscal year. So apparently, almost a disruptive growth. Where does that confidence come from? And now if we look at the businesses in which business areas towards our next fiscal year, do you see a substantial growth I'm sure you will be providing details on the IR day, but if you could share your thoughts on that today as well. :

Tomomi Kato: Thank you for the questions. So Lumada's fourth quarter number, can we pull the number up, Well, I would like to talk about FY 2022 and FY '23. Kato speaking. Thank you for the question. About the fiscal year 2022, 42% growth. Very high growth was enjoyed by Lumada. Well, Lumada itself grew, but there were 2 tailwinds or 2 factors behind this. One was ForEx. So because of the cheap Yen, it had positive impact and GlobalLogic was another factor. FY '21 July, global logic was acquired. So there was a positive impact from GlobalLogic in the 1 quarter for FY 2022. So that was another tailwind. So FY '23, 16% in it may appear like a major reduction, but those factors no longer contribute. But we believe that Lumada will still continue to grow quite robustly.

And Thales, what will be the numbers for the second half? Can -- well, in terms of the rail business, as you rightly pointed out, profitability will be down by 0.2 percentage points from 22% to 23%. That's because of Thales integration costs. The Thales business that's carved out will be brought to Hitachi. And as was mentioned earlier, because of the timing delay Thales is a carved out work is making headway, which is a positive for us. But then there's IT integration costs as well. So PMI cost includes IT migration, IT integration costs. And there will be a la some cost in FY '22. But if we exclude that from FY 2022 to '23, adjusted EBITDA ratio will go up by 0.5 or 0.6 percentage points. So excluding Thales, I think EBITDA ratio will be somewhere around 7%. :

Well, just to supplement from Kawamura, just like Hitachi Energy, railway has a lot of order backlogs. Hitachi Energy -- well, actually, over JPY 4 trillion double that of Hitachi Energy, how will that be reflected in profit and loss. In Hitachi Energy, the lead time is 3 years. Railway is a longer-term business. So it will start to be reflected in profit and loss starting from FY '26 and onward, half of their backlog will take more than 3 years. And so the lead time is very long, and that is affecting the railway business, just to add to the comments made. So may I turn to Kojima-san about MMP disruptive growth planned. :

Keiji Kojima: So FY '23, in terms of profits, there is some drag. There are some transient factors that are negative. So if we exclude them, somewhere around 11%, it can be achieved. So considering that number, I don't think the hurdle is not going to be too high. If we can improve the ratio by 1 percentage point every year, we will be able to achieve the target. FY '23, we're being quite conservative, as was mentioned. FY '25 we need to see business recovery back to normal. And so if that assumption pans out, then I think the target set under MMP '24 is achievable. Kato-san, anything to add?

Tomomi Kato: No, I don't think so. Thank you for the questions.

Junya Ayada: Just one clarification. So what's in this fiscal year's plan?

Keiji Kojima: So transient factor pushing down adjusted EBITDA number. So Hitachi Energy, PMI cost, Thales is going to be consolidated. And Thales PMI-related costs, those are the main cost items pushing down adjusted EBITDA, correct, and DSS structural reform. Will structure reform expense that will hit adjusted EBITDA. And by FY '24, we would like to reap the benefits of such structural reform in DSS.

Operator: Next, Mr. Bolor.

Bolor Enkhbaatar: My name is Bolor from Jefferies Securities. Can you hear me?

Yoshihiko Kawamura: Yes.

Bolor Enkhbaatar: You talked about Hitachi High-Tech, which is measurement and analysis and the 30% reduction in the order in the fourth quarter. And also, the margin is down for the incoming businesses. So is that because of the adjustment of the business? So the in there, when do you expect the bottoming out of this business? Probably, it's going to pick up in the second half of the year. If you have any idea, please share your idea with me. Appreciate it.

Keiji Kojima: Thank you very much for your question. So I, Kojima, I would like to respond to that. It's actually high tech main business. There are 2 pillars of the business. One is semiconductor and the evaluation and measurement equipment. And the second is, together with Roche of Switzerland, we are working together with them. which is the analytical beyond the equipment. And via the latter, Well, they will remain solid in '23, '24. And [indiscernible] will be affected by the market and the economy is semiconductor-related business. Semiconductor manufacturing and the inspection equipment. Looking at that particular market and customer demand, 2023, the business will slow down because the players will refrain from making the active CapEx investment.

However, the companies are indicating the strength in the investment activities in '24. So starting from the second half of '23, are we going to see the bottoming out. Personally, in my view, '23 and the companies we refrain from making investment. But starting from fiscal '24, they will increase their investment. That is how we look at the market. :

Bolor Enkhbaatar: If I may, I'd like to ask you another question. adjusted EBITDA and the company-wide elimination and fiscal '22 guidance, the JPY 92 billion. That was the amount, I believe, JPY 92 billion. But actually, it was the JPY 46 billion. And in the new guidance, well, it is down JPY 1 billion for the elimination. And IT platform investment is not the included year or the risk buffers are not included. So could you please explain a little more about this item?

Keiji Kojima: Thank you very much. I'd like to explain. So for fiscal 2023, Slide 15 shows that minus the JPY 16 billion that is written here, which is the JPY 10 billion higher than last year. It is because of strategic investment, we are reducing the strategic investment. That is the reason for the company items and elimination. This year, 2023, as we mentioned, well, it is very difficult to foresee what's going to happen in the economy this year. So about JPY 20 billion, we introduced the buffer of JPY 20 billion. That is the idea behind these numbers.

Bolor Enkhbaatar: And the JPY 20 billion buffer outside of the operation, are there any buffers which are within the scope of the business?

Keiji Kojima: Actually, this is about the JPY 20 billion, which is a part of the business operations.

Bolor Enkhbaatar: How about the nonoperating aspect?

Keiji Kojima: Well, here at each sector, they are looking at the risk of their own sector areas. So on a company-wide basis, we have not introduced anything specific or special.

Operator: Thank you. So we will like to be questions from those of you on the English channel. [Operator Instructions] I do not see any hand on the English channel. So we would like to come back to the Japanese channel. Nakajima-san, please unmute and start your questions.

Unknown Analyst: Can you hear me?

Operator: Yes, we can.

Unknown Analyst: My name is Nakajima from [indiscernible]. I have a question regarding performance for FY 2022. For 3-year in a row, you have achieved record highs. So for Railway and Astemo, why are those businesses growing? What are the reasons to what kind of customers -- what kind of businesses were successful? What strategies panned out? And earlier, you talked about interest rates and ForEx, that these could turn into risks for you going forward. Now that you have a new structure in place and well, BOJ is under new management. Well, under governer Kuroda, low interest rates continued for the past decade. But with the new governor in place monetary is expected to change. So what do you expect of BOJ in terms of its monetary policy? What are your expectations?

Unknown Executive: So regarding Astemo and Rail business, Kawamura will respond and what is our hope and expectation for BOJ, I would like to turn to Kojima-san for an answer for that.

Yoshihiko Kawamura: Regarding our railway business, FY 2022, there were very strong orders, large projects were acquired. Canada, Ontario, Toronto financial sector, the train system, JPY 1 trillion order was received in Europe. In Italy and other places, we were able to acquire orders. So rather than control and signaling system, it was the roll stock orders that came in, which were large. And so roll stock signaling system control, what's the profit level. Without roll stock business, we won't be able to have enough signaling and control system business. So we need to take roll stock businesses and extend and FY 2022, we had large orders for roll stock.

Regarding Astemo last fiscal year, their business was very bad in FY '21. So it appears that there was a recovery in FY 2022. The major reason behind that is with the pandemic under control, those semiconductor shortage continues. For the GM, Nissan, these OEM manufacturers they are increasing car supplies. And because of that, parts are being sold increasingly. So there's recovery in car OEM manufacturers, and that is positively reflected in Astemo's recovery. So I would like to turn to Kojima-san for a comment on BOJ. :

Keiji Kojima: Thank you for your question. Well, would you like to request is for BOJ to have a good communication with the market and that BOJ is transparent in communicating with the market so that we know what the BOJ message is. inclusive of exit. I'm sure there are lots of discussions to be had. And so we want to BOJ to have good communication with the market. So that we can be pretty well prepared. We don't want any surprises coming from BOJ, and we'd appreciate having not such surprises from the BOJ. Thank you.

Operator: Next, Mr. Harada.

???: This is Harada. I have 3 questions. First of all, starting from April, this year. Well, [Diu] put the GlobalLogic of the sub segment and the [indiscernible] which is in charge of supervising that the GlobalLogic used to be within the segment, and it was not easy to see separately the GlobalLogic. But I hope it's going to be more disclosure about the business and the performance related to GlobalLogic. I hope is going to be changed. And I would like to welcome your comments on this point.

And the second question, the Page 15 of the midterm management, the material and the bottom line stabilization and the cash generation, adjusted EBITDA and the free cash flow. So these are not directly related to related to the accounting results, the -- but -- yes, there is an ongoing shuffling of the business. So this is how you put these in this way. But ultimately, it's going to be included into the regular financial indicators like [indiscernible] and others stocks. So could you please explain about the background of this presentation. :

Unknown Executive: Thank you very much. First of all, GlobalLogic and the disclosure, Mr. Kawamura will respond to that. And the midterm management plan, Page 15, President Kojima will respond to that.

Yoshihiko Kawamura: First of all, global logic, well, [indiscernible] is in Silicon Valley and the Well, the synergy, how could generate synergy between Hitachi and GlobalLogic. That's what the team is working on. So we have no intention to change the way we disclose the material. But for example, Page 17 of today's material, please look at this page. Here, bottom right, you see bar, which shows 3 different segments and Lumada on the ratio. For example, digital system service and green energy and mobility in the middle and the right-hand side, the connective industries, re-energy and mobility portion is smaller.

So Hitachi Energy and the railways and the GlobalLogic collaboration is what we are looking at how to generate the synergy. That's what Mr. Taniguchi is working on. When this portion becomes larger, then the lease to the question as to how we should handle the disclosure. So the Mr. Taniguchi segment, how to grow it is the challenge and the -- along with that, we'd like to consider further disclosure. So Mr. Kojima, Page 15 of the -- our midterm management plan and -- please. :

Keiji Kojima: Thank you for your question. So the stabilization of the bottom line and the cash leads to what I talked about. And the core cash flow and the bottom line with these 2 our intention is to make this clear so that you understand the shareholder and the value. So the adjusted EBITDA is the indicator we are using. And also net and core free cash flow. We are trying to introduce the indicator to connect all these in order to deepen your understanding, so that's our idea. So the ratio between net income and the core cash flow or the adjusted EBITDA. So among these factors, we would like to connect them. And when something happens to EBITDA, both how the bottom line will move and then that will also is related to the cash flow. So the -- we start in mind, we created this presentation.

So -- well, during the reshuffling of the business, well, it is ongoing, but it is not that we keep this because the businesses are changing. Well, we would like to create the business in organic manner. So the EBITDA, the core free cash flow and the net income, we would like -- our target is to make this presentation easy to understand. :

???: And also one last point. Astemo, you also mentioned about Astemo -- and how much -- how big was it? And you're going to sell your holding in September and valuation will change then. So is going to be a valuation loss or the valuation gain, I think it's going to be fixed in September. So what is your outlook?

Unknown Executive: Yes, Kato-san will respond to that.

Tomomi Kato: As for impairment, basically, we do not disclose the impairment. I appreciate your understanding. And this is the impairment, but this is noncash transaction. So it doesn't have any tangible impact on the business. That's our understanding.

???: Understood. So after -- so there will be no disclosure even after the sale. So what do you mean by sale? I'm talking about the sale of the holding in the Astemo will there be any changes of the valuation, valuation loss or variation in the profit?

Unknown Executive: Yes, Kawamura will respond to that.

Yoshihiko Kawamura: So when the 3 companies are being integrated into one, well, there was the corporate value calculated back then. But the Astemo business was not sufficient so far. So the 40%, 40%, 20%, when this change of the holdings took place that resulted in change of the valuation. And based upon that change valuation, 40%, 40%, 20%, the valuation was calculated based upon that. naturally will be valuation changed. But the impairment, as Kojima mentioned, this is not the cash item when valuation is calculated, the when this is an in to present value, this is not included in the calculation. But the major reason is the -- over the past 2 years, Yes, performance of the Astemo pushed down the devaluation of Astemo. And one additional point for [Makoto] impairment, this was not in the fourth quarter. This was incurred in the second quarter.

Operator: The time to close is fast approaching. So those of you raising hand, Hirakawa, Yoshizumi,-san In that order, we will be taking questions and then close the questions and answers. I look forward to your cooperation. First, Hirakawa-san, please unmute and start your questions.

Mikio Hirakawa: I'm Hirakawa from BofA Securities. Two questions. Question number one. Page 2022 -- FY 2022 order number is given. For the 3 segments, FY '23, given the inquiries that you are receiving, what will be the numbers directions. Hitachi Energy, it's a subsegment. But if you could also share your plan and thoughts on Hitachi Energy for FY '23 as well?

My second question has to do with core free cash flow. How much FY '23, the number was JPY 270 billion, but it was overachieved at JPY 400 billion. Why? And our core free cash flow plan has changed to JPY 1.2 trillion from JPY 300 billion. This turned to close to JPY 500 billion next to. What are the measures to improve to such an extent. So core free cash flow close to JPY 500 billion. How are you going to bring the number to that level? :

And my last question was that may overlap with earlier questions. Hitachi's Lumada IT/OT products, with the 3 combined, you are differentiating yourself to grow. I understand that. On the other hand, in what forms and shapes are you differentiating or if they can be understood better by the market, your valuation perhaps will be closer to that of Accenture. So with Hitachi's strength if you have examples of winning gassier competition, I would like to know. :

Keiji Kojima: So to restart, do we have the FY '23 order intake number? Kato-san will answer that. With respect to orders, let me briefly answer. FY '23 we have not been able to collect all the orders yet, but the base, things are very low. Digital systems Page 22, I think the business will continue to be robust. FY '20 -- '22 so ForEx impact for FY '23, ForEx impact will decline. But basically, it's the same green energy and mobility 53%. Hitachi Energy and rail had a lot of orders close to 60%. And for this year, it could be affected by large projects, especially for rail business. I don't think we'll be having as high a level as last year and connected Industries. '20 to it was flat year-on-year. And for FY '23, the expectation is that it will increase. So core free cash flow Kawamura will answer. And your third question, Lumada, Kojima will answer.

Yoshihiko Kawamura: So what you pointed out, we are very much aware of FY '23, FY '24, with a 2-year program, we're going to resolve the cash issue. More specifically, we will have to work on the revenue side and the cost side.

On the revenue side, relatively speaking, there are some businesses where return is not enough. So we need to restructure them quite stringently so that return can be improved. So we need to raise the margin of such businesses. And so we need to work on improving the returns on some of those businesses. On the cost side, as has been discussed, well, same will be deconsolidated. It's going to have a large impact. we had a revenue of JPY 10 trillion or over, but with reorganization, it's going to be down to 8 trillion, 20% reduction. So inclusive of corporate functions. We had a structure fit for JPY 10 trillion. There's going to be a 20% reduction in revenue. It means that we have to reduce cost by 20%. So on the cost side, we have to make efforts to generate cash. So on both the revenue and the cost side we need to work hard to meet the target, although the target is pretty high. So on Lumada, Kojima-san will answer. :

Keiji Kojima: So just to add some comments on core free cash flow -- when it comes to large projects, we get a payment based on milestones. So we are having contracts and taking actions vis-a-vis customers so that we can get revenue and profit quite solidly. I think that kind of thinking has started to take root. And this year, CapEx is increasing but we would like to perform so that we can overachieve the target FY '24. As I said earlier, adjusted EBITDA -- how can we increase conversion rate so that we can turn adjusted EBITDA into free cash flow.

That is very crucial. Well, so far, internally, we have not been 2 cautious of these metrics, trying to translate profit into cash flow. That part was rather weak. And we have strengthened that quite considerably. And with such efforts, we will be able to achieve JPY 1.2 trillion. And IT/OT products. Are we able to differentiate with the 3 combined? And are we winning? Of course, we would like to share such success examples. And we would like to do that on the IR Day, but some customers do not names to be mentioned, they said some of them say that their names should not be mentioned. And so we would like to find customers whose names can be shared. And hopefully, we can find some customers who are happy to share their stories themselves. And with that, I hope we can develop a better understanding on your part. :

Operator: Now we'd like to welcome one last question today, and Mr. Yoshizumi, please.

Kazutaka Yoshizumi: SMBC Nikko, my name is Yoshizumi. And I would like to ask 2 questions. First of all, business portfolio -- you transform the business the portfolio, but you already completed that. And you will shift your focus upon sustainable growth of the business. Now the Lumada profit margin, profitability, how would you like to push up the profitability of Lumada? Page 17 of the financial results. I have numbers. But compared to the revenue growth, the profit growth is about 20%. So because the GP ratio is not so high for Lumada business or the SG&A is high. And how about the cost structure of Lumada. What is the current status of Lumada business in this regard.

And also the aware would you like to strengthen in the Lumada business. Well, the company-wide, the elimination and the strategic -- the cost -- for 2 consecutive years, those amounts were not used fully. So you would like to use this much amount -- but you are not able to use them or the -- because of the market condition, you were not able to use them. It is difficult to see from outside what is happening. So the Lumada profitability enhancement is important. So I would like you to explain on the point. So that's question number one. :

And question number 2 is about the New Year guidance for the fiscal '23. In the connected industries, I'd like to ask you. So the adjusted profit. There are several points. Hitachi Hi-Tech. Well, the semiconductor manufacturing equipment environment or the market is very tough and the revenue and the profit plan is solid because of the order backlog you already captured so the difficult market condition, despite of the market difficulty, you have the certainty that you will be able to achieve these in growth and Industrial digital, in the fourth quarter, it was doing quite well. Is this because of the contribution by Lumada. So what is the current status? And also industrial products, the non-mass products and produce products and the mass-produced products, it seems that the order -- the acquisition is quite good. So could you please explain about the background of this business. Please explain. :

Unknown Executive: Thank you very much for the questions. So the first part, the Lumada part I will ask President Kojima to talk about the Lumada business.

Keiji Kojima: Yes, thank you very much for your question. and the matter profitability from a mid-to long-term perspective, I'd like to explain. Lumada profit margin profitability is determined well, the is the customer is -- they have a new case inviting new customers and the use case can be used for the use case. And the equipment cost incurred for that. However, second round the third round. -- well, similar transactions and deals go to the customers. Initial investment costs or the development costs will be lower. So the how to scale the business, that is the key to success. So the number of use cases and number of solutions is quite important. In that sense, we need to make the good use of that to enhance the scalability that will lead to higher profitability. So that's the good method to promote. And secondly, particularly digital engineering, system integration for these works and areas, people this is a labor-intensive area. It requires people. So a number of headcount is almost equivalent to revenue.

So mid- to long-term perspective, how to raise the profitability of that part of the business, that is another important area. And the key here is how to use AI effectively. System integration, local no code is possible. and to reduce the use of -- or the creation of software and reduce the head count to enhance the profitability profit margin. That's what we'd like to pursue. And on top of that, step ahead of that, digital engineering, something similar to consultation. That sound what we'd like to introduce more AI. So this is the area so the -- it is not that we need more people to scale the business -- but we need to grow out of that. And that is the key to an revenue without increasing the headcount. So together with R&D, that's excess we are focusing upon. :

Unknown Executive: Yes. Then the 2023 outlook and your question about the outlook 2023 will be answered by Kato-san.

Tomomi Kato: In Hitech, as you see on the slide, 2023, revenue is equivalent to that level of around 22%. As for the breakdown, the Ion analysis analyzer, 7% growth is expected. Semiconductor nanotechnology logic customers, foundry customers and the sales of the manufacturing equipment will increase at the rate of 4%. And other materials and the procurement related business will be lower. Then in fiscal '23, well, it is not that we received all the orders solidly. But with the customers, we are talking a lot with the customers. And we have some idea as to how much we can sell to those customers. So I believe that we can achieve that much sales based upon what we discussed so far.

And you talked about the industrial digital business. As was mentioned, Lumada's the IPO is done by this area. Digital solution, robotics SI are very solid and the holy increase. And the growth compared to 22, back in fiscal '22, there were big deals in the projects but there was no repetition of the same project. And also exchange rate ForEx will also be negative. So that is the reason why we expect a flat growth. industrial digital, there are the nonmass produced and the as-produced business. And the normas produced products, UPS and the compressors and the -- all the electrification of the related businesses. We will be the leader in this segment, overseas and domestically. :

Unknown Executive: Thank you. With this, we would like to conclude the presentation on the consolidated financial results for the year ended March 31, 2023, and the progress of the midterm management plan 2024. And lastly, I'd like to make announcement about the Hitachi Investor Day 2023, scheduled on the 13th of June, and we will give you further details later. So thank you very much for your attendance. It's been a long meeting, but thank you for your attendance today.

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