Earnings Transcript for HTHIY - Q1 Fiscal Year 2023

Unidentified Company Representative : At this moment, we would like to start Hitachi Limited's web conference on Q1 FY 2023 Earnings Briefing. First, we thank you very much for taking time out of your busy schedules to attend this briefing. The materials for the meeting are posted at Hitachi Limited's IR site and also the News Release Site. So please have a look if necessary. Now, let me introduce the three speakers from Hitachi Limited's on the stage. Yoshihiko Kawamura, Executive Vice President and Executive Officer, CFO. Tomomi Kato, Vice President and Executive Officer, Deputy CFO. Masao Yoshikawa, Corporate Officer, Executive General Manager, Investor Relations Division. So we have three speakers. First, CFO Kawamura will provide an overview of the financial results. Please bear with us while we switch the screen. Kawamura, please.

Yoshihiko Kawamura: Thank you very much. Hello everyone. Thank you very much for attending this meeting despite your very busy schedules. Today we'd like to give the consolidated financial results of the first quarter ended June 30, 2023 for Hitachi Limited. This is the table of contents of the materials, there are four items. I'd like to give the key messages. Q1 fiscal year 2023 results. The third topic is the forecast of fiscal year 2023 and appendix. I would like to cover each topic one by one. Please refer to Page three. These are the key messages of the first quarter. Number one, the Q1 fiscal year 2023 continuing to consolidate business revenues I presented. This is without just among the three sectors business are included here. This is what we refer to as the continuing consolidate business revenues, which was 1,828.3 billion yen, an increase of 12%. Most important KPI is adjusted EBITDA, which was ¥156.9 billion, year-on-year increase of ¥31.9 billion we had an increase in revenue as well as earnings. Now, Hitachi Energy performed very well and this has been reflected in the profitability as well. On the back of strong demand, it grew significantly and it was a driver for profitability. The second point is the large scale businesses, specifically digital, Hitachi Energy and Railway Systems are included. Orders received, were very strong in the quarter. As mentioned here, in the -- as you can see, on the right hand side, the backlog for additional system was ¥1.5 trillion. For Hitachi energy backlog was ¥3.6 trillion. For Hitachi Energy, the revenues around ¥1 trillion. So, we have a backlog of over three years’ worth of revenues. Our Railway Systems backlog of ¥4.6 trillion. Revenue is around ¥1 trillion every year. So, there is a backlog of around four to five years. Backlog has been very strong for the quarter. Number three, against this backdrop, performance has been very strong and forecast for the full year in fiscal year 2023 will remain unchanged from the previous forecast. There are three bullet points mentioned here. Major topics include that the Hitachi Astemo in June of this year has become an equity method affiliate, are not subject to consolidation anymore. And therefore, in terms of this budget, it is based on the assumption that it will become an equity method affiliate for the Thales GTS. This is included in the focus for the second half of the year 100 billion is the share repurchase that we are conducting at the moment. Everything is proceeding very well. And by September, we should do reach the level of ¥100 billion in terms of the buyback. So, those are the key messages, the qualitative messages for the first quarter. Please look into Page five. These are the highlights of the results of Q1 for fiscal year 2023. There are two messages here. The continuing consolidate businesses the middle column. Mainly on Hitachi Energy it has been performing very well. And there has been the absence of the impact of lockdown in China as well from the previous year. So we have increase in revenues as well as earning. Another positive factor is that material prices now largely offset by price pass through. Therefore, we have been able to absorb the impact of inflation to a significant extent leading to increase in revenues as well as earnings. And based on that revenues was for continuing consolidate business was ¥1,828.3 billion. The y-o-y percentage was 12% increase and it is 9% in brackets to the left. This is mentioned in footnote three and yen is becoming squeaker and the -- excluding the impact of foreign exchange rate fluctuation is 9%. Adjusted EBITDA was ¥156.9 billion and Y-o-Y increase of ¥31.9 billion. Adjusted EBITDA margin 8.6%, Y-o-Y one-point increase has been recorded. And the net income for the quarter was ¥73.1 billion, increased by ¥32.6 billion. Now, please look at the right hand side which is the core of free cash flow. Core free cash flow was ¥29 billion and year-on-year increase was ¥23.6 billion. To the right is the consolidated business. Specifically, Hitachi Astemo, Hitachi Construction Machinery and Hitachi Metals are included. Below foreign exchange information is provided. This is the actual exchange rate for the first quarter when the budget was formulated was 130 -- and ¥130 was the assumption for the Q1 ¥137 and for euro ¥149. The sensitivity will be shown later. The weaker yen is having a strong impact on the revenues. Please refer to Page six and seven, which is the result of the business segment. The first quarter results are presented. First of all, we’re referring to page six. Digital assistance services at the top for the first quarter. The revenues was ¥545.9 billion, adjusted EBITDA was ¥52.4 billion and 9.6%. And Y-o-Y basis is shown on the right hand side for revenues as well as adjusted EBITDA. Therefor we had increase in revenues as well as earnings. There are three sub units, our performance shown as well. As you can see, the services and platforms below was ¥225.9 billion in terms of revenues. Adjusted EBITDA was ¥16.1 billion, increased 26% in terms of revenues, and minus 3% for adjusted EBITDA. As mentioned on the right hand side, the storage business has an impact, which is causing slight and negative. But as written below GlobalLogic’s. The DX company is continuing to show a significant growth, the increase of year-on-year 26% in terms of revenues increase in revenues as well as earnings remaining very strong. Green Energy & Mobility is shown below. And revenues was ¥627.9 billion, and ¥43.1 billion in terms of EBITDA, and plus 23% year-on-year increase in terms of revenue, EBITDA increased by 19% increase in revenues as well as earnings. Hitachi Energy is shown here, as I mentioned earlier, our performance is improving very significantly for this business. The revenues was ¥385.9 billion, 29.3% in terms of adjusted EBITDA to 7.6%. For year-on-basis, 28% increase and 11.9% increase, just 1.8% increase. In particular, the short delivery products is increasing in the first year. There were many that were not included in the PL. Strategically we are capturing the short delivery products, which is making significant contribution to revenues Railway Systems and it was ¥185.7 billion, ¥13.7 billion in terms of adjusted EBITDA, 13.4% to 19% increase in revenues. Overall, the two sectors are showing revenues increase as well as earnings increase. Next is Connective Industry. The revenues was ¥695.3 billion, and adjusted EBITDA was 67.8%, 9.8%. Y-o-Y revenues was plus 4%, increase in revenues as well as earnings here as well. Now, looking below. Building System is minus 3% on a Y-o-Y basis. This is mainly the elevated business in China accounted for a large portion. And there has been adjustment taking place in the Chinese real estate market, they're showing a negative number here. And High-Tech, Measurement and Analysis System Y-o-Y minus 2% or minus ¥8.4 billion as shown here. And this is because of the semiconductor manufacturing equipment. A recession is taking place, it is an adjustment phase for revenues are decreasing. And last year, there have been significant orders received so there is a reactionary decline. Industrial additional water environment industrial products, please refer to the numbers on this page. Page eight. These are the results of business segments consolidate bases. Hitachi Astemo ¥494.1 billion adjusted EBITDA was ¥14 billion. The ratio is 2.9% rather low. Y-o-Y revenue had a 27% increase, 18.7% increase for adjusted EBITDA. Last year, we struggled and -- so there is a reactionary increase this year. Hitachi Construction Machinery and Hitachi Metals will no longer be subject to consolidation. So they are zero. Page nine is showing the factors affecting changes in revenues as well as adjusted EBITDA showing the trajectory. Now, looking at revenues, first, at the left is the first quarter of last year ¥2.569 trillion, and we will no longer have the better construction machines. So that will be negative. I mentioned ¥137 per U.S. dollar and ¥149 pre euro having an impact. Others is ¥236.9 million. This is organic M&A divestitures -- without divestitures. So, the organic growth is ¥236.9 billion. Currently in the Mid-Term Management Plan. We have rearranged the portfolio. We are going to be focused on the organic growth going forward according to the Mid-Term Management Plan. The organic growth going forward according to the Mid-Term Management Plan and ¥2,322.4 billion on the right, this is without Hitachi Construction Machinery, Hitachi Metals. So it is decline in revenues. Look at now adjusted EBITDA. Last year it was ¥154.8 billion that is a starting point, divestiture, Hitachi Construction Machinery and Hitachi Metals. And there is a foreign exchange impact shown on the right hand side, otherwise, there is organic growth. And we have ended at ¥170.9 billion, which is an increase in earnings for the quarter. Next page please, Page 10. This is looking at the financial position as well as the cash flow. The middle column is as of June 30, 2023 balance sheet and cash flow. At the very top of total assets was ¥13,155.3 billion. Changes from last year was ¥653.9 billion. You can see a significant increase has been recorded. Looking below, the total liabilities increased by ¥350.9 billion. This is effect of foreign exchange. Addition to that there have been changes -- significant changes in the balance sheet, but rather it has increased as a result of foreign exchange fluctuations. Looking below. Cash conversion cycle, there has been an improvement of 2.8 days. Please look at the cash flow. Now cash flows from operating activities ¥118.1 billion, increase of ¥12 billion from last year. Cash flow from investing activities should be noted as well. The improvement of ¥34.1 billion free cash flow, ¥78.2 billion, increase by ¥44.1 billion improvement. Our core free cash flow was ¥29 billion, improvement of ¥23.6 billion. So for all these cash flow items are proceeding well. So far I have talked about the first quarter situation. Next, I would like to discuss FY 2023 annual forecasts. Please have a look at Page 12 As this in the bullets at the top as I said. The forecast for the year has not been changed from April. So it remains unchanged from the previous forecast. And as I said up front, Hitachi Astemo will be deconsolidated and Thales GTS is included in the forecast for the second half of the year. Please have a look at the table below. Revenues, ¥8.8 trillion and these have not been changed. To the right and continuing consolidated business, ¥7.82 trillion for the year, up 2% excluding forex impact plus 3%. Adjusted EBITDA ¥800 billion, so 10%. For adjusted EBITDA margin net income ¥502 billion, EPS ¥537 billion. ROIC 7.5%, core free cash flow ¥310 billion. The numbers have been the same. And Forex sensitivity is shown in lower right. And the center FX rate ¥130 yen to the dollar, ¥140 to the euro. And sensitivity is shown to the right. As you can see, when yen depreciates by a ¥1, what will be the impact on revenues and adjusted EBITDA, with ¥1 change ¥10 billion in revenue adjusted EBITDA of plus ¥1 billion. So, these are the increases as a result of the impact from ¥1 cheap depreciation. Page 13 shows highlights or forecast for FY ‘23. So, not all the BUs are shown, the large ones are uploaded. So DSS, Green Energy Mobility and Connective Industries at the very top, Digital Systems and Services. The annual forecast ¥2.45 trillion, adjusted EBITDA ¥308 billion 12.6% in terms of margin. So, Y-o-Y increasing in both revenue and income forecast remains unchanged, so 0% from the previous forecast. And Global Logic as I said, in the beginning, it's going to be a high growth. Revenue of ¥252 billion and adjusted EBITDA ¥52 billion, 20.6%, Y-o-Y 22% growth. Green Energy and Mobility ¥2.58 trillion yen of revenue, ¥173 billion of adjusted EBITDA and margin of 6.7%. Y-o-Y both increase in revenue and income, a new change from the last forecast. And Hitachi Energy on a standalone basis ¥1.502 trillion of revenue, ¥122 billion in adjusted EBITDA, 8.1%. Y-o-Y ¥925.1 billion of revenue, ¥57.9 billion of adjusted EBITDA 6.3%. And Connective Industries, revenue of ¥3 trillion. Well, the top two around ¥2.5 trillion yen of revenue as opposed to Connective Industries having revenue of ¥3 trillion in our forecast. And forecast adjusted EBITDA ¥330 billion and expecting increase in both revenue and income. As I said, for the first quarter results building our systems are affected by China's correction in real estate Y-o-Y it's down. And Hitachi High-Tech Measurement and Analysis system is affecting the forecasts, down 1%. Hitachi Astemo, ¥980 billion of revenue, ¥35 billion, 3.6%. So down 49%, down 38.4%. This will be the consolidated in the second half and that's a major reduction. So on Y-o-Y basis this is the extent of reduction. Moving on to Page 14. Just like we saw in the first quarter results, factors affecting changes in revenues and adjusted EBITDA, FY 2022 to ’23, the trajectory is shown. Looking at the revenues, top left ¥10,881 billion. And Hitachi Metals deconsolidated, Hitachi Astemo is also going to be deconsolidated. So there's negative impact. And Thales Railway signal is going to be acquired a positive factor. And a foreign exchange a negative number ¥130 is the assumption on this number. If it's going to be ¥139, ¥140, it's not as large a negative number. This includes a buffer and organic growth ¥206.7 billion. And so far right ¥8.8 trillion forecast for FY ‘23. So HCM, Hitachi Metals and Astemo are going to be deconsolidated. Therefore, they're going to contribute to a negatively for revenue. Adjusted EBITDA, last year ¥884.6 billion, this year ¥835 billion. So the factors are likewise HCM and Hitachi Metals and Astemo are deconsolidated therefore negative impact. Thales has a positive impact and foreign exchange 7.5 billion and organic growth impact of ¥78 billion and thus the number, our forecast is ¥135 billion in adjusted EBITDA. And if you could go to Page 15, details about Lumada, there are four charts. On the far left, Lumada business revenues are growing again, that is shown. On the far left, the first quarter of last year, and next first quarter of this fiscal year, and FY 2022 annual results and the forecast for this year. Looking at the circles at the top. And there are legends, describing this, adjusted EBITDA margin of 14% to 15%. As you saw earlier, most of the other businesses at around 10%. So Lumada is shown to have higher profitability as our strategy, we would like to increase the component of Lumada business because it will push up our profitability and that is what we're working on. As you can see, from Q1 ‘22 to Q1 FY ’23, 30% increase was recorded. And on an annual basis 14% to 15%. So, the model is growing very strongly, very briskly. And to the right, we are trying to increase the ratio of Lumada business. On the left revenues, on the right adjusted EBITDA. So, FY ’21 ‘22 ‘23 are the three year numbers are given. So revenue ratio is increasing from 21% to 26% to 29%, EBITDA the same. And the red portion is Lumada business. So, you can see that the portion of Lumada businesses steadily increasing. And horizontal bar chart below shows Lumada business revenues composition by segments, Digital System and Services, Green Energy and Mobility, Connective Industries. Connective Industries is increasing as a proportion. It's now up to ¥910 billion, a very large portion. So it's almost close to DSS in terms of Lumada business. And at the bottom shown topics in terms of business expansion. Irish digital engineering company, a Sidero is to be acquired, and alliances are going to be crucial. So with AWS, Microsoft and others, we are appreciating alliances. And number three, this is about Honolulu, Hawaii, a fully automated urban rail system and this was covered in a major way in Japanese media as well. And behind this is Lumada. This is a huge project over 200 billion yen and in Honolulu, there is no major railway, there are eight or nine stations for 17 to 18 kilometers. So for about 50 minutes or so, the train will be operated fully automatically. And we just had a ceremony it was covered extensively in the local media as well. And in terms of strengthening our digital infrastructure, we have set up Generative AI center, we have started various activities around this. And we also have a third corporate fund investing in Generative AI as well. So, that was about the annual forecast. Now let me briefly explain the appendix, if you could please have a look at Page 17. On the far left, Q1 comparison of last year versus this year, and on the right hand annual comparison. So, FY ‘23, shaded in gray. Revenue of ¥8.8 trillion, adjusted operating income ¥675 billion. The numbers have not changed. So on the far right, a plus minus zero, because we have not changed the forecast from the last time. Please have a look at Page 18. This shows the Q1 revenue by market. If you look at the bottom, the composition or ratio, 35% comes from Japan and overseas in total 65%. So Japan versus overseas has come to this level. What is characteristic this time is China right next to Japan, please have a look at this column. Minus 28% in digital, Green Energy and Mobility plus minus zero, Connective Industries down 5%. And total minus 12%. China's economy is in correction having difficult times and that is reflected in our revenues. Now moving on to page 19. Orders grew by business segment. Focusing on Q1, orders are very brisk. From the left DSS digital 11% year-on-year growth in orders and Green Energy and Mobility -- Hitachi Energy 69% increase, Railway Systems 149% Y-o-Y. To the right, Connective Industries building down 14%, Hitachi High-Tech down 12% year-on-year and that's because of the factors I explained earlier. So, those are the Q1 results and are the annual forecast for this year. That concludes my presentation. Thank you for your attention.

A - Unidentified Company Representative : Thank you very much. We would now like to proceed to the Q&A. If you wish to ask a question, please use raise hand button on the web system. When your name is called, please say unmute and state your name and affiliation before asking your question. If you no longer need to ask the question, please release the raise hand button. On your side though we will not be showing the video of the person asking the question today. We will take questions from the Japanese channel and then followed by English Channel. We will take questions from media, institutional investors and analysts at the same time on the Japanese channel. Those of you who have questions please indicate by the raise hand button, these are some ways. Please unmute and ask your question.

Unidentified Analyst: Question. Regarding the first quarter actuals as well as the full year plan. I have a question regarding the progress being made. First of all, and regarding the actual EBITDA is very good. But according to the focus you had internally, what have been upsides and downsides, please elaborate further. Second question, regarding Lumada. Toward the end Kawamura San you mentioned this business. In terms of actual first quarter EBITDA margin the annual plan is as shown here. Do you have the actual margins which is in line with this plan? And for Lumada, it would the fiscal year forecast is doing better than expected or otherwise, please elaborate further on the performance of Lumada business? And if I may, I would like to ask my third question, regarding the consolidated EBITDA plan for the full year. There is going to be divestitures therefore, it is like going to be decline over the previous year. But with foreign exchange, we believe that there is going to be an upside listening to your presentation. Are there any possibility of increasing your forecast which is it could be flat or if anything increase other than foreign exchange? Are there any factors that you can mention?

Unidentified Company Representative: Answer. Regarding EBITDA as well as Lumada, will be answered by Kato San. He has the materials.

Tomomi Kato: To your first question, for the first quarter the -- likely result that will be explained. Foreign exchange is the upside. So we have a generally an upside much in most of the deals so we are following according to the plan. Hitachi Energy as mentioned, we have long term projects and orders, but we also have transformer short delivery orders received as well. So there is been a significant upside in terms of both revenues as well as earnings. Furthermore, downside will also be shared as well, Connective Industries, High-Tech and home appliances. Connective Industries building system was better than expected, so overall it is according to plan. But if you look at the details of the High-Tech, the semiconductors, the customers plan has did not do as well. Home appliances underperformed against the plan as well. But on the other hand for building system in the China business, the new buildings did not grow, but in terms of services maintenance as well as renewables were very strong better than expected. So, all in all for Connective Industries, we have been able to achieve the plan To your second question, Lumada business. As you have rightly mentioned, on an annual basis, 15% profit is the plan or the forecast we have today. In the first quarter, we did not reach the 15% level, however, towards the latter half profitability intends to increase. So, we believe that the forecast is achievable. Thank you very much. Regarding your third question. On a full year basis, in the consolidated, what you have asked about. We have not changed the forecast. The most significant upswing factor which is possible is Hitachi Energy. For the first quarter, very high revenues and earnings have been posted. And but as I mentioned earlier, we have a significant backorders -- backlog and we are also making investment in terms of facilities and we are trying to accelerate the conversion going from backlog into revenues. We are following the plan. But if we're able to do a better job in terms of conversion, this is likely to become the most significant upside for adjusted EBITDA. As you have rightly mentioned the foreign exchange will be impacted by BOJ announcement made today. We are assuming ¥130, but there could be incremental impact as well. But what is most significant is Hitachi Energy. How the backlog can be converted to P&L is the most important factor. However, having said that, there is no clear visibility yet, therefore, that is the reason why we did not change the forecast at this point in time. That's all. Thank you.

Unidentified Analyst: Thank you very much.

Unidentified Company Representative: Let's continue. Please a mute and state your questions please? We're not hearing your voice.

Unidentified Analyst: Can you hear me now?

Unidentified Company Representative: Yes, we can now.

Unidentified Analyst: Thank you. I will like to ask three questions. First, regarding Hitachi Energy. So there was an increase. So, Hitachi Energy seems to be a rather the number has been rather conservative, although it's doing very well. I think you had a cautious assessment of Hitachi Energy’s revenue initially. So I wonder why that was the case, because it's doing very well. And there has been a quality problems with respect to grid networks. So what would be the impact on that delayed delivery for Hitachi Energy? And my second question has to do with elevator chart on revenue, page nine. So excluding Forex impact, ¥236.9 billion and on a full year basis, page 14, excluding FX impact ¥200 billion. So in the first quarter, I think you have already achieved the target. So revenue seems to be growing more successfully than you have planned, it appears. So in Q1, over 10% growth, do you think this can be sustained? Well, apparently, it seems possible. So I wonder what your views are. And question number three, regarding storage business, GlobalLogic is involved and it is looking to increase revenue, but storage is no good. So legacy server is being switched to AI server, which means that there's difficulty ahead. So if you could elaborate on that, please. Thank you.

Unidentified Company Representative: Yes. And thank you for your questions. So question one and three, storage, I would like to answer. And the second question, what was the breakdown of organic growth, I would like to turn to Kato San for an answer. First regarding Hitachi Energy. As you rightly pointed out, when we came up with the plan, at the beginning of the year, we had intensive discussions. Well, practicability was slow to show despite good orders, we had lots of discussions with the local management, but partially there is still lingering impact from inflation, and sourcing of electric steel sheets is difficult. And labor coming back after the pandemic, at what time would that happen? We're not sure. So there were uncertainties at the beginning of the year. So all of these coming back at a very rapid rate, we were not able to see that upfront. So we were very conservative in formulating the plan. But after three months, of course, there's impact from war in Europe, the labor is back and resources materials that can be sourced and electric, steel sheets are still expensive, but can be procured. And CapEx in production -- capacity increase has happened. So in three months, things have changed quite rapidly. And the speed at which backlog reflected in profit and loss that has hastened and short delivery of products that are delivered and reflected in profit and loss in one to two years. We are strategically capturing sales vendors’ products. So although this combined translated into a major increase this time that we're seeing after three months, and we do believe that this will continue into the second half and Hitachi Energy, well, as we said before, so there's going to be a major positive impact from Hitachi Energy into the second half. That's where we are right now. While the second question will be answered by Kato.

Unidentified Company Representative: Kato, speaking. What we explained earlier, if you could please look at page 13 once again. So here are the highlights or the forecast for FY ‘23 on a full year basis. Green Energy and Mobility, Hitachi Energy in the first quarter performed a very well, much better than our assumption. And so for the full year forecast, it's increased revenue up 10% and income up ¥9.5 billion. So upward revision is made. In terms of the sector, where way, M&A is considered, and the timing has to be considered. So in terms of the sector, it's not changed. So ¥170 billion of risk is being reflected in the revenue. Now, if you could have a look at page 14, as you rightly pointed out. So ¥230 billion in Q1, and full year ¥ 2.067 trillion. But if we add the risk ¥380 billion, so it's not lower than what we're seeing in Q1. As Kawamura San said power grid, Hitachi Energy’s business, we will monitor its performance in the second quarter and see how much upside we can expect. Thank you. Now to address your third question regarding storage businesses in the U.S. As you rightly pointed out this fiscal year, because of various settlement plans ongoing, we're not going to launch new products for this year, we'll have to wait until next year. So we're going to compete with legacy products this year. And what approach are we taking in that regard? Well, we have reshuffled the top management. For one thing, we are restructuring our sales channels, we're trying to strengthen sales channels for storage, and reduction of fixed cost and R&D costs, not reduction but reallocation R&D costs strategically, so we're performing cost control, to respond. Next year, we will have new product launch that will translate into market expansion. But this year, we're having new products, therefore difficulty will continue this year, that's what we're expecting.

Unidentified Analyst: So, Hitachi Energy’s quality problems. So a follow up question. And storage is going to shift to AI so is storage business likely to weaken?

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

Unidentified Analyst: And storage market to growth?

Unidentified Company Representative : Well, yes, there's been negative impact from AI. But -- so the market may not grow substantially. But there's a shift to cloud and overseas business. And so the pie overall is sustainable. So would the market shrink? Considerably all of a sudden, we do not believe so. With the launch of new products, we think we can still capture market. With the market change all of a sudden, structurally, we do not expect that to happen. Thank you.

Unidentified Company Representative: Hi. Thank you very much. [indiscernible] San. Please unmute and ask your question. Hope, you can hear me.

Unidentified Analyst: I have two questions. The first question is regarding the evaluation of the first quarter, especially organic growth ¥236.9 billion, how do you evaluate this? And this is the first result after the deconsolidation. I think it's a good result. What is your take? In order to maintain the organic growth, momentum, what do you think you have to do? And in order to sustain this, other prevailing risk, please elaborate further. That's my first question.

Unidentified Company Representative: Thank you very much. Answer. Regarding the first quarter results, actually, the first half is not over yet, though. So it is difficult to say this in a fixed manner. But I think the first quarter we did very well as there have been a foreign exchange impact that we have been discussing, but Hitachi Energy made a significant contribution, making a significant change in our performance which is related to the next question. It is organic growth after taking over Hitachi Energy integration is almost complete and now organically it is making contribution because it is working. As I mentioned at the outset, this is a very important parts of the Mid-term Management Plan. So, this is a good first step, successful first step in terms of achieving organic growth. Our intention is going forward will not be addressed. Large asset business must translate into revenues and earnings. There are four important points to bear in mind. There are different ways of thinking about this. So ¥1 trillion -- we have four businesses that are ¥1 trillion, GlobalLogic, digital transformation related business is one, we have railway business and Hitachi Energy, as well as Hitachi High-Tech. These four businesses are the main engines for our group. So return must be generated, which is a commission through the asset. That is going to be very important as we aim for organic growth going forward. Against this backdrop, but what are the risks that we are contemplating. When the assets are in place in terms of investment as well as business assets, as well as major contracts can accumulate. That means that the risk management job will have to be strengthened as well, that must go hand in hand. So that the four main engines can be fully operating and control the risk than to may emerge, that is our intention for the second half. Thank you very much. Second question. BOJ said the huge cost of control has been adjusted. So it's virtually rate increase. What the impact will this have for your business going forward? What is your take on this? Before coming here, I was looking at the news. So it is not an official comment is only an impression that I can share with you at this point in time. According to the cost of control, the BOJ is that for 10 year JGBs [ph] 0.5% to 1.0% flexibility will be provided. So the intention behind this is that having entered this week, in 25 basis points, right, I know it was conducted in a Europe as well as in the United States, but Japan cannot do that, because there's not the sector that there is inflation. So, some industry, there is more than 2% and other areas that is not the case. So, we cannot change the policy rate in Japan that is the reason why difficult maneuvering is required by the BOJ. The JGB flexibility is being in hands to so then through the bond market in terms of rate formation flow is provided. This is under the very difficult inflationary environment in Japan, the policy was compelled because of this difficult environment in the bond market interest rate formation is going to be utilizing the market. So against this backdrop, what is will Hitachi doing? In terms of policy view is going to go up immediately or the funding cost is not going to increase immediately. But for the time being according to what we have heard today, the interest bearing debt is -- we have ¥2 trillion on the balance sheet. Japanese yen debt is around ¥200 billion plus. That means that it is on a revolving basis. And there is refinancing and new interest rate. So every year ¥200 billion interest rate rise will have an impact every year. But under the -- it's on the same continue, it will control. So I think the impact will be very limited but we are assuming that. Furthermore, foreign exchange is going to have a more significant impact for us. With the BOJ announcement, the impact on the foreign exchange market is not clear because we're going to go into the weekend we have to look at what is going to happen in the next week, it'll curve control. It will have an impact on foreign exchange and this will have a more significant impact on our performance. The third point is interest rates going up and in the capital market the equity cost may be impacted as well. That means, that the investment threshold within the company the hurdle rate may have to undergo change. Therefore, in terms of investment, we will have to consider the rising interest rate environment, and this will have an impact on our direction going forward. So, interest bearing debt, interest rate burden as well as impact on foreign exchange, as well as the impact on the investment gray area decisions will be impacted. So, these are my first impressions, after looking at the report coming out with BOJ. At any rate, the interest rate will have an impact on market overall as well. Therefore, we have to watch the situation very carefully so that we can take appropriate measures going forward. Thank you.

Unidentified Company Representative: Thank you. [Indiscernible]. Please unmute and ask your questions.

Unidentified Analyst: Question. I have three questions that I wish to ask, question number one regarding Lumada. First quarter revenue your assessment of that year on year 30% increase based on the Japanese yen. This is above your full year forecast increase, so excluding FX impact, first quarter 30% increase, how will that look like? How is it different? And there are three segments, DSS, [indiscernible]. Of the three which is growing. It seems like connected industry. So is growing more if you could offer a qualitative assessment.

Unidentified Company Representative: Yes, thank you for the questions. So answer. Lumada's ForEx impact will be explained by Kato.

Unidentified Company Representative: Yes, so on Lumada 30% increase in Q1. There's not much FX impact, even excluding FX impact 27% increase was recorded, so only a 3% difference. So basically, even excluding FX impact organically, it's growing strongly.

Unidentified Company Representative: Thank you. So Lumada in particular, what's going to grow? We have not attached to this as part of today's presentation material. I do have some numbers. However, what's going to grow substantially?

Unidentified Company Representative: Well, you may think that Connective is growing more but year-on-year sector by sector, they're going to grow digital, on a full year basis 15% increase in revenue AGM 18%, CI 17%. So all of them are growing at a similar high level. Connective seems large, but last year Connective Industry’s number was smaller. So it appears larger in terms of growth. So industrial, for example, was not large last year, it's growing. Overall, all three are going to grow at around 16% 17%. Very similar. Thank you.

Unidentified Analyst: Well then question and question number two, Hitachi Energy’s profitability was improved in Q1 and you talked about several factors behind that. But what was the greatest factor impacting the upside and profitability in a descending order, what are the greatest factors and would they be sustained in the second half? You talked about short delivery products and what would be their impact on impact and will the impact continue into the second half?

Unidentified Company Representative: Well, thank you for the question. Answer. Hitachi Energy, it has business size of ¥1 trillion. So Hitachi Limited is always involved in monitoring its business. And there are three main factors behind profitability improvement for one thing. There are over 100 plants and factories small and large around the world. We have made an effort in consolidating these plants and factories and driving down fixed cost and it's showing its effect now. So that's one. And secondly, we have narrowed down R&D strategically, grid automation, especially a software development, we have been concentrating R&D on that. So a large transformer -- large product, so rather than doing R&D on those larger products, we're shifting our R&D on software. So selective and strategic approach to expenditure spending R&D. And number three, inflation is somewhat down and so cost as well, although cost remains high, still it has become stable, and costs increase is passed on to the customers driving profitability. So these are the three main factors are behind the profitability improvement for Hitachi Energy, and how will this fare in the second half, there are still uncertainties. But what I just mentioned, for example, consolidation streamlining of plants and factories and procurement cost is stabilized. Cost is passed on to customers. So I think they will evolve in a stable fashion. So I think these trends can be sustained into the second half. That's all. Thank you.

Unidentified Analyst: So question number three, regarding Connective industries, in your presentation, well, in the first quarter, High-Tech was low, you mentioned. Now looking at your peers, projects are being extended, it seems. So downside risk of High-Tech business, how do you view that? And suppose that there's a downside for Hitachi High-Tech and if we look at connective industries segment alone, would there be any other upside impacts from anything else, so building system business in China, for example. So any positive factors that would offset the negative, if you could share with us?

Unidentified Company Representative: Well, thank you for the question. Answer. About downside risk of High-Tech. This is because the semiconductor manufacturing equipment, Intel has been suffering with AI. Well, there's been a shift away from Intel to MBI, MBI is now the dominant player in the market. So very difficult condition has continued by the end of this fiscal year. I think the correction in semiconductor manufacturing equipment market will end there will be recovering next year, we're expecting. An in terms of High-Tech, we also do a medical analytical instrument that we do with Bosch. For the past three years, because of the impact from pandemic there has been very high demand for these instruments business has been very robust. So, without this medical business, I think semiconductor segments business would have been down more severely for Hitachi High-Tech, but medical has been a positive factor offsetting that impact. And that's this number. And Kato will share with you some numbers.

Unidentified Company Representative: Well, just to add to what was said in the first quarter, well customer’s plans have been changed and shifted, in terms of timing. But plans themselves will not change all that much, but it was lower in the first quarter. But I think semiconductor equipment sales will be the same or flat as FY 2022. And medical equipment in the first quarter, there was some more upside than plan. For the full year forecast, we are seeing increase. So semiconductor equipment flat from the last time but second quarter and onwards for semiconductor equipment business, we would like to closely monitor the market. So overall, Hitachi High-Tech is in a difficult question. Are there any positive factors that we can look to, you asked? Well, High-Tech business has a business of ¥1 trillion, one it's sluggish. We need to have a counter factor. But because of the size of its business, it's very difficult, but overall elevator business in China, it's true that it's not easy there, but we are dynamically reallocating our resources to service business. So constant revenue from that and home appliances are recovering steadily. So we may be able to use that to absorb digital water environment and industrial products, they are not large but they are evolving in such a way that they will contribute more to the bottom line. So even if High-Tech continues to be difficult for a CI over connective industries overall, we do hope that we will be able to absorb negative impacts and achieve that the plant numbers. That’s all. Thank you. Well, Yoshihiko wishes to add a few comments.

Yoshihiko Kawamura : So semiconductor market conditions. U.S. etching company's financial results, I'm not sure if we're monitoring them, but WFE. I have made an upward revision to their forecasts, which is very good sign, we think. So now no technology solution, this segment is in the negative but compared to the etching company in the U.S. year-on-year, Q-on-Q our businesses moving almost in the same direction. So inclusive of that WFE forecast was revised upward, so investment appetite and as Kojima has answered in investor day, AI is going to be a boom, so processor related business where Hitachi High-Tech is involved. So energy consumption with respect to that and technology innovation will be activated as a result. And I think they will increase going forward and if that is going to be the case. And it depends on the manufacturer or the customer of course but I think we can expect the market to bottom out in the second half. That's our hope. So we would like to closely monitor the market for nanotechnology business and in other industries just add home appliances GLS, Lumada business there is to be grown we're trying to do so. And Lumadas business in the first quarter for industrial equipment, well as a part of the midterm business settling we have this narrative so connected home appliances and Hitachi some keys Lumada business in North America that is ongoing. So that is something that I would like to add. Thank you.

Unidentified Company Representative: Thank you very much. [indiscernible] please unmute and ask your question.

Unidentified Analyst: Question. I have three questions. First question is, you said that the backlog is quite significant. So please give me more detailed information regarding this business. Last year, a significant growth was shown. It seems that this year, it is increasingly stronger so please elaborate further on this business?

Unidentified Company Representative: I'd like to ask Kato San to respond.

Tomomi Kato: Page 19 the others are shown here DSS, from business so for DSS is about 70% which has been a very stronger stunt. So all these businesses are stronger financial BU, major deals have been achieved. And social BU, major deals have been won. And in power measure deal has also been one, so last year was rather weak, but we have been able to receive all this. And for the communication areas that we have behind the front loading of the orders received and that is reason why for the front business we have achieved a 70% growth.

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

Unidentified Company Representative: I would like to ask Kato San to explain first.

Tomomi Kato: Regarding connective, 120% has been achieved. What is characteristic is High-Tech and first and foremost connected products in High-Tech in hardware, data enabled and connected are increasing and they are not all Lumada products. So, we refer to them as non-Lumada. So shifting from non-Lumada to Lumada is now occurring. So High-Tech is increasing its business. What is another characteristic is that home appliances GLS and building system in this area connected products are increasing in terms of ratio and digital service business in terms of a business remote monitoring is enabled? Lumada businesses increasing from there is a shift occurring from non-Lumada to Lumada business. And that is reason why connective products have increased. And next let me give you a specific example for home appliances. Refrigerators and washing machines are increasingly becoming connected. But what is more prevalent is the inventory of the mass merchandisers and the track record of customer purchase as well as maintenance are areas where Lumada can be enabled and providing control. So in addition to standalone connected in terms of sales, Lumada is making a significant contribution from Walter. It's not just hardware, pumps and motors are not what we are only selling and Lumada can provide in-house services in this area as well. So it's going beyond hardware, the operation per se can be covered by Lumada. This is the direction we are pursuing having an impact overall.

Unidentified Analyst: Thank you. Question regarding High-Tech. The connected means that you have Lumada for Hitachi compared to other manufacturers? Do you think that this could be a differentiating factor? That's my take. So compared to other companies may understand this is a more advanced use case?

Unidentified Company Representative: Yes, that is correct understanding. There are two reasons why I say this. Software and applications are sold by our company but that's not all. We also have hardware products in the background as well. We can also operate factories we can operate train systems as well. Data can be collected and the management know how will be captured in Lumada. This is also the source of the competitiveness for Hitachi. It's not just a software and applications, we have product as well as system operation capabilities as well which is a source of our strength. Well in terms of characteristic of Lumada products, it's vendor free and vendor agnostic. We can use Lumada for different applications. So it's not just a simple jet engine for a company, we have multiple entry points. Lumada can control the overall system. This is also another source of competitiveness on our part. For High-Tech Lumada solution using semiconductor co-creation sites, we have the three such sites. We are working closely with our customers in 2022 in the United States, in Oregon, we have such a site. For this year in Taiwan, we have established the site and in Korea 2022. So I think it is easy for you to imagine what kind of clients we are working closely with and in the area of growth, where we can have a laboratory jointly with our customers, so we are close to our customers. That is the DNA of Lumada, the strength of Lumada that is being brought there in a specific manner.

Unidentified Analyst: Third question. Regarding energy. I want to clarify the following. You said that the backlog is increasing for energy. And you cannot correspond to that that is a reason why you're trying to enhance your capacity. And you're also introducing the short delivery products. Have you been able to ramp up the capacity faster than expected and is that the reason why you are able to increase revenues in this area?

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

Unidentified Analyst: Thank you very much. That's very clear. Thank you.

Unidentified Company Representative: Thank you. To continue [indiscernible], please unmute and ask your questions.

Unidentified Analyst: Yes, thank you. Can you hear me?

Unidentified Company Representative: Yes. Thank you.

Unidentified Analyst: I would also like to ask a few questions. First about the situation of late. We're at the end of July, Hitachi Energy, Hitachi High-Tech. There are both negative and positive factors that you explained about. So have there been any changes since the end of the first quarter, if you could offer qualitative comments?

Unidentified Company Representative: Well, thank you very much for the question. Well, Q1 is over and we're at the end of July and half of the second quarter is almost over. The greatest change from the end of Q1 is so Forex. First quarter actual rate was ¥137 yen to the dollar. But how will the rate change? Will it go up or down? We have come to a turning point, if you will. Up until recently, I think there was a forecast that the yen will further depreciate, but we no longer know whether that's going to be the case because the BOJ announcement and other developments. So Forex is very uncertain. That's one change. And secondly, in terms of the business, have trends changed in a market away from Q1 to Q2? No. The four engines of growth that I talked about where there's large asset base, they are moving, they're operating more or less as planned. So in terms of the substance of business, is there going to be any major change in the second quarter? I do not think so.

Unidentified Analyst: Well, thank you for the answer. My second question, page 9 about adjusted EBITDA others, so increase in businesses scale changes in selling prices. There are several factors noted here. So is this in descending order, the largest at the top? So if you could show the size of the number of for each?

Unidentified Company Representative: Well, Kato will answer the question.

Unidentified Company Representative: Well, as you said, yes, this is in descending order, the largest at the top. So changes in business scale. So ¥236 billion. So in correspondence to that ¥68 billion, that's changed in business scale, ¥33 billion for selling price change, and rising material prices, the impact there negative ¥10 billion, and the remainder is the rest. So in line with the increase in revenues, so we are reinforcing construction, which has a negative impact, but roughly, that's the breakdown for this.

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

Unidentified Company Representative: Well, thank you for the question. As you know acquisition of Thales, well, that is for Thales Railway signaling system. So European continent and the U.K. From the competitive authorities of both, we have heard opinions and we're in the final leg of negotiation or coordination with the U.K. CMA, or competitive competition authority. Well, Thales says signaling business and while they're telling us that, they would like to coordinate the competitive condition by changing the scope of signaling system, we have offered a counter proposal to what the authorities have said and they're looking at our counterproposal and whether confirmation go or no go, that will be heard in around October, according to the media. So the actual deal will be done into the New Year, or at the end of December, at the earliest. So, by the end of August, we're looking to close the deal. But because of our coordination with the U.K. authorities, it's taking time, therefore, we're looking to close the deal, yearend or early into the New Year. So there's been some delay of several months, but we were able to acquire and that's it's included in the forecast. That's where we are.

Unidentified Analyst: So you're including Thales in the second half. That's three months’ worth of business, but it could be reduced. Is that correct?

Unidentified Company Representative: Yes. If it cannot be closed in September, if it's going to be closed in December, yes. Three months’ worth of business to be subtracted from the forecast. That is correct. Thank you.

Unidentified Company Representative: Now at this time we would like to now take questions on the English Channel. Those of you with questions, please use the raise hand button. Any questions on the English Channel? Please use the raise hand button if you have a question on the English Channel. There seem not. So will Google revert back to the Japanese channel? [Indiscernible], please unmute and ask your question.

Unidentified Analyst: Question. I also have three questions. I have three questions. First of all, regarding building system. Revenue was better than expected. In terms of backlog, minus 14%. How can we evaluate this in terms of real estate market is in a correction period? And has there been any changes in the competitive landscape. And taking into the orders into consideration is still on the course of increasing revenues based on services?

Unidentified Company Representative: Thank you. Answer. Kato San will answer.

Tomomi Kato: Regarding the building system in the first quarter. As you have rightly mentioned before building system minus 14% in terms of orders, this is mainly a reduction in China. For new builds. The number of units is decreasing compared to the previous year. So, that is a decline, but as I have explained in terms of service business. So, maintenance as well as retrofitting elevators, so, for existing buildings and renewals are very strong. For the first quarter, the performance was good. For the new buildings has decreased, there is also time lag in terms of sales. Therefore, with the first quarter orders, it is for the forecast for the year will change for the -- the focus for the fiscal year is still achievable, according to our view.

Unidentified Analyst: Second question. Regarding GlobalLogic? 22% increase for the full year and 19% for three months, so it seems as though you're slightly behind. Is this impacted by the global recession? What is your take? Please elaborate?

Unidentified Company Representative: I'd like to ask Kato San to explain this.

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

Unidentified Analyst: Question. My last question. Regarding DSS service platform, profit, there's what I'd like to ask a question about, storage is declining and growth investment is expanding. Specifically, what kind of investment at what scale are you contemplating?

Unidentified Company Representative: Answer. There are two points to be made here. Research and development continuous investment will take place and there is also M&A. One time a significant amount may be invested as well, mainly around Lumada and generative AI are areas. There is investment domain and research and development on recruiting mode. It isn't as if we are contemplating investment for large acquisition, it's a generative AI, round Lumada where we are continuing to make investment. For example, for cloud, especially for hybrid cloud, we want to grow this business going forward. The full solution so will be enhanced as well as sales effort will be stepped up. That is where we are making investment for growth. Regard the first point building orders. Last -- first quarter in terms of units. The business was very strong compared to the quarters before and after. Last year’s first quarter was 110% in terms of orders. And then the subsequent quarter, it was below 100% because of the slowdown in China. So if we make a year on year comparison between the first quarters, last year was very strong. So minus 14% is a numerical impact that is manifest. Regarding the growth rate of the GlobalLogic business. Two pure competitors exist in the United States, organic and inorganic are mixed in the performance. But on the surface, our numbers are larger but the impact of M&A must be considered as well. There is also synergies that have been brought to bound with other businesses. So if we exclude that, compared to a competitor, so, we are in line with industry. But on the other hand, we have the other sectors, and we can bring to them and enjoy synergies. So, that is the advantage of GlobalLogic belonging to the Hitachi group. So, in this way, that is how the trajectory of growth for GlobalLogic should be evaluated.

Unidentified Company Representative: There seems to be quite a number of hands being raised, but we're approaching the time to close. So the next one will be the last question. And we will like to follow up on other questions later, individually. So, lastly, Ishino San [ph 1

Unidentified Analyst: Thank you very much. Can you hear me?

Unidentified Company Representative: Yes, we can hear you.

Unidentified Analyst: Thank you. So question, what comments and talk at the beginning. So Japan accounts for 35% of revenue and overseas 65%. It's in the past share performance report as well. So for Hitachi group, in terms of profitability in Japan in terms of profitability, what is the percentage that Japan accounts for? And how are you are trying to control a global profitability in that context, as well, Asia, North America, Europe, there are other regions. So how are you controlling a profit Japan versus overseas?

Unidentified Company Representative: Well, thank you for the question. Well the number for Japan alone, we're not tracking that any longer each sector each business unit has global business, including Japan, we're looking at over numbers only. So we're not covering out numbers such as for Japan, we're not able to give you an immediate answer. So please take your question, please let us take your question back as homework.

Unidentified Analyst: Well, when monetary policies are changed substantially I think that's going to be a very relevant question. So I look forward to your answer at a later time. And another question, GlobalLogic, Generative AI related business orders, what is the percentage of such orders?

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

Unidentified Analyst: Well, thank you. And lastly, about High-Tech, Hitachi High-Tech. So orders. So that was mentioned about WFEs upward forecasts revision. So the extent of improvement is limited, it's minus 30 to minus 25. So Hitachi High-Techs order growth. Our orders are going to slow down given the situation of the industry. Does that mean that it's going to have a tough time next year?

Unidentified Company Representative: Well, thank you for the question. I think I talked about this in earlier discussions. But Hitachi High-Tech not only does semiconductor manufacturing equipment, but medical analysis and measurement, instruments, data processing as well as, so that balance out. So manufacturers who are dedicated to semiconductor manufacturing equipment, they're in very difficult position, but Hitachi High-Tech is not, medical businesses doing very well. It can be balanced out and offset. So semiconductor manufacturing equipment decline will be bottoming out. And we believe that there will be a recovery in that market into the next year. So in the second half of FY ‘23 next fiscal years’ we're not being pessimistic about our semiconductor manufacturing equipment business. Thank you.

Unidentified Company Representative: So the time has come, I need to bring the Hitachi Limited web conference on first quarter fiscal year 2023 earnings to a close Thank you very much for your attendance despite your busy schedules.