Hitachi, Ltd. (6501) Earnings Call Transcript & Summary

Thank you very much for taking your time to join us today for Hitachi's financial results briefing. We will now begin Hitachi Limited's Financial Results briefing for the first quarter of the fiscal year ending March 31, 2027. Let me first introduce today's speakers. Tomomi Kato, the Senior Vice President and Executive Officer, CFO, Hitachi Limited; Masashi Hatakeyama, Vice Perten Executive Officer, Deputy CFO; Shinichiro Tamai, General Manager, Investor Relations division. Those are today's 3 speakers. So Mr. Kato, the floor is yours.

I'm Kato. Good afternoon. Before I begin today's presentation, I would like to express my deepest condolences to those who lost their lives in yesterday's Kumamoto earthquake of 2026 and extend my heartfelt sympathies to everyone affected by this disaster. At this time, we have confirmed no material impact on the Hitachi Group. However, we will continue to closely monitor the situation and take any necessary actions as appropriate. In addition, based on conditions and needs in the affected areas, we are considering what support Hitachi can bid to assist with the recovery efforts. Now I would like to walk you through our consolidated financial results for the first quarter of fiscal 2026 as well as our outlook for the full year. Let me begin with the key highlights of today's earnings announcement. In the first quarter of fiscal year 2026. The revenue increased 20% year-on-year, reflecting business expansion as well as favorable foreign exchange effects. Both revenue and adjusted EBITDA reached record highs for our first quarter led by the continued strong performance of Energy Power Grids business, all 4 sectors, DSS, Energy, Mobility and Connected Industries achieved double-digit revenue growth. The impact of the situation in the Middle East during the first quarter was smaller than we had initially anticipated. Quarterly profit was broadly in line with the previous year despite the impact of the progress at JPY 50 billion special dividend associated with last year's air conditioning business reorganization. On a comparable basis, we regard this as an increase in profit Core free cash flow also exceeded the previous year's level despite the absence of large advance payments supported by improved collection of trade receivables. Now our outlook for fiscal year 2020. reflecting our stronger than planned first quarter performance, order trends and revised foreign exchange assumptions, we have raised our forecast for revenue, adjusted EBITDA, net income, core free cash flow and ROIC. To support organic growth, we plan to increase capital expenditures, including investments in production capacity and also expand the corporate strategic investments aimed at accelerating AI adoption. Developments in the Middle East remain a potential source of significant volatility depending on how the situation evolves, we will continue to monitor them closely. The results include several factors, including foreign exchange effect when comparing with the previous year. Let me explain the year-on-year changes in revenue and adjusted EBITDA. Revenue increased by 10% year-on-year, given primarily by business expansion. After taking into account the negative impact of the Middle East situation, onetime effects from large projects and ported foreign exchange effects, Revenue increased 20% year-on-year. Adjusted EBITDA followed a similar trend. The adjusted EBITDA margin improved by 110 basis points through business expansion and other factors. After reflecting higher corporate strategic investment, the impact of the middle situation, onetime factors and foreign exchange effect, adjusted EBITDA margin came to 11.9%. And the outlook for FY 2026 follows the same trend. Revenue is expected to increase by 9% Y-o-Y, primarily driven by business expansion. In addition, after taking into account the impact of the restructuring of Home Appliances business and ATM business and the foreign exchange effects, full year revenue is expected to increase by 11% year-on-year. For this forecast, we have revised our foreign exchange assumptions for the second quarter onwards to JYP 160 per USD and JYP 185 per euro. Adjusted EBITDA is expected to follow the same trend as revenue, business expansion and other factors are expected to improve the margin by 10 basis point after reflecting corporate strategic adjustments and the impact of the Middle East situation, foreign exchange and other factors, we expect the adjusted EBITDA margin to 13%. Next, our first quarter results and full year outlook by segment, as shown in here, including special factors, First quarter orders increased 7% Y-o-Y revenue rose 11% and profit also increased. In Japan, growth was driven in particular by our AI transformation business, which supports customers' AI adoption together with our modernization business, which upgrades the underlying systems. -- profit decrease tanks not only to higher revenue but also to stronger project management, expansion of the Lumada business and productivity improvements through AI. For the full year, we have raised our forecast by JPY 30 billion for revenue and by JPY 8 billion for adjusted EBITDA. In Energy, Power Grids orders increased significantly Y-o-Y in the first quarter. Supported by continued strong memory transmission equipment and including foreign exchange effect, revenue increased 37%. Higher revenue together with productivity improvements also led to higher profit. For the full year, we have increased our revenue forecast by JPY 360 billion and adjusted EBITDA forecast by JPY 76 billion. Adjusted EBITDA margin is expected to improve by 130 basis points to 14.2%. Mobility first quarter orders increased 25% Y-o-Y driven by large signaling and control logic together with foreign exchange effects. Revenue and profit also increased, supported by strong performance in Lumada businesses such as railway signaling systems together with favorable foreign exchange. For the full year, we have raised our revenue forecast by JPY 100 billion and adjusted EBITDA by JPY 9 billion. The adjusted EBITDA margin is expected to improve by 120 basis points Y-o-Y, reflecting growth in Lumada business, such as we're signaling in connected industries. First quarter orders increased 25% Y-o-Y, led by the measurement and analysis equipment. Revenue increased 3% Y-o-Y, including foreign exchange driven by the expansion of service business in Building Systems and growth in semiconductor manufacturing equipment as well as semiconductor measurement and inspection equipment. For the full year, we have raised our revenue forecast by JPY 100 billion and adjusted EBITDA by JPY 14 billion. Consolidated is first quarter revenue increased 20% Y-o-Y. However, as I mentioned before, differences in the scale of special factors, including foreign exchange effects, mean that full year growth is expected to be 11%. Next slide, I'll expand the results, excluding these special factors, I'll expand the first quarter results and the full year are bob segment, excluding special factors, excluding special factors such as foreign exchange and business reorganization, Hitachi's consolidated revenue growth first quarter. We expect this growth moment to continue, resulting in 9% growth for the full year. Adjusted EBITDA margin is also expected to improve by 100 basis points Y-o-Y. In DSS, we expect to maintain the first quarter growth rate through the year resulting in full year growth of 6% in FY '26. As in the first quarter, AI transformation and modernization are expected to remain primarily growth drivers. We also expect the profit margin to improve. In energy, the revenue got rate may appear to moderate from the second quarter onwards. However, in absolute terms, revenue growth is expected to exceed Y-o-Y increase recorded in the first quarter supported mainly by planned capital investment in the Power Grids business, expanded our production capacity through workforce growth and productivity improvement, we expect revenue to increase 21% year-on-year for full year, excluding special factors with the creating improvements in the profit margin. In Mobility, we expect to maintain the first quarter revenue growth rate throughout the year. We also expect the profit margin to improve through a better business mix in railway signaling and rolling stock business with cost reductions. In Connected Industries, we expect to sustain the first quarter revenue growth rate through the remainder of the year. resulting in full year growth of 6% year-on-year. The key growth drivers include demand for semiconductor manufacturing equipment and clinical analyzers, measurement and analysis systems equipment and as continued building service business grows. And also expansion, including the mother business is expected to improve profit margin. So from here, I will explain the progress of the DSS strategy. First, I would like to talk about the domestic IT service business in first quarter revenues increased by 8% Y-o-Y, so as profit. centered around the AI transformation and modernization by industry, the financial in insurance and the social sector, including government agencies and local governments and transportation each grow by double digit or more driving us the overall Domestic IT Services business. For this fiscal year, we are aiming to increase orders by 7% Y-o-Y to accelerate the growth of this AI transformation business, we newly developed and announced last week the Agentic AI integration platform. This platform, combining Hitachi's domain knowledge with our partners, Frontier AI enable us to achieve both high quality and rapid development speed. We'll apply it large project for system integration starting inceptor. Next is overseas IT services business, specifically global logic and Hitachi Digital Services. These 2 have been operated as 1 entity from this fiscal year. The total of synergy in a stand-alone revenues increased by 28% year-over-year in Q1 and Synergy revenues expanded significantly compared to last year, primarily in energy and mobility. Despite a challenging market environment surrounding the digital engineering business, revenues exceeded the previous year's levels. Further growth in energy, we opened an experience center in India in Q1, where customers experience benefits of HMAX solution for building systems. We're also strengthening our physical AI capabilities with other companies through Alliance. Moreover, [indiscernible] selling a project that offer end-to-end services from digital engineering as the operation, expanded in high-tech and manufacturing sectors contributing to the revenue increase in Q1. As announced today, we welcome Anand Birje who will lead overseas IT service business to accelerate business transformation. Next is the impact of the Middle East. In Q1, a large project in the Middle East was affected along with some raw material shortages and a cost increase. However, the impact was rather limited than initially anticipated. We have factored in the risk of impact from Q2 onward in the current forecast, but there will be so much uncertainty and subject to change. We'll continue to monitor it closely. From here, I will explain the highlights of the Q1 FY 2026. The -- revenues and profit increased for all 4 sectors as of core free cash flow. We spent more on organic growth, primarily CapEx for facility investment with focus on energy. For organic growth, Mobility completed the acquisition of a clever devices, IT service company for public transportation in North America. Moving forward, we will expand our business to the multimodal domain beyond the railway sector. As regards to shareholders' return, we bought back JPY 150 billion of our shares in Q1, reaching 27% of the plan for this fiscal year. Here, I will explain the quarterly profit and cash flow on a year-on-year basis. Quarterly profit remain at roughly the same as the previous year despite the impact of special dividends associated with the air conditioning business reorganization in the year before. As for report free cash flow, excluding the impact of [indiscernible] received, it increased by over JPY 200 billion year-over-year attributed to higher adjusted EBITDA and improvement in net working capital, driven by better turnaround of receivables. Now I will explain the financial position. Total assets at the end of Q1 FY '21 stood at about JPY 15 trillion, staying nearly the same as the end of FY '25. Cash conversion cycle dropped from the year of the end of FY '25 mainly due to less receivables and more advanced payments to improve the capital efficiency even more. Next is revenue by region. We expanded overseas led by Europe, including ForEx impact, Energy grew average all regions, including Europe and North America, hitting 35% in total. Mobility grew by 18% total RCS led by the real control business, particularly in Europe. CI grew by 21% total overseas, mainly in China, driven by an expansion in building system services as well as semiconductor manufacturing and inspection and measurement equipment system. This pages order results by segment. DSS increased by 7%, driven by growth in the domestic AR transformation business, modernization of business and global storage business. Energy saw a significant increase. Despite nuclear energy's rebound from scale project in the previous year. The Power Grid business benefited from solid demand for gradient in several large-scale HVDC project in Europe. Order backlog exceeded JPY 10 trillion. Mobility increase overall due to large orders in the rail control project, order backlog increase compares to the end of FY '25, including ForEx impact. CI expanded as a whole, driven by increases in semiconductor manufacturing and inspection measurement equipment well as clinical chemistry and immunocity analyzers. There are the highlights of the FY '26 forecast. As for organic growth investments, we plan to increase CapEx by over JPY 170 billion Y-o-Y with focus on the power grids and energy. With regards to shareholders' return, there is an unexecuted buyback of about JPY 400 billion for Q2 onwards and will continue with share buyback. We are also revisiting ForEx rate set for Q2 onwards. Here I will explain the net income and cash flow on a Y-o-Y basis. Net income is expected to increase year-over-year due to higher operating income despite the in nonoperating gains and losses from business reorganization, it was on a portfolio reforms executed in FY '25. Core free cash flow is expected to increase Y-o-Y, excluding the impact of large advance received -- despite increase of tax such as capital expenditure for production expansion and a rebound from special dividends tied to last year's business reorganization, higher adjusted EBITDA and a better net working capital will contribute. Finally, I will explain the Lumada business, a key pillar for our growth on Page 27. Here is the performance of Lumada and HMAX, which is a solution for Lumada digital service business. The mother accounted for 43% in Hitachi's consolidated revenue. For FY '26, we plan to reach approximately JPY 5 trillion, 22% increase Y-o-Y, which accounts for 44% of revenue on improving adjusted 17%. The Q1 revenue growth was mainly driven by the modern such as Domestic IT services and a global storage and DSS building system services and I and semiconductor manufacturing equipment and medical analyzers in measurement and analysis systems. As for HMAX, Q1 revenue reached approximately JPY 110 billion. We achieved a 22% progress towards the full year forecast of JPY 505 billion for FY 2026. I Key drivers are HMAX in the railway, CI and DSS. This concludes the briefing on the Q1 performance in the full year forecast for FY '26. We recognize that in Q1, that represents a good start for the second year of the Inspire 2027. In particular, we believe that the growth drivers excluding the one-off factors explained today are highly sustainable. On the other hand, the Middle East of peers and external business environment remain uncertain. We'll push forward the growth strategy as well continues to enhance risk management.

Thank you, Mr. Kato. We will now move on to the Q&A session. [Operator Instructions] We'll take questions in the order of the Japanese channel first. We'll take questions from a press and institutional investors analysts during the same QA session. [Operator Instructions] Mr. [indiscernible], could you please unmute yourself and please ask questions in Japanese.

My name [indiscernible] from Fidelity. My first question. Q1 Energy business, the improvement of the margin compared to your assumption, was better. And compared to the full year, I think the number is higher. and what is the reason that -- and after Q2 and onwards, do you think with the same reason, it's going to be higher? Could you please explain that?

Yes. Thank you very much for your question. Yes, this time, Q1 performance of Energy business. At first, we had a plan. However, compared to that, the number was better. There are some factors behind that. In terms of yen, there is an impact from the foreign exchange. However, in dollars, it's increasing, mainly the order situation compared to our assumption, it was very strong. And Q1 order situation I explained, large-scale orders we have received as well. But other than that, what we call base orders, they are not large orders. However, for example, transformers and those equipment, those are very successful, and that really contributed to the performance of Q1, and we are doing CapEx spending and including the increase of hiring, we are increasing the capacity and also productivity has been enhanced. And last year, it was as well. But in Q1 as well compared to our assumption, it was better. We have a lot of products we are making, and we have so many defined projects going on. So as much as possible, we would like to strike a very good balance, and we are spending our investments on IT, and that is really contributing. And during the explanation, I was talking about the foreign exchange and also other than temporary factors and other special factors, we have added some explanation on Page 7 of the slide. As you can see here, as for the revenue, the percentage I talked about after Q2, it looks modest compared to Q1. However, looking at the value in Q1, there was an increase of more than 3x as much. In Q2 and Q4, you can see it in terms of the growth rate, the growth rate year-on-year might be the same as Q1. And the margin as well 10 basis points and over is our assumption. So that means basically that this should remain However, having said that, what we cannot project right now is the enhancement of the efficiency of production in the field, this is really the contribution of the field and the efforts of them, but it's possible that it might change up or down -- my second question, it might be related to your explanation, and you are talking about HMAX EBITDA ratio was 22%, and you have 4 segments. HMAX exposure, for example, it should be different from the breakdown of Lumada business. So what is the specific segment or segment that has a contribution of HMAX or the improvement of the margin -- profit margin. Yes, HMAX last fiscal year, we only had the fiscal year's number. So year-on-year Q1 growth cannot be disclosed. I'm sorry, we don't have the number here. However, we believe that there is a 2-digit growth, especially the contribution comes from building and high-tech business and mobility railway business. they have contributions and as for building as we have announced HMAX for Building for remote monitoring and as for high tech, especially the projective analysis for the equipment and also each of them really contributed. And as for the margin, about 20% and over evenly. So compared to the other sectors, profit margin, the growth here really looks significant. This really is a traction.

[indiscernible]

My name is Hirakawa. First question is about the domestic IT has explained, AX and the modernizations, really driving the performance. I understood that. And on the other hand, during the Investors Day, you said 7% growth if you continue to do that, then that will reach to the JPY 3 trillion of revenue at some point. However, the JPY 5 trillion, which is the significant figure has been already represented and there is a significant demand for the AX? So right now, your number is 7% of the revenue growth. And we actually foresee the double-digit growth. And if you have that visibility when that what's going to be revised? And will be the -- do you have enough capacities leveraged by EI, for example? That's my first question.

So for this year, domestic IT service is the domain that you asked. So the late single-digit order is visible now. But I'll ask -- this is not enough to hit the JPY 5 trillion. The 2 drivers. One is the leverage of AI. How much of the profitability improvement we could achieve is 1 key -- so the -- as of the end of '25, 10% of the productivity improvement was achieved. So we try to push this number up -- so for the next year, FY '27, this number should go up to 30% from 10%. So that's the internal target. This is ambitious target. So how far we could achieve it is still not really visible, but this is a great contributor to the improvement of the productivity. Another 1 is inorganic growth investment for the domestic and IT service, we don't that much around it. However, saw some specific targeted domain, there is any opportunities out there. We would like to seize the moment. So these 2 factors, if these 2 driver work, then we could actually start to foresee the JYP 5 trillion was in the range of achievement. So as for the productivity improvement effect, that would contribute to higher profitability. But productivity improvement itself, how does it work? So because now you have a better visibility, that's actually it explained Yes. So in the domestic market, we have a limited number of the IT resources. So we haven't been able to fully accommodate all the demand. So if we can improve the productivity, leveraged by AI, we could accommodate more customers needs in demand.

The second question is about the HMAX. During your presentation and the HMAX, you brought up the CI, specifically in the buildings and IT as a contribution drivers. But to me, the real way is the starting point of HMAX so that the Railway Business accounts for the significant part of the HMAX, I'm sure that it's difficult to express for FY '26 ended in March '27 or the following year, how does HMAX exposure would change how this HMAX is going to grow and how the energy is going to be playing its role in this context?

So JPY 110 billion is the actual result as of the end of the Q1 and half of this JPY 110 billion is CI. So specifically building and Hi-Tech followed by railway business and also the DSS and energy follow -- and as of now, in order to number the CI, since it has significant exporter compared to the mobility. So that's a result but the radio, I cannot really refer to it, but every sector, every BU expect it to grow. So all of them will be on contribution drivers in a midterm perspective. That's all.

Next, Mr. Yasui.

My name is Yasui from UBS. About Energy. That's my first question. At first, you were talking about efficiency improvement. So could you please elaborate on this and conclude at new factories, you have increase. And so the lead time for production is getting shorter. And this is a new factory, you have new machines. Is that the contribution for the efficiency? So in terms of the continuity going forward, if you can achieve high margin per revenue, is that true? Or the cost for materials is increasing. So how are you passing the cost into the end users and customers? And what's the significance of this continuity. That's my first question.

Yes, for FY '25, the trend is the same. So FY '25, the revenue increased -- it's not only about the increase of the capacity of production. We cannot explain it only with that. I don't have clear numbers. However, to some extent, Yes, production capacity increase was the contribution there is really true. There is a significant contribution. To what extent we can continue this trend, but before efficiency, looking at the backlog situation, always the margin per backlog is what we are checking. And so far, the average backlog and we are looking at the gross margin, it's improving. It has been improving. So in that sense, by managing the backlog, we can increase the gross margin ratio and the production efficiency. FY '26, we saw a great event FY '24, the previous year, our ERP system introduction was completed. So we are getting used to using it. And FY '25, we are seeing good results from that. And about AI, we are using AI as well to enhance our business efficiency. So we do have that project as well. So how AI utilization can improve productivity is the next point. And another factor is project management. We have had so many large projects and orders such as HVDC. The period is very long for those projects. And so we might have some risks associated. However, we are doing derisking out of EPC, EMP Engineering and procurement are our focus. As for civil, the construction we don't include the C part in the construction to receive orders. So in terms of project management, we always make an effort. So the cost excessive cost to make it efficient. Well, compared to the past, that kind of case is already declining. So in terms of project management, we are really improving the situation that really contributes to the profitability. Additionally, about price situation, so many products are increasing costs. So your procurement cost increases and selling prices are increasing, so I'm not talking about the increased prices because of the cost, but because of the tight demand and supply situation, can't we just expect the profit increase because of the price increase. Yes, as you point out, HVDC project might have 5 to 6 years in the projects. So how to reduce inflation risk is one. So project management includes what I have described I'm sorry, I didn't explain that clearly. But basically, we are using a lot of indices. So when costs increase, we can reflect them on the selling prices to customers. That is our system. These are indices. Well, there are not so many cost reductions, but cost increases could lead to, well, a pass-through. So this is not profitability and product. This is not real increase of the profit, but we can, of course, increase the margin, but we can stabilize the business. That is our recognition.

Yes. My second question. Overseas, Global logic and storage business blocks to our business have been very good. You said at the same time, DRAM and NAND they are getting very high in terms of the prices. So for storage business, did you enjoy increased profit selling prices increasing. So it looks like you have increased revenue and the global logic, especially in the U.S. Well, because of the death of SAS, you have a negative situation. So when you look at the market situation, it looks like the situation is deteriorating. Could you please elaborate on this part?