6501.T FY2024 Q4 Earnings Call Transcript
Date: 2025-04-28
Source: Financial Modeling Prep

Unidentified Company Representative: It is time. So we would now like to start the briefing on Inspire 2027, Hitachi Group's New Management Plan and Consolidated Financial Results for the Year Ended March 31, 2025. Thank you very much for taking time out of your busy schedule to attend today. Today, first President, Tokunaga, will explain the New Management Plan. Then Mr. Kato, CFO, will explain the FY 2024 financial results, followed by a Q&A session. We plan to end at around 6 pm. The presentation material is posted on Hitachi Ltd. IR website and news release site, so please take a look. Let me introduce the two speakers. Toshiaki Tokunaga, President and CEO of Hitachi Ltd.; Tomomi Kato, Senior Vice President and Executive Officer, CFO. First, President Tokunaga will talk about the new management plan. Mr. Tokunaga, the floor is yours.
Toshiaki Tokunaga: Hello everyone. My name is Tokunaga, President and CEO. Thank you very much for coming to this meeting despite your busy schedules. Now it is my pleasure to talk about Inspire 2027 which is our new management plan. First of all, I would like to begin by sharing my determination to execute the new management plan of Inspire 2027. Hitachi is a globally unique company that offers IT, OT and products together. Our strength lies in our ability to integrate technology and domain knowledge to transform society's infrastructure. Additionally, even in a world where fragmentation is accelerating, we believe that we can address regional challenges leveraging our autonomous, decentralized business structure. In the Inspire 2027, I will explain today based on the current business environment, we will focus on strengthening cash flow, optimal capital allocation and accelerating portfolio reform and transformation more than ever before. In so doing, we will fully leverage Hitachi's strength and aim to further enhance our corporate value. In addition, to demonstrate our unwavering commitment to transforming Hitachi into a digital-centric company, we have set up targets for the Lumada business to represent 80% of total revenues and adjusted EBITA margin of over 20%. We have established these targets as new long-term management goals. As we have embarked upon this new long-term management plan, we have changed the name of our previous Mid-term Management Plan, MMP, to Inspire 2027. In business environment presented with future uncertainty, having entered this year, it's very important to identify risk and implement measures with a high degree of agility. At the same time, we will maintain a steadfast commitment to our long-term direction of driving sustainable growth and to elevate Hitachi to the next stage. And above all, we are committed to contributing to the realization of a harmonized society in which the environment, well-being and economic growth are in harmony with Hitachi's vision. We will integrate the combined strength of the 280,000 colleagues of the Hitachi Group in -- through One Hitachi and strive further to enhance corporate value by implementing the Inspire 2027. Let me proceed to the details of the plan. I would like to start off by a reflection of the Mid-term Management Plan 2024 under the President Kojima's leadership, the 2024 MMP achieved record-high KPIs across the board, successfully transitioning into organic growth that's targeted and significantly enhancing corporate value in particular, in the plan, cash flow and ROIC focus of management was emphasized and we have been able to firmly establish and see tangible results. Additionally, the Global Autonomous Decentralized Management initiative has been underway for a decade, has made progress enhancing resilience against geopolitical risks. And Hitachi Group's local procurement rate reached 82%, and in order to have a sustainable growth and further enhance our corporate value, there are many more challenges that must be overcome. Specifically, there are still gaps in profitability and capital efficiency compared to our global peers. During the 2024 MMP, investments to drive the next phase of growth were not executed as planned. Furthermore, the business environment continues to change rapidly and there is no end to Hitachi's business portfolio transformation. In addition, in an uncertain business environment in 2025, continuing to strengthen risk management will be essential for sustainable growth. In Inspire 2027, I am committed to addressing these challenges head-on, elevating the Hitachi Group to the next stage and striving further to enhance corporate value. Next, I would like to give you my explanation regarding the vision of Inspire 2027. In the Inspire 2027, we are aiming to contribute to the realization of a harmonized society where environment, well-being and economic growth are in harmony to achieve Hitachi's sustainable growth. True One Hitachi will be the key. In the MMP 2024, Hitachi achieved the transmission to organic growth and each business has become stronger. Against this backdrop in Inspire 2027, covering the fiscal years of '25 to '27 by leveraging the True One Hitachi with digital at its core, we will generate uniquely Hitachi values and premium offerings and aim for sustainable growth. The four examples shown at the bottom of the slide illustrate what we believe are uniquely Hitachi values. Next, I'd like to talk about the organizational structure to promote Inspire 2027. From fiscal year 2025, Hitachi will expand its four main businesses, Energy & Mobility, Connective Industries and Digital Systems & Services across six global regions. In addition, the newly established Strategic SIB business unit, directly reporting to the CEO, will promote the development of new acquired business under the One Hitachi initiative. These are the financial KPIs targeted in Inspire 2027. In Inspire 2027, we have set targets for five KPIs with the aim of achieving sustainable growth. For revenues, we will aim for sustainable growth 7% to 9% even under uncertain economic conditions. For adjusted EBITA margin, we will aim for global peer level of 13% to 15%. For cash flow conversion, we aim for a level of over 90%. In terms of ROIC, we aim for the level of 12% to 13% despite anticipating certain growth investments under Inspire 2027. And regarding Lumada, the engine driving growth and profitability improvement. We aim to a revenue ratio of over 50% and EBITA margin of over 18%. Next, I'd like to talk about the strengthening of cash flow generation and capital allocation. We will continue to work on Inspire 2027 under uncertain environment. Therefore, we will continue to strengthen cash flow. In addition to the four initiatives listed on the left side of the slide, we will certainly implement business portfolio reforms targeting non-Lumada business and minority shares. We will also continue to prioritize capital allocation in our management. In Inspire 2027, regarding growth investments, we will focus on strengthening Lumada business while maintaining financial discipline. In selecting investment targets, we will place importance not only on strategic fit but also on returns, namely ROIC spread and adjusted EBITA. Furthermore, we will consider shareholder returns and prioritizing stable dividends while also conducting flexible share buybacks. The dividend increase and JPY300 billion share buyback announced today reflect our commitment to implementing this policy. Going forward, we will continue to engage in dialogues with the markets and engage in sincere communication with our investors to expand returns over the medium to long term. Now, here onward, I would like to talk about the growth strategy of Inspire 2027. The first point is the evolution to Lumada 3.0. Lumada has continued to evolve since it was launched in 2016. Lumada 1.0, as it was called at the time of the launch, has evolved as an IoT platform that enables customers to transform their business with data-driven insights. In the MMP 2024, the acquisition of GlobalLogic has significantly strengthened Hitachi's digital engineering capabilities, enabling Lumada to evolve to Lumada 2.0. This enables customers to evolve their entire value chain through the use of digital technology. Furthermore, in Inspire 2027, Lumada will evolve into Lumada 3.0 with AI enhanced by Hitachi domains knowledge. Through business portfolio reforms, Hitachi's digital capabilities, domain knowledge and installed base have been significantly strengthened. With Lumada 3.0, we will leverage AI enhanced with Hitachi's domain knowledge to drive the transformation for the social infrastructure. In line with the evolution to Lumada 3.0, we will clarify the scope of Lumada's business. We will simplify the four categories of Lumada business in Lumada 2.0 into two categories. Specifically, we will integrate the lower half of Lumada 2.0 connected the products and system integration into digitalized assets. Meanwhile, the upper half of Lumada 2.0, consisting of the managed service and digital engineering, will be integrated into digital services. This will clarify that the installed base of energy, railway and industry installed base will be clarified as assets to generate value, not only for generating data. At the same time, Lumada enhanced with domain knowledge and AI will further strengthen digital services that convert collected data into value. And by scale up, we can grow the top line as well as the bottom line. From fiscal 2024 to 2025, we expect Lumada revenues to grow by 30% and EBITA margin to grow by 1 percentage point. A good example of Lumada 3.0 is HMAX. By combining railway domain knowledge with AI, it collects and analyzes real-time operational data such as vehicle signal and operational status, thereby improving the asset efficiency of railway infrastructure. HMAX is already deployed on approximately 8,000 vehicles worldwide, achieving results such as, 15% reduction in maintenance costs and 20% reduction in train delays. The evolution of Lumada 3.0 does not stop here. Based on the track record of HMAX and developed for railways, Lumada 3.0 plans to expand into HMAX for energy -- for energy sector and HMAX for industry for the industrial sector. Furthermore, we aim to expand beyond our own installed base to other companies' installed bases as well. We are already applying HMAX for railways to other companies' vehicles in Europe. As explained above, Lumada 3.0 aims to achieve a sustainable growth in both the top line and bottom line performance by scaling across multiple industries and multiple installed bases. Hitachi will continue to strengthen its Lumada business with the aim of further improving profitability. By the end of 2027, the final year, we aim to achieve Lumada revenue ratio of over 50% and EBITA margin of over 18%. Additionally, we have established the target level for Lumada business as a long-term management goal. Going forward, we are committed to advancing our business operations with the goal of achieving Lumada revenue ratio of 80% and EBITA margin of over 20%, which is our target level. In order to achieve this goal, it is essential to strengthen investments in Lumada and continuous transmission of business portfolio will also be required. For the non-Lumada business where we cannot hope for high growth or profitability, we will take decisive action. Next, I would like to talk about the second pillar of our growth strategy to strengthen our four main businesses with Lumada at its core. First, Energy sector. Under Andreas' leadership, we will achieve sustainable growth by capitalizing GX supercycle and enhance profitability by strengthening service businesses. Over the three-year period of Inspire 2027, we aim to achieve revenue CAGR of 11% to 13% and adjusted EBITA margin of over 12%. The T&D systems market is expected to grow not only during the Inspire 2027 period but also in the long term toward FY 2030. Therefore, the main focus of Energy sector is to optimally increase production capacity to address the backlog of over JPY6 trillion and to expand service business that will lead to improved profitability. As part of our growth strategy, we will innovate our O&M services through HMAX for Energy. In addition, SMR business promoted in Energy sector will be examined for global expansion using the first unit in Canada as the foothold to drive future growth. Next is the Mobility sector. Under Giuseppe's leadership, we will expand service businesses to the entire vehicle rail infrastructure through HMAX. Over the three-year period of Inspire 2027, we aim for revenues CAGR of 7% to 9% and adjusted EBITA margin of over 11%. In the Mobility market, rail control and vehicle systems are expected to remain stable, while digital mobility services are expected to grow. Furthermore, Mobility sector already has a backlog of over JPY6 trillion. Therefore, our focus will be on further improving production efficiency to address the backlog while also expanding our service business which will lead to increased profitability. As part of our growth strategy, we will continue to expand local production for local consumption in response to geopolitical risks and develop service businesses using HMAX and AI. Next is CI sector, under Brice's leadership, CI sector will first accelerate its business portfolio transformation. Based on this, at Inspire 2027, we will formulate and execute our strategies to capture growth in the industry automation market. Over the three-year period of Inspire 2027, we aim to achieve revenues CAGR of 6% to 8% and adjusted EBITA margin of over 13%. In the industrials market, markets such as battery manufacturing, biopharma and high-performance materials where discrete and process systems converge continue to grow. In the industrial automation market, the CI sector will continue to materialize services that improve the productivity of frontline workers, such as automation and efficiency, including line builds. We also plan to roll out HMAX for industry to CI sector. We plan to provide a detailed explanation of our growth strategy at the Hitachi Investor Day scheduled for June. Finally, DSS sector, under Abe Jun's leadership, we will sustain top line and bottom line growth by capturing DX market expansion and drive Group-wide Lumada business. Over the three-year period of Inspire 2027, we plan to aim to achieve revenues CAGR of 7% to 9% and adjusted EBITA margin of over 16%. The DX market is expected to continue to grow both globally and domestically. Therefore, our focus will be to strengthen our OT and IT fusion capability, our DX knowledge and skills, while continue reviewing our business portfolio to improve profitability. As a growth strategy, DSS will expand its global DX business, including AI application with GlobalLogic at its core. In Japan, in addition to winning large-scale mission-critical SI projects which is one of DSS' strengths, we will integrate the entire process, including related relevant DX projects to sustain top and bottom line growth. It will also supply digital to all sectors to drive Group-wide Lumada business. The third growth strategy is capturing new business opportunities, supporting sustainable growth. In Inspire 2027, we established a new business unit called Strategic SIB directly under the CEO. Under Taniguchi Jun's leadership, we will gather resources of One Hitachi and work to create new businesses in new growth areas. Furthermore, in collaboration with the R&D department, we will work on innovation through advanced in-house technological development. In addition, Hitachi Ventures, the company's corporate venture division, will be put under the management of the Strategic SIB business unit to also focus on investing in start-ups and creating innovation through ecosystems. We will invest up to JPY500 billion during Inspire 2027 period as business development investments for Strategic SIB to create new businesses. As of the start of FY 2025, we have defined the four focus areas shown in the slide and have begun creating businesses taking into account recent social and technological changes. One area which Strategic SIB is currently focusing on our efforts is data center. Advancement in generative AI is pushing the data center market to expand rapidly. Hitachi has the power to provide total integration of data centers from application to energy as One Hitachi. To leverage this capability to capture new growth, we hired Kaushik Joshi, an industry expert with domain knowledge of data centers as the Data Center Leader for our Strategic SIB. We will accelerate our efforts so that data center business can be considered an early success for our Strategic SIB. Furthermore, by strengthening R&D, Hitachi will generate innovation on our own and strengthen our efforts to create the next growth areas. In addition to R&D that is directly linked to our current business, we plan to invest up to JPY1.3 trillion in R&D during Inspire 2027 to create innovation in new areas that will contribute to our future business, such as therapy, mobility, quantum and space. The fourth and final point of our growth strategy is strengthening management foundation supporting True One Hitachi. The business environment is becoming increasingly uncertain in FY 2025, so strengthening risk management will be essential for sustainable growth. In Inspire 2027, we will continuously strengthen risk management across Hitachi Group globally. We will particularly focus on further promoting Autonomous Decentralized Global Management and pursuing new growth opportunities that arise along with risks and turning them into sustainable growth. In particular, the U.S. is an important market for Hitachi Group with revenue reaching JPY1.3 trillion. On the other hand, we believe that not only the tariff barriers imposed by the current U.S. administration, but also the transition from liberal economy to a home-first heavy commercialism is irreversible. Under these circumstances, Hitachi will further promote Autonomous Decentralized Global Management and further strengthen local production for local consumption. We also have pursued growth by creating new business opportunities that incorporate the value of One Hitachi that contributes to the development of the U.S., such as solutions and services for data centers. Additionally, under Inspire 2027, we will actively invest in human capital to strengthen the talent that will drive sustainable growth. Share-based payment which has been available to executives, will now be expanded to employees for the first time, thereby increasing compensation levels and strengthening our commitment to improving corporate value. In addition to strengthening generative AI talents, we will also work to strengthen our leadership development programs, such as Future50, which has proven successful to date. Under Inspire 2027, we will further enhance our sustainable management. We will set targets for each of the sustainability indicators shown on the slide and align them with executive compensation. This will also demonstrate Hitachi's continued commitment to the corporate philosophy of contributing to society. Last section is the summary. Through our new management plan, Inspire 2027, Hitachi aims to contribute to a harmonized society by True One Hitachi and grow sustainably. The KPIs we aim to achieve between FY 2025 and 2027 are shown at the bottom of the slide. Additionally, our long-term management goal is Lumada 80/20, which means we target over 80% Lumada revenue ratio and over 20% Lumada adjusted EBITA margin. As we enter FY 2025, the business environment remains extremely uncertain. But in order to achieve Inspire 2027, we will strengthen risk management, steadily advance our current businesses, and thoroughly prepare for growth in our business management going forward. I did not have time to elaborate on the strategies for our four main businesses in today's presentation. Regarding this point, we will hold Hitachi Investor Day in June as we do every year, where the Heads of our four major businesses will explain their growth strategies. Additionally, Lorena, CHRO, will explain our human capital strategy which is a key initiative for Inspire 2027. I look forward to have a good discussion with the management team, including myself, so I sincerely ask you to attend. This is the last slide. To mark the start of Inspire 2027, Hitachi Group has redesigned the brand for the first time in 25 years, Inspire the Next. Our determination to pave the way for the future as True One Hitachi. We will continue thinking about what's next as we envision and create the future. Thank you for your attention.
Unidentified Company Representative: Thank you very much, Mr. Tokunaga. Next, the outline of the financial results will be presented by Mr. Kato. We will switch over the screen now. Kato san, over to you.
Tomomi Kato: First of all, I would like to explain the structure of the materials. These are the key points of the financial results and then the results of '24 as well as the outlook for fiscal year 2025, and I will explain the segment results as well. Now let me talk about this result. For the three sectors, we had increasing revenues as well as earnings for GEM has been continuing to have a strong demand for renewable energy-related projects and updates to the power transmission infrastructure. DSS, Digital System & Services, has also benefited from ongoing growth in demand for DX and modernization of the domestic IT market. CI, Connective Industries has also grown strongly. Here I will explain the three -- six KPIs. Top row shows the three sectors. First, revenues increased by 14% year-on-year. Adjusted EBITA exceeded JPY1.1 trillion, an increase of approximately JPY290 billion year-on-year. Furthermore, adjusted EBITA margin improved to 11.7%. The bottom row shows the figures for Hitachi's consolidated results. The net income attributable to parent company shareholders was JPY615.7 billion. Although the gain from the sales of the Astemo stake was included last year and no longer is recognized, the increase in operating profit across the three sectors resulted in a year-on-year increase in net income. Additionally, core free cash flow increased by approximately JPY200 billion from the previous year to JPY780.5 billion. This was driven by the acquisition of advanced payments for large-scale projects and increased operating profit. ROIC improved from the previous year and achieved 10% mark for the first time. As mentioned earlier in the explanation of Inspire 2027, the financial targets for the '24 Mid-term Management Plan have -- for the 2024, in Mid-term Management Plan has been largely achieved. Next, we'll provide the outlook for 2025. Despite the growing uncertainty in the global economy, we anticipate the momentum of DX and GX will remain strong. Driven by the continued growth of DSS and Energy, we plan to increase organic strategic investments as a foundation for medium to long-term growth while factoring in the risk of U.S. tariff impacts. As a result, we project an increase in both revenues and adjusted EBITA on a consolidated basis. Specifically, revenues is projected to increase by 6% to JPY10.1 trillion excluding currency effects. Adjusted EBITA is expected to increase year-on-year to JPY1.1 trillion under the new definition and net income is also projected to increase to JPY710 billion. Core free cash flow is expected to be 70% of net income, reflecting 90% of net income, reflecting the reaction decline of the advanced payments of the previous year. ROIC is expected to remain at the previous year's level taking into account the possibility of M&A investments. Next, shareholder returns. For the fiscal year ending -- for that fiscal year 2025, we plan to expand the total cash flow base return to approximately JPY500 million, taking into account the strengthening of cash flow generation capabilities and financial position over the mid to long term as we plan the sale of air-conditioning joint venture company. This represents an increase of JPY100 billion compared to the previous year. Of this amount, the amount allocated to share buybacks will be increased by JPY100 billion from the previous fiscal year, totaling JPY300 billion. And we are planning to pay dividend of JPY22 per share which is JPY1 higher than the interim dividend paid last year. This represents 10% increase compared to the previous year and for the more interim dividend for this year is expected to be JPY23 per share, JPY1 higher. The first topic is the impact of reciprocal tariff in the United States. So first we will classify the direct impact on our procurement into the United States and other countries, and the indirect impact, such as lost sales opportunities due to the impact on customers. Of these, we have factored in the risk of direct impact in the United States. The rest are not factored in at this point in time as the impact is unclear. Assuming that all tariffs announced by the U.S. government on April 2nd are fully implemented, we have estimated the risk of direct impact in the United States at JPY350 billion in current period. While there are concerns about renewable energy projects in the United States, we believe that the momentum for renewable demand in the power grid business will remain unchanged in the medium to long term. The segments most likely to be affected include power grid measurement and analysis system and Astemo equity method affiliate. Countermeasures under consideration include supply chain restructuring, including production expansion within the United States, sales expansion in other regions, cost reduction and passing on the price increase for the impacts that cannot be mitigated. The risk amount may change in the future. Next, I will explain the Hitachi Energy business, which is expected to grow in the long term. First, this is the breakdown of the business segments, products such as transformers and switchgear accounting for approximately half of the sales revenue. The remainder consisted of system products, such as ultra-high voltage direct current transmission systems and services and software, including consistent monitoring, maintenance and customer asset management software. Regarding long-term growth rates, we anticipate annual growth of 12% to 14%, exceeding the market growth rate until 2030. Additionally, to expand our growing service business, we established a service business division within Hitachi Energy in April. As shown in the graph, revenues are expanding in line with the increasing order trend. We will continue to steadily strengthen our supply capacity and pursue business expansion. Here are the highlights of the results for fiscal year 2024. GEM, DSS and CI, all reported increase in revenues and EBITA, resulting in a recorded adjusted EBITA for Hitachi's consolidated results. So core free cash flow increased year-on-year also reaching record high. ROI exceeded the target of 10%. Next, year-on-year changes in revenues and adjusted EBITA. First, the upper is the revenue segment. Sales decreased due to the sale of shares in Astemo last year, but increased due to the acquisition of Thales GTS business and the exchange rate had a positive impact due to the weakening of the yen. Finally, organic revenues grew in the other category. This is mainly in Hitachi Energy and DSS. Next, I will talk about the adjusted EBITA in the lowest section, the trend is similar with that of revenues. Other items increased by JPY250 billion. The increase in business scale and changes in selling prices outweighed the impact of rising procurement costs and increased investment. Next, let me talk about the financial position. First, total assets at the end of fiscal 2024 was JPY13.2 trillion, an increase of about JPY1 trillion from the previous year, and the increase was due to the impact of higher revenues as well as acquisition of Thales GTS business and yen's depreciation. Interest-bearing debt also increased due to higher working capital resulting from the increase in revenues and acquisition of GTS, but remained at the previous year's level due to the increase in core free cash flow. Next, sales situation for fiscal 2024 by region. In Japan, mainly DSS front-end business and IT service business increased. In North America and Europe, the GEM power grid business and railway business grew significantly. Next I will explain the segment-based order backlog. GEM was driven by a stronger demand for renewable energy related projects and updates to the power transmission and distribution equipment, while DSS was driven by expanding demand for DX and modernization in the domestic IT market. Next is the outlook for FY25 -- 2025. Regarding reportable segments, the major change is that the previous GEM has been split into two, the Energy segment which includes Hitachi Energy and Nuclear Energy, and the Mobility segment, which includes railway systems. Let me explain the highlights of our outlook for FY2025. Main contents were explained at the beginning. I will explain the breakdown on the next page, but starting from the record profit level of the previous fiscal year, we are forecasting increased revenues and profits driven by DSS, Energy & Mobility which are expected to grow in the medium to long term while also factoring in organic strategic investments and the tariff impact. The current exchange rate assumptions are JPY145 per $1 and JPY155 per EUR1. In addition, starting this fiscal year we've revised the definition of adjusted EBITA to no longer include equity and earnings of affiliates, but have simplified the definition to simply add back acquisition related amortization including intangible ass other items to the previous adjusted operating profit. Next, I will explain the breakdown of increase/decrease in FY25 compared to the previous year. First, the top line shows revenue. Excluding the impact of foreign exchange, we expect organic growth of 6% driven by DSS, Energy & Mobility. Next, adjusted EBITA in the lower part. It is generally the same trend as revenue. Due to sales growth in DSS, Energy & Mobility, we expect profits to increase year-on-year, even including increased organic strategic investment. But due to the negative impact of exchange rates and the tariffs, adjusted EBITA is expected to remain at approximately JPY1.1 trillion. Next, the income, there is an increase in operating income and gain on the sale of the air-conditioning joint venture due to the negative impact of exchange rates. However, including non-operating income and expenses and the risk of the impact of U.S. tariffs, net income for FY 2025 is expected to remain at JPY710 billion. Next in terms of core free cash flow, operating profit is expected to increase but is expected to decrease year-on-year due to the impact of reactionary decrease following the increase in advance received in the previous fiscal year and increase in net working capital due to increased sales and increase in CapEx due to expansion of production capacity in the power grid business. Next is result by segment. First DSS, overall revenue grew 9% in FY24. Adjusted EBITA margin was 14% representing increase in revenue and profit compared to previous year. Compared to our previous forecast, profit increased in Q4 due to stronger-than-expected performance in IT services and Lumada front-end business, including improved selling prices. DSS outlook for FY 2025 is that revenue will increase by 8% overall, excluding the impact of exchange rates due to growth in each business and profits are also expected to increase, exceeding the growth rate of the previous fiscal year of 7%. Next is Green Energy & Mobility results for FY 2024. Overall GEM revenue increased 28% and both revenue and profit increased year-on-year. Adjusted EBITA also improved by 2.9 percentage points. Revenue increased by double digits or more in Hitachi Energy, Railways and Nuclear Energy and both revenue and profit increased. In Hitachi Energy, in addition to an increase in equipment such as transformers, the Lumada business including HVDC system integration and integrated asset management solutions also grew. Compared to the previous forecast, Hitachi Energy improved due to solid performance in grid integration and high voltage as well as the impact of exchange rates and railways also improved due to project progress. Of these, Hitachi Energy's performance was already factored in as an expected improvement for Hitachi overall. Next, outlook for FY 2025. In Energy business as a whole, we expect 12% increase in revenue and increase in profit, excluding the impact of foreign exchange. Hitachi Energy's growth rate in U.S. dollar terms is 14%. In Mobility, revenue is expected to increase 7% year-on-year, excluding the effect of foreign exchange rates. Profit is expected to increase despite an increase in costs related to acquisition of GTS. Next, Connective Industries. CI's overall revenue increased 3% year-on-year in FY24. This was driven by industrial digital which saw robust domestic DX business for industrial use and industrial products which saw growth in services for large industrial equipment. On the other hand, while some business units saw a decrease in revenue, all business units saw an increase in profits thanks to the growth of the Lumada business and others. This is the outlook for FY25. CI as a whole is projected to see a 2% decrease in overall revenue due to the impact of the decline in the Chinese real estate market on building systems and others. However, we expect to maintain operating profit at the same level as last year by expanding the Lumada business and to improve profit margins. Finally, Lumada business revenue in FY 2024 increased by 29% year-on-year and Hitachi's consolidated Lumada business revenue ratio was 31%. Starting from FY25, we are revising Lumada business classification into two simple categories. We plan to increase sales by 28% in FY 2025 compared to the previous year. We plan to increase adjusted EBITA by 1 percentage point year-on-year to 16%. That concludes my explanation on our financial results for FY 2024 and outlook for FY 2025.
A - Unidentified Company Representative: Thank you very much, Mr. Kato. We would now like to proceed to Q&A. [Operator Instructions] [indiscernible] san, please unmute and ask your question.
Unidentified Analyst: I hope you can hear me.
Unidentified Company Representative: Yes, please go ahead.
Unidentified Analyst: I have three questions. First question is on Page 18 regarding the Inspire 2027. Regarding the Inspire 2027 energy growth, you mentioned 11% to 13% here and this is at the level of the market growth CAGR 10% to 12%. Do you hope to gain market share in the market? What are your thoughts on this?
Toshiaki Tokunaga: Answer. [indiscernible] san, thank you very much for your question. Obviously in the area of energy is expected to drive the growth for Hitachi overall. Therefore, we are hoping for high growth going forward. But on the other hand, in the United States and others, there is a weakness and uncertainty. So we have to consider what would be a reasonable outlook. Currently, we believe that the growth will be in line with the market CAGR, but we certainly hope to achieve a growth rate in terms of operations to exceed this level. We will also promote the expansion of service business. This will require investments beforehand. Therefore, we will take the overall situation into consideration to allocate the capital so that the return can be enhanced.
Unidentified Analyst: Question number two. Regarding strategic investment for this year, you said that there is going to increase by JPY43.5 billion. Where is it going to increase? And compared to previous year, is it -- will there be changes in the allocation of capital?
Toshiaki Tokunaga: Thank you very much. Answer. Regarding strategic investment for '24 to '25, you asked about the changes between the two years. The most significant changes is the Strategic SIBU that has been established. We are going to capture growth in the future. Therefore, Strategic SIB will be responsible for finding growth and this is -- will be receiving significant investment. Another important pillar will be AI. Generative AI progress must be captured into the growth of Hitachi. Therefore, there will be focused investment in this area as well. These are the two areas for investment. In addition, there are additional investment increase in '25 for regions enhancement. As I mentioned earlier, global six regions will be poised for growth. Therefore, in order to promote the Autonomous Decentralized Global Management, we need to make investment in the respective region.
Unidentified Analyst: Question. I have a pinpoint question. For this fiscal year, for building system margin improvement. Can you talk about that? Margin has been improving because of promoting services as well as strengthening maintenance and margins have improved, but it seems that the outlook is assuming this will not further improve. Please elaborate further.
Tomomi Kato: Thank you. Regarding the building system, as I mentioned in the results PowerPoint presentation from '24 to '25 China market newbuild revenues demand is declining. This was seen from fiscal 2024 as well. So it was expected. But for fiscal year 2024, newbuilds were decreasing but renewal and services was able to offset the decline. But for fiscal year 2025, unfortunately, we can no longer offset that. Therefore, it looks as the newbuilds are declining but renewal and services are continuing to grow. So we will be focused on continued growth in this area. Overall revenue will decline significantly and profit will be limited as well. Therefore, we are not able to forecast improvement in margins. But with new as well as services have been enhanced, so profit margin is improving but in '25 will be in a lull. There will be a pause in this improvement.
Unidentified Analyst: Thank you.
Unidentified Company Representative: Thank you very much, [indiscernible] san. Next, Yasui san, please unmute yourself and ask your question. Yasui san, could you please unmute yourself?
Kenji Yasui: Oh, I'm sorry. This is Yasui from UBS. Can you hear me?
Unidentified Company Representative: Yes.
Kenji Yasui: Thank you. I have two questions. First is power grid forecast. So you mentioned that -- Tokunaga san mentioned that this will be the driver for your future growth. So the capacity -- if you invest in capacity, it will not immediately lead to the capacity expansion. And so, is there a forecast or potential for aggressive growth in this area? So power grid impact in the U.S. that you touched upon. It may be a sensitive region, and I think U.S. is dependent on import. So will you need to invest in the U.S. going forward? So, the market status and the power grid status in the U.S., if you could elaborate on these points, I'd appreciate it.
Toshiaki Tokunaga: Thank you, Yasui san, for your question. Answer. Regarding power grid, our capacity planning is done in a very detailed, thorough manner. And this has been announced. $6 billion investment capital expenditure has been decided and is carried out. The current order and capacity are pretty much matched. So the plan that we disclosed this time is based on that capacity planning and the tariff impact. Hitachi Energy-related U.S. local production ratio is around 80%. And needless to say, we have to increase this to reduce the tariff impact in the U.S. We plan to continue making efforts, but if we cannot fully absorb the impact, we have the escalation in almost all contracts. So we can do pricing pass-through. That will be the next option we will consider. For now, we will continue -- we still forecast a strong momentum in the U.S. Thank you.
Kenji Yasui: Question. Thank you very much. My second question is your Medium-term Management Plan. So your intention is to increase Lumada. You mentioned Strategic SIB as the driver, the mechanism for that. On the other hand, as an outsider looking at you, you have been trying to expand Lumada all along. And so will you accelerate your efforts? Do you have measures, initiatives to accelerate? Customers want to be digital service. I know that is the case. But as you're trying to accelerate, can you really accelerate in the next three years key departments or talents or technology? There are various AI technologies. So AI agent or is it prediction area in particular or your own proprietary technology? Could you elaborate on the contents of the driver, the acceleration? Thank you very much.
Toshiaki Tokunaga: Answer. As you just rightly said, Hitachi will continue focusing on Lumada. And Hitachi will grow with the growth of Lumada. That is our basic stance. On the other hand, to scale up Lumada, we have had a few challenges in the past. Those challenges -- with the emergence of generative AI, the challenges can be overcome using generative AI. For example, Railway HMAX, Hitachi's OT knowledge and domain knowledge can be learned, trained to use the assets more efficiently. That was not possible in the past or more sophisticated operation. These are becoming possible and we have track record. This track record of HMAX can be applied to other industries like energy and industry. By deploying this to other areas, Lumada will surely scale up. And the key department for that is DSS. In the global markets, in DSS, GlobalLogic will collaborate closely with each sector to apply this technology. For example, in HMAX, GlobalLogic members will be deeply involved and are involved in development and DSS members are already moving to Mobility sector to apply AI, has already assumed the post of Digital COE Head and so under this new Hitachi organization and new forms of collaboration, I think we can sufficiently scale up Lumada going forward and that is why we have this high target. And regarding this high target, the sector leaders approved of the Inspire 2027 goal and are now coming -- developing their detailed targets. So I am confident that we can achieve this target. Thank you.
Kenji Yasui: Question. One follow-up. GlobalLogic's business model is extremely advanced I think. On the other hand, the business development in Japan has just started maybe from -- you started preparing from two, three years ago and so you are a unique dominant position in Japan. Will this lead to your share increase in the next three years using your dominant position?
Toshiaki Tokunaga: Answer. Thank you for the question. Whether we can increase our market share in Japan and what the engine for that be? Of course, GlobalLogic's knowledge and track record is one engine, one driver. Japanese market is lacking in AI digital talents. So India talent can be used for system development in Japan, in India and Europe. We -- I call this insourcing. By increasing this insourcing, we can complement the shortage in digital talent and increase our business in Japan by insourcing from India and Eastern Europe. In addition, mission-critical system development that Hitachi has accumulated all along has been well received by our customers and the recent orders in DSS are becoming large-scale. So these large-scale projects can be handled by us. We are such a unique vendor and that is how we want to increase DSS business in Japan. Thank you.
Kenji Yasui: Thank you very much.
Unidentified Company Representative: Thank you very much. Next to [indiscernible] san, please. Please unmute and ask your question.
Unidentified Analyst: Question. Can you hear me?
Unidentified Company Representative: Yes, we can.
Unidentified Analyst: I have two questions for Mr. Tokunaga. For '24 results, what is your evaluation of the results? I think it has been very successful, but the outlook for this year has been increased -- forecast has been increased. Which areas can you strengthen further and what is your reflection upon the '24 result? That's my first question.
Toshiaki Tokunaga: Answer. Thank you for your question. All in all, for fiscal year 2024, the result was outstanding. That is how I evaluate this result. And for organic growth, which was the objective of MMP 2024, has been achieved. Cash flow, ROIC emphasized. Management is taking root in the organization and it is reflected in the results of fiscal year 2024. And based on that, we will be continuing for fiscal year 2025. There is a weakness but the DX, GX momentum will not change in the medium to long term, according to our view. Therefore, risk management will be strengthened and continue to promote the existing business. Furthermore, for fiscal year 2025, as I mentioned at the end of my presentation, this is going to be very important for future growth going forward. Strategic SIB is a good case in point. A new business creation will be required and therefore we have to strengthen initiatives in this area, pursuing the current business in the steadfast manner and prepare for future as well.
Unidentified Analyst: Question. Regarding the Inspire 2027, you said that there is going to be a focus on Lumada and you said that you're going to take decisive measures for unprofitable business. What businesses are you referring to? In which area? Please elaborate your policy in this area.
Toshiaki Tokunaga: No, I'm not going to talk about individual business today. But the profitability has been improving for Hitachi and we have been focused on Lumada. And Lumada to account for 50% and EBITA margin to achieve 18% is the target. That means that businesses that cannot leverage Lumada and unprofitable business that cannot utilize Lumada will be subject to measures without identifying any specific area. That's my view currently.
Unidentified Analyst: Thank you very much.
Unidentified Company Representative: Thank you very much. Next, [indiscernible] san. Please unmute yourself and ask your question.
Unidentified Analyst: This is Murase from [indiscernible] Newspaper.
Unidentified Company Representative: Yes, we hear you.
Unidentified Analyst: Question. I have a question on the growth investment. In MMP '24, you mentioned you could not carry out as planned. What do you -- how do you analyze the background, the reasons for that? And on that basis, in the next three years, what is your M&A plan? Any areas you're focusing on, you think you need?
Toshiaki Tokunaga: Answer. Thank you Murase san for your question. In the MMP '24 period, the growth investment, of course, we considered aggressive investment up -- and prepared JPY1 trillion budget for it. But Hitachi business, whether it matches the Hitachi business strategy and whether the counterpart bring appropriate return to Hitachi business was the key. So it had to have a good match. Unfortunately, during the MMP '24 period, we could not meet some such ideal deals. So, as I said at the outset, I could -- we could not do sufficient growth investment in the previous three years. Now, in Inspire 2027 period, as you see on Page 9, a very simple description. First, Strategic SIB will be enhanced, including data centers and other focus areas. Going forward, the capability that's lacking in Hitachi will be enhanced. And in CI, we will enhance the portfolio transformation. And one pillar is industrial automation. To enhance this area, we need to think of the investment -- growth investment. In GlobalLogic, bolt-on based M&A will be pursued. Right at this moment, these are the three areas that I can mention to you, Murase san. Thank you.
Unidentified Analyst: Thank you.
Unidentified Company Representative: Thank you very much. Next Ezawa san, please unmute and ask your question.
Kota Ezawa: Question. I have two questions based on -- from the financial metrics as well as ROIC. Regarding the Page 9, capital allocation is mentioned in the material, leverage, cash flow is mentioned and the shareholder return about 2 times is being mentioned. That's my take. D/E ratio 0.5 times is mentioned. Do you think it can be achieved? It seems far -- too far to reach. I don't think it will reach 0.5 times according to my calculation. So what is your -- what are your thoughts on this? That's my first question.
Tomomi Kato: Thank you for your question. I have to mention something at the outset regarding Page 9, capital allocation is shown in this graph in order to illustrate the point we have presented in this way. But the scale is not precise. So you should not estimate the amount by looking at the scale of this graph. That is not exactly exact. The arrow indicates that we want to increase, so there is no change in terms of direction. But as mentioned here, for the mid to long term, shareholder return will be expanded. This is something that we have mentioned. We will also make investment for growth. And as I mentioned in MMP '24, we were not able to make strategic investment enough so we will try to improve. But it is not according to the scale described in this graph. Now, if this is the case, D/E ratio 0.5% -- there -- 0.5 times cannot be achieved, but it will depend on the actual amount. In the future, the strategic investment as well as sale of assets are subject to uncertainty still. Therefore, in terms of absolute value, we did not mention a specific number on this page. In terms of scale, you please understand that there will be increase but we cannot give you specific numbers. But I don't think it is misaligned significantly.
Kota Ezawa: Question. In three years’ time, D/E ratio 0.5 times can be achieved. Is that the case? Is it visible? And half of equity will be -- that is at…
Tomomi Kato: This is about financial discipline. We are not exactly aiming for 0.5 times. It will depend on the prevailing situation which is in line with what we have been explaining in the past. And this is just a guideline.
Kota Ezawa: Thank you. Question. Regarding ROIC, in the new plan from '24 to '27, how much of ROIC improvement are you expecting? There is attention from the market. In the last plan '24 compared ROIC was 3 point improvement has been made during the last period. For Inspire '27, the improvement is 1 percentage point to 2 percentage point. It looks like a slowdown in terms of improvement. Regarding ROIC, what is your view? With the new President, new CEO in the mid to long term, what are you envisioning for the mid to long term? You have been trying to catch up to the global peers. I think there must have been a sense of crisis. So by increasing the ROIC was an important focus for management. But is it no longer the case? That's my question. Please elaborate further.
Toshiaki Tokunaga: Answer. Thank you very much for your question. What I would like to emphasize regarding ROIC is going to be emphasized going forward. This will not change as a policy. Going forward, even beyond Inspire 2027, this will continue to be an important KPI that we must aim for. On the other hand, as I have mentioned today, toward growth and we have to make investments. So ROIC improvement must be in line with growth. So we have to strike the right balance between the two. In Inspire 2027, we are aiming for 12% to 13% as one target. But it isn't as if I am satisfied at this level. Therefore, on a continuous basis, we will aim for a higher improvement in management.
Kota Ezawa: Question. Sorry to be long-winded. According to Tokunaga san, in the '27 plan, you said that in terms of ROIC, a small improvement will suffice and there is going to be more focus on strategic investment in the next three years rather than emphasis on ROIC. And in the next subsequent plan, you're hoping to improve further the ROIC. Is that correct?
Toshiaki Tokunaga: Answer. This is very difficult to explain to you, but ROIC is one of the most important KPIs and that is the reason why it is also included in the 2027 plan -- Inspire 2027. But growth investments must also be made as you have rightly mentioned. Currently, we are trying to strike the right balance and that is at 12% to 13%. But at the risk of repeating myself, we believe that further higher level must be aimed for and we will continue to make improvements in ROIC even beyond Inspire 2027.
Kota Ezawa: Thank you.
Unidentified Company Representative: Thank you very much. Next, Hirakawa san, please unmute yourself and ask your question.
Mikio Hirakawa: BofA Securities, Hirakawa is my name. I have two questions. Question. First question, earlier Tokunaga san, Kato san talked about as the first year of your Mid-term Management Plan, the environment is difficult. EBITA -- 11% EBITA ratio. FY27, you want to achieve 13% to 15%. So, to achieve 13% to 15%, what needs to change the most? There are internal and external environment, what needs to change to change your trajectory as a big driver? If you could share with us that driver. And along with that, that Lumada 3.0 is a very interesting concept. You want to expand the industry and go to other company's system. Will this be a strong enough driver in the next three years? So, if you could also comment on that. Thank you very much. That's my first question.
Toshiaki Tokunaga: Answer. Thank you very much. First, FY25 is 11% and by the end of Inspire 2027, how we achieve 13% to 15%. In FY 2025, of course, we have factored in the risks of the external environment. So whether the risk materializes in FY25 and will continue into the following years, we do not know. It's hard to predict. So what we must do is to mitigate this risk and to offset the risk and achieve higher profit margin. It really boils down to that. So the way we manage our business is, as I said earlier, this own country first policy will not change for some time. So this Autonomous Decentralized Global Management need to be pursued. And to improve our profit margin, Lumada and service business will increase and also improve the business portfolio transformation profitability. Will Lumada 3.0 become a true driver? HMAX and assets, Social Infrastructure Business efficiency -- it has an impact to improve the efficiency of Hitachi business. So how we expand this is the key. Lumada 3.0 expansion is now being discussed mainly by the sector Heads. We are coming up with detailed plans. In the Investor Day in June, we want to talk about more details and executing the plan will enable us to surely achieve Inspire 2027 target. Thank you.
Mikio Hirakawa: Question. Thank you very much. My second question is on individual sector -- energy sector. In energy sector by FY 2027 -- this overlaps with the earlier question, but in profit margin over 12% is FY 2027 target. So related to that point, Hitachi Energy's competitor Siemens Energy Grid Technology in January to March quarter it was high 11% EBITA margin and mid-10% EBITA margin is expected to continue going forward. And you have a similar business model. So over 12%, how do you analyze your target? Maybe it's a bit low. And so if you could elaborate on this target. And the price status or supply chain status, what does it look like now for you to set up this 12% goal? I think it's a minimum goal, but still looks a bit low. So please elaborate.
Toshiaki Tokunaga: Answer. Thank you very much. Energy sector's profit margin as of FY 2027 we say over 12%. Over 12% shows we want to exceed this as much as possible. That is our intention behind this number. Now, in comparison to Siemens Energy, it's difficult to do an apple-to-apple comparison. So we cannot just single this out and say we are higher or they are higher. But for Hitachi Energy to improve our profit margin, the key is the enhancement of service business. Starting this April, Hitachi Energy established a service business division, a dedicated division to develop the business plan and execute the plan. So with the establishment of the service business, the profit margin should improve going forward. On the other hand, the supply chain disruption can be one risk. As I said earlier, the Decentralized Autonomous Global Management and escalation clause can be triggered if necessary.
Mikio Hirakawa: Thank you very much.
Unidentified Company Representative: Thank you very much. At this juncture, we would like to now go to the English Channel to receive questions. [Operator Instructions] That seems not to be the case, so we go back to Japanese channel. Currently it's 17:48, so we only have 10 more minutes remaining and we have many hands up. And it is unlikely that we can address all the questions today, we'd like to ask for your understanding. Now, next we'd like to call upon [indiscernible] san. Please unmute and ask your question.
Unidentified Analyst: Question. I hope you can hear me.
Unidentified Company Representative: Yes.
Unidentified Analyst: I have two questions. It's about something that you have mentioned. There is uncertainty in the business environment and that is when you have announced Inspire 2027. Did you have to review the plan because of the uncertainty in the business environment?
Toshiaki Tokunaga: Answer. Thank you very much for your question. The uncertainty in the business environment was evaluated and upon formulating the plan there was a review made from two perspectives. First, the home country first policy is spreading, and against this backdrop, we have to mitigate risk. And as I mentioned earlier today, we will utilize Autonomous Decentralized Global Management first and foremost and we will pursue business in six global regions. So globally in each region, we have leaders in place. So we have to be aligned in terms of pursuing business amongst all the leaders and we need to further enhance this organizational structure that is reflected. Second is the strengthening of the Lumada business because Lumada is highly profitable and we can hope for a high growth going forward because it is essential for a customer's business management. It has to continue to be the case. And therefore we have to provide a valuable solution to a customer's business and enhance scale of such a business will be required. That was the perspective from which we reviewed the Inspire 2027 plan and the results are being presented today. But this is only the overview. So, please come to the Investor Day to be scheduled in June. We will be able to give you a more detailed explanation.
Tomomi Kato: I would also like to weigh in. For 2025 forecast, the U.S. direct impact of the tariff has been factored in but that is only for fiscal year 2025. For Inspire 2027 is a mid- to long-term plan, therefore, specific risks have not been factored in for Inspire '2027. I wanted to clarify this point.
Unidentified Analyst: Thank you very much. Now my second question. So the outlook is opaque and in terms of the facility as well as human capital, what are the challenges for investment going forward? For example, you said that you're going to continue to make growth investments but the environment is opaque. Will -- but wouldn't it be difficult to make decisions on CapEx? And you have been raising wages significantly, but wouldn't it be more difficult going forward with the prevailing uncertainty?
Toshiaki Tokunaga: Answer. Thank you for your question. Regarding growth investment overall, I would say that this must be evaluated properly and the return must be evaluated and we have to be prudent in terms of making such investments and that is how we'll make investment -- a capital investment because there is acceleration of home country first policy that means that supply chain which is local production for local consumption will be required. And based on the assumption that there is not going to be significant change, CapEx will be planned accordingly as we make progress going forward. In terms of human capital, business environment has to be considered obviously but basic premise for Japan market is that population is declining. And in this environment, we have to secure human capital required for our business which is an important challenge for us. That means that the compensation package has been attractive in order to secure outstanding human capital, so the investment in human capital will continue going forward. That is my plan for the time being.
Tomomi Kato: I would also like to weigh in. Regarding the '25 plan, organic growth investment is increasing. Mr. Tokunaga also mentioned that Lumada 3.0 as well as regions investment that will be made. And the management structure will be subject to investment or for example leaders investment as well as new compensation package to be designed will also be included. Depending on the prevailing situation, we need to be prudent but we have to also do what we must do along these lines.
Unidentified Analyst: Thank you.
Unidentified Company Representative: Thank you very much. We will have an English question. So [Okinaka] san -- we will go to the English channel. Okinaka san, please unmute yourself.
Unidentified Analyst: Hi, Tokunaga san, Kato san. Thank you so much for your presentation. I just wanted to ask on the Energy segment, can you talk about your outlook for the business today versus maybe six to 12 months ago? Do you think your outlook has gotten a little bit more conservative given the geopolitical situation? Thank you.
Toshiaki Tokunaga: Hi. Thank you, Okinaka san, for your question. Answer. As I mentioned a few times today, the tariff impact is one impact on us. But in the medium to long term, GX momentum remains unchanged and therefore, Hitachi Energy and energy sector business can expect strong growth at this point in time. That said, the tariff impact -- depending on the tariff impact, customers' behavior -- investment behavior may change. So customers' investment behavior or slowdown in economy need to be watched closely going forward. Thank you. I hope this answers your question.
Unidentified Company Representative: Thank you very much. We will go back to the Japanese channel. We are running out of time, but we're going to call upon Harada san. Please unmute and ask your question.
Ryo Harada: Question. Thank you very much for this opportunity today. I have two questions. First question is regarding Lumada. You've been mentioning Lumada 3.0 -- 3.0. You want to accelerate this going forward. When -- what is the timeline in which your profitability will be improved in the area of energy? 12% -- more than 12% has been mentioned. Above 12%. Please give me the ratio of service revenues or Lumada ratio. Can we expect increasing trend? And on Page 15, you talked about expanding your business to other install base as well as beyond the industry. With that, profitability is expected to increase? Is that the case? But when is it going to be realized? Is it beyond Inspire 2027? Now, when you talk about providing to other installations other industry, is it the Strategic SIB or is it going to be conducted within Hitachi Energy for their own product? Is that the case? How is it going to work? How is it going to be led in terms of the organization?
Toshiaki Tokunaga: Answer. Now, regarding Lumada 3.0, when will the profitability be improved for this business is your question. If we take energy as an example, as you can see on Page 18 for 2024, Lumada ratio is limited to 11% still therefore for the energy sector, the service business must be strengthened so that profitability can be expanded. That will be the key. As I mentioned earlier today, from '25 within energy sector, the service business new division has been established. And centering on the effort of this new division, service business will be expanded significantly. And during the Inspire 2027 period, we hope that the service business will contribute to business. In terms of expanding to other companies -- expand install base, you asked who is going to lead this effort. For service business will be promoted -- will be the leading organization. But for digital technology to be injected, this will be conducted by DSS as well as GlobalLogic. So, according to the leading command, DSS will work together with the Energy to inject the digital technology similar to HMAX. That is what we are contemplating today.
Ryo Harada: Thank you. Question. The Lumada in energy is nearly equal to grid automation?
Toshiaki Tokunaga: Beyond grid automation, for example, in the energy sector for data centers, we are introducing the transformers. Because of security issues, customers don't want to have connectivity in this area. But we can ensure security and provide monitoring on a remote basis to enhance the utilization ratio of customers' equipment. This is a challenge that we'd like to take on. So it's not just limited to grid technology, but additional technology can be utilized for other product areas as well.
Ryo Harada: Thank you very much. Second question regarding share buyback, you said you want to do this in a flexible manner. What is the background of this? What is the objective? When there is an asset sale, are you thinking about the returning half, for example, or when there is an acquisition, you will utilize this as a measure? Please elaborate further on the intention.
Tomomi Kato: And so, regarding your question, so far interim dividend forecast had not been provided. But we have done this for this fiscal year. As mentioned in the slide explanation capital allocation, the accumulated amount is not presented. But for this fiscal year, we are presenting the number, say, in terms of scale so that you can have a better understanding of our intention. We are trying to be more flexible. For buyback specifically, when there is a asset sale, buyback will require certain procedures. So the cash flow estimate going forward in terms of asset sale as well as investment for growth will all be taken into consideration to consider what is the appropriate level of shareholder return. So in the context of one fiscal year, we are making such consideration. And as mentioned, cash generating capabilities, well as financial level as well as there is a asset sale that is contemplated. Therefore, we felt that this is a good balanced number. And going forward, because there is economic uncertainty going forward, these risks will also be taken into consideration to come up with a reasonable level. And that is the reason why we're saying it's flexible. We have been focused on one-half -- conscious about one-half in the past. But that will not suffice in cases where we need the investment for growth. That is the reason why we're giving you this guideline. But in the short term, there will be a very variation. But in the mid to long-term, we will increase the shareholder return and this is also clearly stipulated in the capital allocation for Inspire 2027. It's not half a free -- core free cash flow. Answer. We're not thinking about half of that level because it's not really holistic. We are considering it should be half in the mid to long term. But the significance of having a guideline of one-half, it may not be reasonable in some cases. It depends on the opportunities for investment for growth. So that is the conclusion we have come up with.
Ryo Harada: Thank you.
Unidentified Company Representative: Thank you very much. As I said earlier, we had many questions, we have many hands but we exceeded the time. So I'm so sorry but we would like to take the last question and those who have your hands up, we will respond later. Okawa san, please unmute yourself and ask your question.
Junji Okawa: Thank you very much. Daiwa Securities, Okawa. I have two questions. First is the actual results and capital allocation. First question, in GEM sector, Hitachi Energy and railway, the variability was large and so more than JPY10 billion upside in both segment. So could you give us your outlook here?
Tomomi Kato: Thank you very much for the question. Answer. I did not explain sufficiently earlier. Sorry about that. GEM sector has two. One is power grid, the number was higher than we thought. And railways system was also higher than our plan. Overall, power grid upside was expected. So, in the company-wide, we included the upside and so this was within our expectation as Hitachi as a whole. Order is increasing and this is the trend that we've seen so far. But transformer and these switch gear and large-scale system are progressing. So those are the background to the upside. On the other hand, rail system, the project progress was viewed rather conservatively, but it was the last year of the Medium-term Plan, so the line division worked very hard. In Q4, the deal -- the project progressed which pushed up the profit. So this was the reason we enjoyed the upside for Hitachi as a whole.
Junji Okawa: Question. Thank you very much. Second question is on cash allocation. One clarification in Ezawa san portion, you said that this does not sound strange. So not strange for JPY2 trillion? And growth investment, you talked about the industrial automation and so in Connective Industries the presence is still small. Maybe you have big potential here. So, what kind of enhancement are you thinking of hardware or software? Siemens, Rockwell? No, Honeywell. Are you going to achieve aim for that kind of player? What kind of enhancement are you thinking of? Thank you very much.
Toshiaki Tokunaga: Answer. Let me first answer your second question, the industry automation. When I mentioned this earlier, it was just a verbal explanation. In the industry automation market, the discrete and process converge, in other words, extreme mission-critical domain will be targeted by CI sector. By targeting that area, Hitachi's IT and OT and product capability can be leveraged. And that is -- so by battery and biopharma and high-functional material markets are growing in this area. So this growing discrete and process area where they converge, where there's mission criticality, we want to create our business leveraging our capability. That is what we have in mind in coming up with a concrete strategy. The detail will be explained more in the Investors Day from Brice. That is our current plan. Thank you.
Tomomi Kato: And to the first question, I said it doesn't sound strange. It's not about the size of the shareholder return, but is Ezawa san's question. The D/E ratio level, we have a certain assumption which I do not think is way off. It's not that strange. Thank you.
Junji Okawa: Thank you very much. Question. So when you deploy horizontally, do you -- leveraging GlobalLogic or the Strategic SBU. You have HMAX and GlobalLogic, you are ahead of other players. So, horizontal deployment of GlobalLogic, what is this key to success? Is it Tokunaga san's leadership or organizational setup? Could you give us why you are working this well, why it's successful?
Toshiaki Tokunaga: Answer. Thank you very much. GlobalLogic has -- is linked to multiple sectors as they conduct their business. In other words, they're generating synergy. That is the basis. In other words, GlobalLogic has great engineering capabilities. In addition, from FY 2025, all sector leaders, including Strategic SIB and region leaders and corporate heads, will come together to discuss the strategy and decide on concrete steps. We have that meeting for -- in place. This meeting is -- have discussions -- more active discussion than we thought and this will be a big positive driver for our future business. So we are executing One Hitachi as we speak and that gives us a big expectation for the business growth going forward. Thank you.
Junji Okawa: Thank you.
Unidentified Company Representative: Thank you very much. With this, we would like to bring the Hitachi Ltd. web conference on Inspire 2027 and results for year ended March 31, 2025 to close. There is one housekeeping announcement to be made. As mentioned, on 11 of June, Hitachi Investor Day 2025 will be held and media and analysts and others will be receiving a detailed explanation in advance. With that, we would like to bring this meeting to a close. Thank you very much for your participation over the long hours. Thank you.