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The time has come to start the Hitachi Ltd. briefing on the consolidated financial results for the third quarter ended December 31, 2022. Thank you very much for attending this briefing despite your busy schedules. We have the information available in the Hitachi website for your reference. We will now introduce the speakers for today. Yoshihiko Kawamura, Executive Vice President and Executive Officer and CFO; Tomomi Kato, Vice President and Executive Officer, Deputy CFO; Masao Yoshikawa, Executive General Manager of the Investment Relations division.
CFO, Kawamura, will be providing the outlined explanation of the results. We will be switching the screen. Kawamura-san, please start.
Thank you very much for attending this briefing despite your busy schedules. I would now like to present the consolidated financial results for the third quarter for our company.
Please refer to Page 1. This is the content. There are 4 areas to cover: points -- key points; second is the accumulated results up to the third quarter results; and fiscal year 2022 forecast; and appendix. Here, we have presented the third quarter results for your reference.
Please proceed to Page 3. These are the key messages for the third quarter, 1 to 4. The first point is the numbers for the third quarter. Second is orders. And the third area is the portfolio reforms. And the fourth point is the forecast.
Regarding the third quarter, under 1, revenues was JPY 8,108.7 billion, which is 10% increase year-on-year. Adjusted EBITDA was JPY 624.2 billion, and net income was JPY 292.2 billion. On a Y-o-Y basis, there was a decline as just mentioned below. That was because of the shift to the risk-sharing corporate pension plan and Hitachi Energy's goodwill impairment. And that is accounting for the significant portion of this negative number.
Second, orders remained very firm. Digital and green energy and mobility have remained very strong. For Digital Systems & Services, for the third quarter, orders were JPY 651.3 billion year-on-year, 22% increase. For Green Energy & Mobility, between Quebec and New York, AC transmission of electricity was a gain. We have been able to be awarded this contract. And for railways, we have won major project for Ontario Line. It's about JPY 1 trillion overall. This has been received this order.
As a result, Hitachi Energy for Q3 orders was JPY 554.4 billion and we have a backlog of JPY 2.5 trillion. So in terms of completion, it's JPY 1 trillion, so there is increase by [ 2.5. ] Railways Systems was JPY 666.5 billion, Y-o-Y 135% and backlog is JPY 3.9 trillion. So all this [indiscernible].
Third is the portfolio reforms. As we have been reporting from the past, we are making steadfast progress in this area with Hitachi Energy. ABB has had 20% stake. But in December, we have taken back this 20%. Therefore, it is now wholly owned subsidiary. For Hitachi Metals, in the beginning of January, we have completed -- the selling of shares process is being obtained. Hitachi Transport System is also proceeding well as well.
Fourth point is the forecast for fiscal year 2022. Revenue is JPY 10,550.0 billion, 1% increase from previous forecast. Adjusted EBITDA JPY 877 billion. No change to the previous forecast. Core free cash flow JPY 270 billion, increased by JPY 20 billion from the previous forecast. For net income, we will make upward revision. We had reported JPY 600 billion, but record high of JPY 630 billion has been recorded.
Now Page 4. Let's now look at the macro, it cannot make out plant. And this is from the Estancia Research Institute and also from the World Bank, IMF has also provided focus from 2023 from the second half, the outlook looks positive. But this is based on the well done forecast. So therefore, it is more conservative. 1.7% for global. As you can see on the right-hand side, PMI, Purchasing Managers Index should be referred to.
Regarding the outlook going forward, is presented for major countries, it is currently below 50. 50 is the medium. So this global outlook is 1.7%. Japan is 1.3%. U.S. 0.5%. Europe is 0%. And therefore, Autogas, Japan is relatively high. China is plus to 4.3%. Overall, for fiscal year 2022 as well as for 2023. Economic outlook cannot be too optimistic. But based on this understanding, we will be managing our company.
Positive factors on the left-hand side below, there are various measures implemented, especially economic methods. As mentioned here, for example, the resilience program in Japan as well as in the United States, infrastructure investment and economic merchants are presented such as chips and science at and inflation reduction. China is also promoting infrastructure construction as well.
There are negative factors on the right-hand side as well as shown in the middle. For fiscal 2023, interest rates are likely to rise further, there is likely limit. But entirety go up, this will have an impact. Therefore, we have to watch very carefully about the native factors going forward.
Please refer -- yes, I would like to talk about the semiconductor and material impact on our business. As I mentioned the cushion above the semiconductor shortage is affecting mainly Hitachi Astemo, especially in the automobile areas. So this is not high end, rather logic, analog and discrete semiconductors.
Supply and demand remains tight and summer has been impacted. For material prices, this is having impact on Hitachi Energy as well as well as Hitachi Astemo and steel sheet electrical associates remains very high. To the right, in terms of energy, electricity price is rising in Japan and elsewhere. This is having an impact on our factory operations for Ukraine and Russia.
In the beginning, we were very concerned. But so far, the impact for our company has remained minor. It is asset that will have a significant impact on our performance.
Page 6, please. Yes, I would like to talk about the Q3 results. Left-hand side should be referred to, starting with Digital Systems & Services, global uptick is now included. And Connective Industries and Astemo are shown here as well.
As you can see in the bottom, the orders are shown here as well.
The for digital system, JPY 578.1 billion, adjusted EBITDA, JPY 70.8 billion, ratio was 12.3%. So increase in revenues as well as EBITDA. Below is global logic. This is on a sentiment basis of JPY 54.8 billion, and the right increase of revenues by 46% and adjusted EBITDA is 3.7% and remaining very strong. Again, energy and mobility should refer to JPY 652.1 billion and JPY 46.1 billion, a 7.1% is as well as profit. Hitachi Energy, JPY 388.4 billion and JPY 32.8 billion increase in revenues as well as EBITDA.
Connective Industries, JPY 742.5 billion in terms of revenues and JPY 78.2 billion adjusted EBIT, 10.5% increase in revenues as well as profit below. That's just Simo. JPY 93.1 billion, and it's 5.7% lower than other sectors. Last year was very difficult. So this year, as increase in revenues as well as EBITDA. Third quarters have been strong for all the sectors.
Page 7. These are the orders results for the third quarter. Y-o-Y should you refer to from Digital Systems service, 22% increase in third quarter. Hitachi Energy increased by 15%. Railway Systems increased by 135% and Building Systems increased by 9%. So you can see that orders are increasing. Hitachi High-Tech is minus 28%. Last year, there was significant orders. Therefore, it's a reactionary decline.
Page 8. Lumada business is presented here, left and signed graph should be referred to on the left-hand side is the 3 quarters of fiscal year 2021 to the right is the 3 quarters for the fiscal year 2022. And to the right is for the whole year, fiscal year 2021 and to the right of that is fiscal year 2022 forecast.
As you can see, the right, if we compare the 2 fiscal years, the for '21 was JPY 1.39 trillion and this year, JPY 1.9 trillion, increased by 36%. And in terms of adjusted EBITDA, 13% numbers have not changed. At the very top, the light rent is global logic. Here, digital engineering is the business. And therefore, it is showing steps growth.
Now please look at the right-hand side. The composition by segment are presented. The right-hand side is the fiscal year 2022 in forecast. And if you look at the breakdown of JPY 1.9 trillion, digital system is JPY 810 billion. Connective industries is JPY 800 billion, accounting for more than half. The green energy and mobility was JPY 280 billion. So that is the breakdown.
And there is also the breakdown between overseas in Japan, 50% each are presented. Please look at the lower side, we are taking the measures for the next work, especially for global logic, in none as well as Romania, Uruguay companies have been acquired -- delivery, personnel and customers have increased. The for Global Logic's service capability has been enhanced sold on these acquisitions. So those are the highlights for the third quarter.
Please now refer to Page 9. Q1 to Q3 fiscal 2022 results are presented.
Referring to Page 10. This is on an accumulated basis Q1 to Q3. Left-hand side is revenues and in the middle adjusted EBITDA. Increase in revenues as well as earnings. Left-hand side is revenues. The dark gray is the 3 sectors and Astemo. The light gray is for listed subsidiaries. Please refer to these numbers. On the right-hand side, overseas revenues is JPY 5.235 trillion, Y-o-Y 17%. Lumada business, JPY 1,361 billion, plus 51%. And the net income was JPY 292.2 billion, decreased by JPY 158.5 billion. This is because of the pension shift and Hitachi Energy impairment are reflected here.
EBITDA, JPY 81.6 billion. The case from operating activities, JPY 380 billion, increased by JPY 22.9 billion. This is because of a tax effect as well as operating profit, which are reflected in the slide.
Our KPI is core free cash flow, JPY 74.9 billion. Irani increased by JPY 13.4 billion. You can see that for all the items, our performance has been very strong. Page 11. These are the results of the 3 sectors. The sectors on the left hand side, the Astemo and listed subsidiaries are shown. The 3 sectors, as limited here, increase in revenues as well as profit and JPY 5.48 trillion, for EBITDA as well as for net income, we have seen an increase.
For Astemo, last year was very difficult. Therefore, looking at the snapshot, it looks like revenue increase and profit increase. But as you can see at the very bottom net income is minus JPY 26.4 billion because of the fixed asset impairment as well as the pension shift. And that is the reason why it is negative for the listed case.
On the other hand, the 2 companies are different. – Hitachi construction machinery reduction in revenues as well as earnings. So we have sold the shares. – Hitachi metals both increase in revenues as well as earnings. On a consolidated basis, revenue was -- total is JPY 818.7 billion, and the net income was JPY 293.3 billion.
Now from the next page onward, let's look at the business segments. Please refer to Page 12. At the very top is Digital Systems & Services, JPY 1,678 billion, JPY 188.3 billion EBITDA, ratio is 11.2%. Front business Y-o-Y EBITDA is minus JPY 5 billion. This is because of the transportation as well as power have led to a reduction in investment on the part of the customers. So this has had an impact. For some projects, cost have increased. Therefore, we have a slight negative but we will recover this going forward.
Next is Green Energy & Mobility. JPY 1,723.7 billion, 5.3% as well as JPY 91.9 billion in terms of EBITDA. Hitachi Energy, JPY 1.84 billion, adjusted EBITDA was JPY 69.7 billion, 6.7% on a full year basis, it looks different. But this is for the 3 quarters. Railways that then JPY 9.7 billion, JPY 28.4 billion, 5.6% Page 13 connective industries are shown here.
Revenues was JPY 230.3 billion and adjusted EBITDA was JPY 27.4 billion, 10.5% -- where I must report is the second area, SmartLife and ecosystem is eco-friendly system, this is home appliances, minus 5% in terms of revenues and minus JPY 8.5 billion for adjusted EBITDA. Because of the end of the year, revenues were lower than expected.
And in Shanghai, lockdown has prolonged the impact. Page 14 should now be led to, I'd like to talk about the same as well as construction machinery as well as metals. Last year was very difficult. Therefore, if you look at this number, Y-o-Y 20% increase in revenues and adjusted EBITDA is JPY 2.5 billion. So it is increase in both revenues and profit.
And next page, Page 15. This shows the first quarter through the third quarter, the EUC via the fiscal '21 on the left-hand side and the fiscal '22. And the top is revenue and at the bottom is adjusted EBITDA. I'd like to talk about adjusted EBITDA. On the right-hand side, the JPY 575.2 billion for fiscal '21, 10.7 million because of the global Logic acquisition.
And then divestiture of Hitachi construction machinery minus JPY 28.5 billion. And then foreign exchange, positive 64.5 million and then others. So on the right-hand side, fiscal '22, 3 quarters, the total is JPY 624.2 billion.
Next page, Page 16, shows the financial position and cash flow. And in the middle grade, the hatched area is the as of the end of December 2022. Please look at the total assets, which is at the top, 1 trillion, 281 billion and down the table. The cash conversion cycle, the million, 56.7 days, nearly 20 days reduction in order to -- they don't have more cash, we prepared for the conversion and the trading.
And the total Hitachi Limited stockholders equity ratio, 34.1%. And a 2.8 percentage point on the EBITDA, DE ratio improved up to 0.59x. And at the bottom of this page, cash flows and the operating cash flow, JPY 380 billion, increased by JPY 122.9 billion and the investment and the cash flow, negative JPY 145.2 million on the free cash flow, the JPY 234.8 billion which is on a year-on-year basis increase of JPY 1 trillion and the core free cash flow, JPY 74.9 billion.
Please go to the next page. This is the revenue by market starting from North America. In the circle, you see the percentage, which is the increased 32% increase. And Europe, 21% increase. China this is different from the other years. 5% increase. So this means that the China is not expanding. So it is a very difficult situation. And below that, Japan is also struggling. And then ASEAN and India 18% increase in other areas, 6% increase. As you see at the bottom, well, the overseas revenues of JPY 225.6 billion, 65% overseas ratio, 4% increase year-on-year is the increase of the overseas ratio. So the so far, I talked about the numbers. Now I'd like to talk about the full year forecast for the fiscal 2022.
Please go to Page 19. This is the highlight of the forecast. Left-hand side, revenues. And in the middle, you see adjusted EBITDA. So you see increase both in revenue and the EBITDA. On the right-hand side, you see some notes, Lumada business revenues, JPY 1.9 trillion, and the net income, JPY 630 billion.
Positive impact is because of the construction machinery, the sale of the shares of the group companies and the net [indiscernible] comes up to JPY 630 billion. EBITDA, JPY 1.390 trillion. And the cash flow, the operating cash flow is EUR 710 million free cash flow, JPY 270 billion and the ROIC, ROIC is 7.4%.
The use foreign exchange rate and also the sensitivity. So the adjusted EBITDA and the impact is on the positive JPY 0.2 billion and also JPY 4 billion the impact for the revenue, when yen changes and the weakens against the data.
Next page shows the forecast by 3 sectors: Astemo and listed subsidiaries. The C at the top, the 3 sectors increased the revenue and the profit and Astemo likewise. But just like the third quarter, the bottom line -- the profitability is a negative JPY 8 billion. That is how we have recovered. But this is the current state on the listed subsidiaries, the both revenue and profitability decrease.
And on the right-hand side, the revenue total, JPY 10.55 trillion; adjusted EBITDA, JPY 877 billion. And then so these are the numbers we are going to announce here well. On the next page onward, you see forecast by business segment. So at the top digital systems and services. On a full year basis, JPY 290 billion, JPY 300 billion for adjusted EBITDA. So increase in revenue and profit. Green Energy & Mobility, JPY 44 trillion 529 billion, 6.5% once again, increase in revenue and the EBITDA.
Hitachi Energy, which is the third from the bottom, JPY 1.396 billion, 7.5% JPY 105.2 billion. So the both increase in the revenue and the profit. And the railway systems, JPY 126.9 billion, 45.8 million, so was an increase in revenue and profit. And the Connective Industries on the next page, JPY 2.84 trillion, JPY 33 billion for revenue and EBITDA, 10.7%.
So the second from second from the top, Smart Life and Econ systems, as you see on the YD basis, adjusted EBITDA is down by JPY 4 billion. This is our other business right now and technology, which is the Hitachi High-Tech measurement and analysis systems, the business is quite solid, making contribution. Page 23, please. As to assume here, Astemo adjusted EBITDA, JPY 92 billion.
So here, in the first quarter, well, we still have the semiconductor supply issue. So we have to see -- wait and see how it will happen. But the 4.9%, JPY 92 billion. That is what we expect -- Next page, which is the trajectory of the revenue and adjusted EBITDA for the fiscal '22 total, if you could take a look at adjusted EBITDA, it was JPY 855.3 billion in 2021. We have some positive impact of the acquisition of our global logic, but they are negative because of the divestiture of the companies.
And then foreign exchange and others have several items. And on the right-hand side, the forecast for '22 is EUR 877 million. And the adjusted EBITDA on this page, Page 25. So how is it reflected on the net income? At the top is 2021 and at the bottom is 2022. I'd like to use the bottom part.
So the 877, which was strong on the previous page appears here, once again, on the left and side. And then we have acquisition-related amortization, JPY 83 billion negative and then 290-so positive for the net gain on business reorganization. And then the structural reform, impairment and the EUR 100 income taxes and the others.
So the pension and the issue is also included taxes deducted. And then it comes down to JPY 630 billion. So as you see, for 2022, -- divestiture of listed companies contributed to the performance of the company. Please go to Page 26. A -- So this is the consolidated statement of profit and loss and the UC cumulative quarter 1, quarter 3 of fiscal '22 and you see other details.
So the starting from the adjusted operating income and going down, we have the equity in earnings and the affiliate’s acquisition-related amortization and then we have adjusted EBITDA. And then we get the EBIT. And then after that, we have interest in festive taxes, no condoning interest. And the net income on the is JPY 630 billion, as you see on the right-hand side. And then we have appendix and here in the appendix pad, we only have the Pasha the 28, for example, -- these are the numbers only for the third quarter. Page 29. Once again, these are the numbers only for the third quarter. Page 31, 30, 31, so all these pages cover the numbers in the third quarter alone. So the -- sorry, I rushed through the materials, but so much for my presentation. Thank you very much.
Thank you very much. We would now like to proceed to the Q&A period. [Operator Instructions] So this is the procedure we would like to follow today. So we would like to take questions from the press on the Japanese channel first. [Operator Instructions] [indiscernible], please unmute and ask your question.
I have 2 questions. The first question is the evaluation of the results. And for next fiscal year and what is the outlook of the performance, especially for next fiscal year onward, what are the prevailing risks that you envisage in geopolitical as well as foreign exchange and industry, please elaborate further. Question number two is regarding Astemo. Is this still negative in terms of net income? EBITDA is positive profit. But why is it negative in terms of net income. Why is this the case? And what are the measures you intend to implement?
Thank you for your first question. For your first question, regarding the evaluation of the results of the third quarter. Environment has been very difficult. There was a pandemic. That was a [ great ] issue. So the environment is very difficult. But in the third quarter, we have been able to report the revenues according to our forecast and we have been able to also make an upward revision as well. So we are quite happy with this result internally.
For the next fiscal year, as I already mentioned, the macroeconomic environment may not recover in the second half. Therefore, we believe that environment will remain difficult for the fiscal year. Foreign exchange, JPY 130 is likely to remain at this level. The difference in the interest rate as well as the prices between Japan and United States will have an impact as well.
So there's still weak yen and strong dollar trend is remaining. But if we look at the prices, the inflation rate in Japan is lower compared to the United States. The difference in the foreign exchange as well as the price difference will lead to adjustment. I don't think it is going to -- yen is going to deteriorate -- depreciate further, but it's not the case according to [indiscernible] foreign exchange remains JPY 130. So there is no significant impact. For interest rate, we are concerned.
In terms of our borrowings, debt has been controlled. And therefore, interest rate [indiscernible], we can absorb that. But with this example, it will have impact on the asset value. This will have an impact on the real economy. That is a concern because it will have a negative impact on the economy. So [indiscernible] the environment very carefully. Against this backdrop, for next year, we hope that profit can be generated similar to this year.
Astemo has issues regarding semiconductors. Therefore, next year, it is likely that this situation will continue for about 6 months. But there is demand for automobile. There is also the electrification demand that is very strong. So if this recovers, we believe that similar levels can be achieved for next fiscal year according to our budget.
Regarding Astemo net income level, there is the impairment as well as shift in the pension system. If you need details, Kato-san can provide information, but this is a one-off impact. Therefore, it doesn't deserve management measures will be required for Astemo. This will fall of next year.
Regarding the third quarter evaluation, let me give further information for the third quarter. Compared to what we had expected, impact of foreign exchange is very significant. About JPY 100 billion upside was obtained. And that's JPY 85 billion was foreign exchange and organic with 3 sectors and for some, there were upsides recorded as well. In terms of profit level, JPY 12 billion upside was recorded and JPY 9 billion was foreign exchange, JPY 3 billion is for the 3 sectors.
There were upside for the 3 sectors, especially for the green energy mobility, Hitachi Energy as well as Railway Systems have had strong orders apart from positive impact of foreign exchange. For fiscal year 2023, as Kawamura-san has already mentioned, foreign exchange, inflation must be taken into consideration. And regarding the pandemic, there could be further increase. There was also geopolitical risk that are concerns that we have identified.
For Astemo, on the other hand -- on Page 20, the outlook for the year has been presented. As you can see here, the adjusted EBITDA -- you can see that the profit is provided. But although it's not written here, non-operating about JPY 60 billion is expected. This is impairment as well as the corporate pension plan shift. These are all one-off measures. It will not be prolonged. In terms of net income before tax is positive. Therefore, for next fiscal year, we have high expectations. That is all.
Please unmute and ask your question.
Can you hear me? I'd like to ask Mr. Kawamura. And this may not be related to financial results, but domestically in Japan, the prices are rising in Japan and wages and salary, what is your view about the compensation and the sale of schemes of the company? Can I have your comment?
Yes. Thank you very much for the question. Yes, wage increase the and also increase of the compensation and the annual income of the employees, this has become the national agenda in Japan, and Hitachi is also looking at this in a sincere manner. So how much the salary increase is possible will spring and the lever negotiation should we be starting and that will lead to the conclusion. But we'd like to take as much response as possible to that question. What we are thinking is that the wage increase compensation increase shall be sustainable. If it is down only 1 or 2 times, it is not the -- be sustainable.
So basically, what we should do. Well, as we learned from the economic vary. Well, the labor productivity has to be raised by increasing the wages. So we have to improve the labor productivity and that should be reflected on the higher salary. So that should be the basic structure. So that it's going to be the sustainable program on the mid- to long-term basis. How much was up is possible. As you know, yes, it is at the level negotiation to decide. But we'd like to take as much on the actions as possible to this question. Thank you very much for your question. Thank you very much.
Please unmute and ask your question.
I hope you can hear me. Now at this time, in terms of revenues as well as the net income bottom line attributable to the parent company have been revised. What are the factors that has led to this revision compared to October, what has changed? Please, elaborate?
Details will be presented by Kato later. But in terms of macroeconomic point of view, up to the third quarter, there have been impairment measures implemented. And therefore, compared to the beginning of the fiscal year, risk others was not necessary for the fourth quarter that was the management decision made.
Secondly, the revenue remained stronger than expected. So therefore, we have decided to make the upward revision at this time. So the macroeconomic factors as well as the revenue-generating capabilities have increased. That is the reason why we have done the revision. Kato will provide more detailed information on this matter. First of all, in terms of revenues -- on page 21 by segment information is provided for the fiscal year. As of this brain energy mobility we have made upward revision of JPY 130 billion. Hitachi Energy and Railway Systems mainly.
The foreign exchange impact up to the third quarter as well as orders been very strong, revenues are increasing. Therefore, we have decided to make this adjustment -- but the semiconductor prices are increasing as well as personnel cost is also increasing. Therefore, in terms of profit, it has been surprised to a certain level.
And for the adjusted EBITDA, it has remained flat from the last time. Regarding net income, we have made upward revision. Please return to Page 25. The adjusted EBITDA to the waterfall chart is presented. Around the middle there the JPY 10 billion in terms of global risk.
Last time, we had estimated this to be JPY 40 billion impairment and unexpected events could occur toward the end of the fiscal year. But after ending the third quarter there is only the fourth quarter remaining, and we don't think that there are significant risks. Therefore, we have reduced our global businesses to JPY 10 billion. So that is the reason why for the net income, it is JPY 630 billion.
[indiscernible], please unmute and ask your question.
This is [indiscernible]. Can you hear me?
Yes.
Hitachi Energy, and you mentioned that the supply/demand is very brisk. And in the previous meeting and once again, you mentioned that the business is brisk for Hitachi Energy. So the business environment surrounding the company and also the about potencies of the company, could you please explain more about the riskiness of the business? And also, the energy security and also energy price is shooting up. And that's negative to your cost. But your energy-related businesses and how does it affect the demand for your business in the energy sector?
Yes, this is the answer. And the reason why the business of Hitachi Energy is so risk is because microscopic the environment is one factor. In Europe, there was a Ukraine situation. So well, the transition to green is slowing down mainly in Germany. But basically, the pace towards the green energy is very strong. So what's going to happen, for example, in Germany, the windmill, the wind power, they are operated in the northern part of Germany, mainly, and there is no industrial area in the northern part of Germany. And then they have [indiscernible] the middle and Munich -- or the area surrounding Munich is the industrial area.
So the wind power and we have a technology to bring the power generated in the northern part of the country down to the southern part of Germany. And also looking at the Middle Eastern countries, be a petroleum or the natural gas if the price changes. So they want to change them into the power. So from Saudi Arabia to Egypt -- the cost on the soda across the national border. So these are also related to the situations in the oil-producing countries and the consideration for the green energy.
So the GE Siemens are the competitors, and we are trying to get business in this competitive environment. That's the macroscopic energy environment. And the technology-wise, Lumada is the something that we can use. So the India session, the transformation station, we can put the Lumada in order to optimize the distribution of the power. That's what we are doing in this business. So the -- in the field of software, new technology is making progress. So the related to Lumada, these are what we're doing. So macroscopic environment and also the -- when it comes to technology, Lumada is continuing a lot through this business.
And as for the energy -- the national security point of view. So the private company alone is not able to make the big trend. So we have to work together with the governments, and we are having the discussions with the regulators or the government offices. Well, the natural gas is expensive, but we have to burn the fossil to generate energy.
However, for a long-term perspective, we have to incorporate and embrace the green energy. So the high voltage and the transmission is where we are good at and also the energy that can be based upon our own natural resource, it can also be utilized -- and also, looking at the government policy, the resumption of the nuclear a plant is what the government is talking about. And we also have the capability there.
If the nuclear power plant is to be resumed, and that is another area we can contribute. So not just the fast or the transmission lines, the renewable energy and in some cases, probably the nuclear power generation, maybe part of the efforts. And with all these activities, we'd like to make a contribution. That is all. Thank you very much.
Next, we will take questions from the institutional investors as well as sales on the Japanese line. Those of you with questions, please indicate using the raise-hand button and ask your question.
I have 3 questions. First question is regarding Astemo. In the third quarter, if we look at that revenue is a Q-on-Q plan. But what are the, but still you made improvement? Why was this the case? You said that nonoperating basis, JPY 60 billion for the year was mentioned for the up to third quarters or for the full year for the nonoperating area, what is the relevant risk as well as the impairment. -- alleviating the cost because of impairment. Please elaborate further.
In terms of our Astemo revenue is not growing, but profit has increased. This is because of the parts business in automobile in the first quarter, second quarter and third quarter movement are seeing. In the third quarter and fourth quarter, the price adjustments are of a need for the third quarter, although it is not related to revenues, there have been price adjustments made. And against this backdrop, profit has been impacted toward the fourth quarter, we are still negotiating this area. So if this is generated, it will be incremental. We believe that the risk -- remaining risk can be absorbed. The price adjustment is having an impact on the profit even in the absence of the increased revenue.
And for the second point, I'd like to ask Kato to address in detail. Regarding nonoperating expenses, the JPY 60 billion was mentioned for the year. Although it is not the detailed numbers, I would like to give you the scale information in terms of the impairment as well as the pension shift is 1/3 each in terms of impact. The points as I mentioned, these are one-off factors.
Question. Well, the third quarter Astemo profitability is such that -- it looks inflated, -- is that the case? Or as a result of negotiation has the pricing we can assume this to be an appropriate level. What about continuity?
Every year, this is occurring for the end of the year. And therefore, we can expect the same for this fiscal year as well. It's not just product volume and revenues and profit. This is a commercial practice that is continuing or the numbers are likely. Therefore, it has been factored in.
Question number two. It was mentioned in the first question. Next year, macroeconomic conditions may not recover in the second half. Why is this the case? What is your take on this? Furthermore, if it is not going to return in terms of the environment, what are the business domains that is concerning for you?
This is regarding the economy. Therefore, there could be different views. But we are looking at the environment with a conservative perspective, there are 3 or 4 factors to consider. First of all, pandemic seems to have run its core, as you can see in China, but the variants are emerging. So we don't know when the next year around the pandemic will occur. Secondly, the interest rate is also to be considered in our company, 1% increase in interest rates does not mean a negative impact on funding, but there is the impact on the assets having an impact on the environment.
In terms of foreign exchange, according to the economy, just this is not made yet. Therefore, the interest rate is concerning going forward. Multifactor is geopolitical as well as the U.S. and China as well as Taiwan. And in terms of Ukraine, in the exit is clear. Therefore, compared to before the pandemic, before Ukraine, the comfortable environment that we had prior today's are unlikely. Therefore, we believe that the macroeconomic environment will continue to be difficult. That is the basis of our management operations. The free cash flow has increased JPY 20 billion.
For your 3 years capital allocation plan, based on the core free cash flow, -- is there an upside? Or has it remained the same in that context? A related topic is about half is to be returned to the shareholders and JPY 200 billion of the buyback was made. What is the schedule -- in terms of buyback as well as shareholder return enhancement for the second year and third year from the point of view of the core free cash flow, is there an upside? Please elaborate further.
In the current environment, our core free cash flow remains the same as when we announced the midterm management plan. So we are not going to change as a result of the upside. As I have already been emphasizing fiscal '23 it cannot be overly optimistic.
Therefore, we must achieve the results of -- for the midterm management plan, Astemo Astana. Therefore, we are not going to change at this time. And therefore, in terms of share return, the half to be returned is a policy that remains unchanged. Cash flow situation will have an impact because how cash flow is generated is subject to volatility. But so the dividend as well as our share buyback policy in terms of shareholder return policy will remain unchanged.
Next [indiscernible], please unmute.
I have 2 questions. It may sound a little abstract. But the -- in the previous and the second quarter, and this time, third quarter, the business is quite solid -- performance is solid. But you cover very extensive business areas. And in many areas, the business is improving. And at the same time, there is no major the difficulties or the one in auto that you do not have any segment which is the assembling block, so to speak.
So the -- and the business is going quite smoothly. And I know that you are making a lot of efforts to run it smoothly. And -- are there any changes to the approaches taken by management team and Mr. Kawamura, if anything that you can talk about, for example, the business is expanding in a stable manner. Is it just happened that way that they turn out to be stable? Or the management team made a different commitment. You have higher sense of the other agency, new the attitude or the something new happening in the management team to stabilize the performance. Could you please explain?
Thank you very much for your question. So these are -- the question related to the underlying concept of the management. So under the current President, basically be an approach to the business has not been changed. So what we are trying to do is that we have the businesses for the power grid in railways and global logic and high-tech such high tech. These 4 businesses, these are the engines. And when they are stable, then that stabilizes the entire Hitachi business. So these are the 4 -- the major assets.
And we, the management team, executive team are paying for attention so that we can closely monitor the performance of these 4 engines. And if something goes wrong, then we'd like to provide the correction. So that's the attitude. And as for the low profitability business and profitable business, the -- in terms of OP, the 5% contribution, that is the threshold. And we are looking into that. Even if it is a cash-generating business, if the ratio is below 5%, then we are trying to combine that business with others or divestiture possibly, so that we can minimize the unprofitable businesses. So it is a low key step-by-step activities, but this kind of activity is also supporting the profitability.
And the management particularly now Mr. Kojima is the President. And what is noteworthy is the refocusing and a lot of attention on the cash flow. So of course, the P&L is important. But ultimately, cash is the king. So how do you generate King on the cash? And how to secure that and how to share that with the investors? That is quite important agenda for us. And that is the notion shared by all the management executives and all the management team.
So the forecast management of the -- for the important portfolio. And also, the management action is to focus more on the cash flow. It is our commitment. So these are the features of our management approach.
If I may ask another question. So as you mentioned, energy and railway business, the macroscopic environment looking at the environment in North America and Europe, the growth rate is not so significant and it is a difficult business in these markets. But the center of your activities is in the North America and Europe. And currently, for next year, the macro environment may slow down in Europe and the U.S. But do you think these businesses are sustainable and will be viable?
Power Grid and railway business, there is enough commodity business. We have to go to the market and the sell and buy the customers. Another type of business that is affected by the market condition is infrastructure. And we also in North America and Europe, they are the regulator.
We will secure the funding to make this project long standing on a long-term basis. So regardless of the changes of the market and the sentiment. These are quite resistant to the changes in the market, particularly in the U.S., as I mentioned earlier, the current Biden the administration, they made clear that they invest heavily in the establishment of the infrastructure. So the power grid as well as the railway the businesses will benefit from that.
So our intention is to get the business there. And in case of Europe, Well, there's the Ukraine situation. It's quite difficult to foresee what's going to happen, but still as well on the power grid business, we were able to capture it. And the railway business is running quite smoothly. It is the infrastructure business.
So it is not the -- it's quite resistant to the cyclicality of the market. So the we believe that we can continue this business in fiscal 2023. Thank you very much.
Please unmuted and ask your question.
I have 3 questions. I think for -- I think you can make more profit. Well, generally second, I think you had more profit digital system. Digital Systems & Services, a JPY 20 billion increase in profit is focused. Global Margin is about JPY 20 billion. So if you exploit that, that means that you're not making money, profit, but environment has been very good. So what is the background to this? And what is the outlook going for the next fiscal year? That's my first question.
Second, for Power Grid, JPY 2.2 trillion at the beginning of the year and now has now increased to -- from JPY 1.2 trillion to JPY 1.4 trillion. But in terms of profit, there has been hardly any change. It could be the impact of foreign exchange, but please elaborate on the difference of the change.
Third is the railway systems revenues are going up, and it has increased. But in terms of profit, operating profit, 368 is now 336 -- it is a reduction. Adjusted EBITDA is almost flat. Why is this the case? The business environment should be good. Compared to the top line favorable, it seems that there is no upside in terms of profit. Please elaborate further on this point.
For the individual numbers, Kato will make a follow-up. But regarding IT, first, I would like to address your question. As I mentioned at the onset, for some customers, there have been cost increases and a suppression of investment. Generally seeking, IT investment is DX investments are increasing. But there is a customer circumstances to consider. That is the reason why Vertis limited to where we are today.
Regarding Power Grid, revenues are increasing. And what about profits. That was your question. The revenues is JPY 80 billion, JPY 90 billion is this increase on a net basis, but the profit has not been generated because of semiconductor issues as well as employee bonus because we have orders, the incentives are to be paid. So having a cost increase and reducing the profit. Regarding railway system, the other the recognition timing is different depending on projects. This is having an impact. Kato will provide further detailed information. Thank you for your question.
Please turn to Page 21. I think that is what you're referring to. It is true that a competitive per share for Hitachi Energy, revenue 5% profit has increased by JPY 40 billion, approximately. So your question is regarding this. The result impact of foreign exchange revenues look significantly increasing. From the beginning of fiscal year, we have mentioned that price increase is being reflected. So because the material cost has increased. And only 30% of contract can reflect that on price. But now it has increased to 70% can be reflected in price increase and we're trying to negotiate further.
There are customers that are more willing to accept it. But generally seeing the raw material cost is not fully reflected in the price in our plans. But what I would like to emphasize that the revenues are increasing and profit capabilities on a stand-alone basis is improving by 1.4%.
And for railway system, foreign exchange impact has meant the revenues have increased. But depending on projects, there are ups and downs, it's mixed and therefore, 1.7 points, the profitability in treatment has been achieved compared to resume. Compared to the last forecast for Hitachi Energy for associated costs as well, is this increase in profit for railway and systems increased as well. But sector profitability improvement is underway. Hitachi Energy and affiliated cost has been accounted for. Therefore, Hitachi Energy [indiscernible] not changed. [indiscernible] will also provide more information regarding energy.
Semiconductor has had an impact therefore high-profit automation and product mix improvement is forthcoming going forward, the SCADA system, system monitoring as well as process control, enterprise asset management software.
These profit is high compared to hardware-driven business. So as we increase the ratio of these businesses, for the backlog installed basis, we will be able to digitalize a significant portion of this, which change that profitability can be improved significantly going forward.
Regarding the Railways Systems in the long term, 6% plus for more than 6.5% margin is compared to the European peers, we are becoming closer. And in fact, we're exceeding them in this fiscal year. It is our long-term business. Based on the installed base, we have to establish that fully. And the signaling business can be improved to further increase by increasing the mix, we will be able to generate more profit. That is how we would like to generate more profits going forward.
Regarding these 3 businesses, what about the margin profit? I think -- marginal profit, what is your view on that for the next fiscal year?
This is Kawamura speaking. Regarding margin profit, we are always considering this. For the 3 businesses, we have the notice with us to give you details. So the IR department will be able to give further information date -- and regarding -- it's not just the major 3 businesses, but for Hitachi overall, -- in terms of gross margin, it's not a margin profit.
But in terms of gross margin for the 3 quarters compared to previous year, there is hardly any change. But we want to increase this further in the recent past, there have been cost increases having an impact. And that is the reason why we have not been able to increase the gross margin. But we want to reflect this in our prices further and product mix will be improved. -- centering on the other business, we want to increase the ratio of load by so doing, we believe that the gross margins can be improved.
Mr. [indiscernible], please unmute and ask a question.
I have 3 questions. Number one, green energy and the profitability there. I would like to know more about this point. Earlier, the railways systems profitability shall be raised and the Thales and the segmenting business in the U.K., it seems to take more time than you expected. That's what I heard. So acquisition the timing of the acquisition, the feasibility, the year-over-the can be realized. Could you please give us your comment? And when it comes to green energy, well, in the strategic team on the Green Energy, Mr. Kojima, is no -- he members. Could you please explain the significance of that?
Yes. As for Thales, the railway systems -- we -- on the corporate side, we were involved, and we are paying a close eye on what is happening there in the original contract. And sometime in March, carve-out will be realized and it was supposed to be consolidated. But as you mentioned, in the U.K. because of the competition law in the U.K. and also EU differentiate the competition law, it is taking more time to satisfy these requirements, particularly in France. Phase 1 is already completed. And the refiling in the second phase. And the way assure that we can go ahead to that stage, and it's going to be cleared in the near future.
And as for U.K., it is quite interesting. But specifically, there is the no Thales business, but the U.K. regulator is talking about the anticompetitive situation. So locally, we are taking actions towards the regulator.
So right now, in fiscal '23, something in summertime in '23, over by the end of calendar year '23, we hope that we will be cover everything so that we can under come this out and bring this to our site. So the HR, IT, accounting Well, not violating began jumping.
Well, we hope to integrate this business once it is carved out immediately after the coming out, we will be ready to incorporate this business to us. Any other comments about Thales? Yes, I will make some additional comments. In the EU Commission and the European Commission submission to the commission. Well, we already submitted the application, but in November last year. On the year, we decided to withdraw that submission because the -- once the examination process is over, then the recent start negotiating and talk with the commission once again and the process wise, and we judged that it is more positive for this entire project. So that was the adjustment we made.
And so now we are having the prior discussion right now. And once that is done, then we will submit once again, the application to start the official procedure.
And as for the agreeing in the HR matter, Mr. Kojima used to be the person who led this initiative so far. And there are things that we are not able to disclose. But now we have a clear target as to what to do, and we have a clear story about our investment. So Mr. Kojima has the other businesses to attend. And a lot of them, so the consumers position, then shall be transferred to the [indiscernible] and will be the Executive Vice President and he will be overseeing this business. And now we have a clearer idea about the direction of and project. So that is the reason for this change of the membership.
Second question, DS and the top line. In the third quarter alone, the 22% increase in the order. But how is it divided into Japan and the overseas -- and how does it look like? And also the sustainability of the business. The third quarter number, the -- is this the number because you had the large projects or the global logic and Lumada made the contribution. So in this addressable market, continuously, do you think that you can outperform in this market? So these are my next question.
And as for the sustainability supply/demand, Mr. Kato will respond. Yes. I don't have the breakdown between Japan and others. But we have 3 subsegments in our disclosure. And talking about them, well, the 3 of them means front business, IT services and the services and platforms, these are 3 and the 22% positive for the total from 24% positive, IT service, 12% positive. -- servicing platforms are 21% positive.
So respectively, they contributed the growth -- double-digit growth. In case of performance business, well, the financial BU is doing quite well. There are large deals with the banks and also front-loading of the projects. Next, IT services. And the Hitachi Solutions is a company involved in this or in Japan and also North American orders that they are receiving in these countries are increasing. So in the industrial area, the security sit and the cloud shift, these are the businesses that we are getting.
And the services and platforms, domestic cloud and the DX projects are increasing, and hardware storage server business are increasing. And so much overseas are also the increasing in orders. So the businesses are quite smooth. And this is partly because of the exchange rate situation. But excluding that, well, the growth is higher than 20%. -- in you for the response. And you also asked about the energy and the railways, the third quarter, do we have -- yes, so we happen to have a large deals? And is this sustainable? And will this continue in the first quarter over, -- we are monitoring large projects and the transactions even before we submit tender.
Well, once we get the project, then the risk will change. So how to control the portfolio, that is an important consideration. Specifically, it is difficult to disclose right now. But on the -- to submit the tender to be the system for Power Grid and the railway systems, there are a lot. So we have many opportunities, and we are accessing them.
In the revenue systems, the about 10 cases and power grid in cases, we are chasing and the tracking the different on the tender opportunities. Sometimes we can win, sometimes we lose. But we are tracking and we have the mechanism to track all these large deals. And sometimes, we are successful, sometimes not, but in the fourth quarter and the next year, we believe that we will be able to get the large deals one after another. But as I mentioned, another aspect of the question is how to control the cost and the risk -- so that's the management decision to balance the risk and opportunities.
And lastly, I have one more question. Connective Industries, 4 key authority businesses and also the Hitachi Hi-Tech. The demand is declining in the third quarter, fourth quarter. It is because of the supply demand and inmate P&L next year probably.
So if Hitachi Hi-Tech will be struggling in the next year. How about the other businesses, for example, in the business in the pipeline, -- are there any areas that you can expect the growth in next year? Because this may have the macroscopic the macroscopic environment may have an impact on this segment. But if you have the promising areas, please, the share information with us.
Yes. As for Hitachi Hi-tech, we were able to get a lot of deals. And so that is the reason why it looks quite slow. However, business is doing quite well. There are 2 pillars, the semiconductor producing equipment and also the medical diagnosis and the analysis system, and they are contributing a lot. And the market condition is favorable.
So compared to last year, it looks like last this year. However, constantly this segment can make a continuous contribution. And also, the household appliances or the Smart Life confine may have a difficulty. But if Shanghai situation recovers, then our refrigerators and washing machines, I believe that we will get more demand, demand will come back.
And as you see, industrial digital business. So the -- this is about the manufacturing, the DX and the robotization of the manufacturing facilities factories. And this is where we can expect the growth. And also industrial products, which is the mainly hardware business on Page 13, it is contributing to the profitability of the company.
So this is not the 1 trillion business like high-tech. However, all these businesses are positive. So connective industries, of course, it is subjected by the market conditions. But they are still on the resistance to some extent, so we hope that we can continue performing well in the next year.
This is Yoshihiko Kawamura. And in high tech, this is not only semiconductor -- and there are complementary businesses, the immunity type of the business, even if high-tech is the business is volatile. For example, even if the NAT is down in vitro business, and they can compensate for that. So 60% is even if 60% is the semiconductor. Well, the others, this is in the appendix, but the medical technologies in the Europe.
Well, is it the high tech on the non-semiconductor business of Hitachi Hi-tech that is contributing. The industrial machineries is growing in the U.S., for example, for in industries, these businesses are complementary with each other. Biosystems building systems in China, for example, supply chain is a very strong and that was program. And at the same time, it is a country where the many accidents happen factors warranty is important.
And the building systems or the maintenance and also a contract and the baton is increasing. The volume is increasing and the wallet is increasing, TAM is getting higher. So in the sense of building systems has become the resilient business. So that was the document recommend that we wanted to add. Thank you very much.
Please unmute and ask your question.
I have just one question, one question. JPY 1.9 trillion is. There is no change. But for the first 3 quarters, -- in the fourth quarter, plus 10% is the revision made digital entry and it seems you're looking at lower revenues. Is that a conservative outlook that we expected.
Regarding JPY 1.9 trillion, it is not an easy target in the past release. And the mother business is receiving many orders, there is opportunity for upside indeed, -- that's all.
I have a follow-up. Upside is in service. Is that the case for the second quarter and third quarter, JPY 150 billion for the second quarter and third quarter and JPY 130 billion for the third quarter? I think this is very conservative. In other words, looking at the run rate, it could be increasing. Is this a positive factor?
Regarding managed service, this is where there is most significant potential. So we have our expectations on this.
Well, we are running out of time. So we'd like to switch over to the English channel. [Operator Instructions] [indiscernible], please unmute yourself and start your question.
I have 2 questions. On the Hitachi Astemo, on the previous meeting, I asked the question and you mentioned that you will be able to achieve by the annual plan. And -- well, the profitability of the motorcycle business, [indiscernible] good expectations. So the -- what I understand is that, that is the key to achieving your annual plan. So the -- could you please clarify on this point?
This is Kawamura. Thank you very much for your question. Yes, in the third quarter, basically the structure of the business has not changed. So the motorcycle accounts for 50% of the business performance. But speedily, we are switching towards the digitalization. So the [indiscernible] are also ramping up.
One year ago, well, the motorcycle – we depended very heavily on the motorcycles. However, motorcycles account for 50% of the performance. But the vehicles are struggling because of the shortage of the semiconductors and that also helped the ramping up of the EV. And now the 50% of the profitability is generated by motorcycles, as you mentioned.
If I may, I'd like to ask the second question. In the connected industry segment, Building Systems and Hitachi High-Tech, I'd like to ask about these 2. In the fourth quarter, just the deduction, but the building systems -- the profitability appears to be quite limited or small in the fourth quarter. Is this a temporary situation? And in the next fiscal year, would you be able to maintain the same level of profitability [ concerning ] the Chinese environment right now. So that's the question about the building systems.
And the industrial, the charging and the semiconductor business is affected significantly by the market and the conserving the contribution next year. It seems that there is risk of significantly lower profitability in the industrial business. And could you please elaborate on this point?
As for the elevator, the new -- the businesses in Japan, China is struggling, but we have significant base of the business. The remote maintenance and -- repair and maintenance is the major part of the business. So rather than depending on the new projects, we are doing more on the maintenance side. So we do not foresee any significant downside here. And at the same time, it is not possible to see the skyrocketing of the profitability. But stable profit contribution can be expected from next year onwards.
As for the industries and also semiconductor, this is not about the low end of the automobiles, but the high-end semiconductors related. And as you know, the recovery is the same and investment on the semiconductors -- high-end semiconductors. So the high-tech and the high-end semiconductor side, I don't think the impact is not as big as the automotive. But still, we'd like to pay close attention to this. But in the connective industries, we do not foresee any significant impact because of the semiconductor situation.
In the Building Systems, fourth quarter, on a Q-on-Q basis, from third quarter to fourth quarter last year, the profitability declined and the market is still difficult to foresee. And excluding the exchange rate, it may be a breakeven or the same level. And there is a sense of uncertainty. So that is the basis of the fourth quarter assumption.
And as for Astemo, the 4 wheel and the motorcycles, they are not separate. So we have the powertrain, e-Axle. The technology is based upon the passengers. And that can be utilized for the next generation of motorcycles. So our intention is to combine them together. So we are not separating the vehicles and the motorcycle separately. We'd like to combine them for the future.
The time has come to bring this meeting to a close. We still have many people with their hands up, but we would like to now close the meeting. If you have any questions, please refer the questions to the department in charge.
With this, we would like to bring the Hitachi Ltd. briefing on the consolidated financial results of the third quarter ended December 31, 2022. Thank you for your attendance today. [Statements in English on this transcript were spoken by an interpreter present on the live call.]