Hitachi Ltd
TSE:6501
Earnings Call Analysis
Q3-2024 Analysis
Hitachi Ltd
In a year of robust growth, the company saw revenues climb to JPY 2.189 trillion, an 11% increase year-on-year. The three quarters cumulatively resulted in a 12% revenue boost to JPY 6.0537 trillion. Furthermore, the revenue guidance was lifted by 4% to JPY 8.2856 trillion, indicating confidence in continued growth.
Profits paralleled revenue growth, with adjusted EBITA jumping by JPY 34.1 billion to JPY 221.8 billion, and a three-quarter increase of JPY 83.4 billion, reaching JPY 581.5 billion. This profitability reflects an upward trend with guidance also revised higher by JPY 11.3 billion to JPY 829.3 billion. Impressively, the adjusted EBITA margin rose to 10.4% in the three sectors, showcasing the efficiency of the company's operations.
Net income is looking to outperform previous estimates, with a forecast increase of JPY 10 billion, totaling around JPY 530 million. Core free cash flow projections were also optimistic, having been revised up by JPY 100 billion to JPY 440 billion. These revised forecasts reflect the company's strong financial performance and effective cash flow management.
Significant contracts in Digital Systems & Services (DSS) and Hitachi Energy drove the positive figures, with DSS orders topping JPY 2 trillion, up 9%, and Hitachi Energy's orders rising by an astonishing 51% Y-o-Y to JPY 2.6209 trillion. These sectors now boast backlogs that could serve approximately two years of business, demonstrating the company's potential for sustainable revenue generation over the medium term.
The company's performance shone across its focus sectors. Digital Systems & Services enjoyed a 9% revenue increase alongside an increase in adjusted EBITA, with particularly strong growth in regions like GlobalLogic. Within the Green Energy Mobility sector, revenue grew by 21%, although adjusted EBITA remained largely flat. The Connective Industries saw flat revenue but an increment in profit, thanks to successful business adaptations and shift towards service offerings.
The divestiture of entities like Hitachi Metal and Hitachi Astemo strategically shaped the company's revenue, while bolstering adjusted EBITA through positive foreign exchange impacts and other proactive sales efforts. This demonstrates a strategic realignment to focus on core, high-performing sectors and services.
While Japan remains a strong market, accounting for 39% of three-sector total revenues, China witnessed a 1% decline. This particular downturn in China, especially in Digital Systems & Services, is a notable contrast to the overall positive global growth achieved by the company.
Lumada, the company's digital innovation arm, reported a remarkable year-on-year revenue increase of 19% to JPY 568 billion for the third quarter. The forecast for the full year expects continuous momentum, projecting a revenue climb of another 19% to JPY 2.330 trillion. Adjusted EBITA for Lumada is estimated to rise from 14% to 15%, exemplifying the company's strength in its digital transformation businesses.
Company projections for the full fiscal year are strong, with an 8% revenue growth and a 14% rise in adjusted EBITA. Core free cash flow is expected to increase by JPY 100 billion to JPY 440 billion and ROIC is anticipated to improve from 8% to 8.2%. Such positive outlooks underline the company's financial health and its effective maneuvers in an ever-changing global market.
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Thank you very much for waiting. Time has come. So we will now begin the financial results briefing of Hitachi Limited for the third quarter ended December 31, 2023. Thank you very much for taking time out of your busy schedule to join us today. First of all, today's presentation materials are available on Hitachi Limited IR website and the news release site. So please check them as you need.Let me now introduce the 3 speakers, Yoshihiko Kawamura, Executive Vice President and Executive Officer, CFO, of Hitachi Limited; Tomomi Kato, Vice President and Executive Officer, Deputy CFO; Masao Yoshikawa, Executive General Manager, Investor Relations Division.Kawamura will now give an outline of the financial results. Please wait for a moment while we switch screens. Mr. Kawamura, please.
Thank you very much for gathering for this meeting today. Now we would like to start the explanation of the results of the third quarter for Hitachi Limited. Now please look at Page 1. There are 4 points I'd like to emphasize today. First is the key points of the third quarter and second the results of the third quarter, three the fiscal year 2023 forecast, and also number 4 is the appendix. These are the points I would like to cover.Now, please refer to Page 3. Here I would like to give you the key messages for the results. There are 3 points that are covered here. In terms of the results, three sectors are included. Hitachi Astemo for automotive parts have been reorganized. They are no longer consolidated. Therefore it is only for 3 sectors that we are showing performance for Hitachi Limited. That is the reason why we are referring to this as 3 sectors.The third quarter results will be presented. Revenues came in at JPY 2.189 trillion, 11% increase year-on-year. Adjusted EBITA JPY 221.8 billion, Y-o-Y JPY 34.1 billion increase. So, we have revenues and profits.For the accumulated from Q1 to Q3, revenues was JPY 6.0537 trillion, Y-o-Y increased by 12%. Adjusted EBITA JPY 581.5 billion, Y-o-Y plus JPY 83.4 billion increase in revenues as well as profit.Now based on the 3 quarters, I'd like to talk about the forecast. Revenues JPY 8.2856 trillion. This is 4% increase from the previous forecast. Adjusted EBITA JPY 829.3 billion, increase of JPY 11.3 billion from the previous forecast. Therefore, we have revised upward in terms of revenues as well as profits.Now in terms of consolidated total forecast. Net income, JPY 530 million, that is JPY 10 billion increase from previous forecast. Core free cash flow, JPY 440 billion, increase by JPY 100 billion from the previous forecast.I would like to talk about major transactions for DSS, Digital Systems & Services, as well we have had a very strong orders inclusive of that for Hitachi Energy's for DSS [indiscernible] as mentioned here, the next-generation nationwide load dispatching system has been won. This is not on a region basis, but rather nationwide load dispatching system has been one. Now, Hitachi Energy has also been very strong. And as mentioned here the -- from TenneT we have won a business of JPY 14 billion under the framework agreement for Hitachi Energy and Petrofac. And Hitachi Energy will supply its HVDC converter stations. This is a framework agreement for this deal or arrangement. With this advanced payment can be provided. This will also have a positive impact on our cash flow.Furthermore, for Trenitalia we have won deal of JPY 140 billion deal for high speed trains in Italy.Digital Service & Systems for the 3 quarters orders has exceeded JPY 2 trillion year-on-year, up 9%, backlog of JPY 1.5 trillion. Hitachi Energy orders for the 3 quarters came to JPY 2.6209 trillion, up 51% Y-o-Y, backlog of JPY 4.3 trillion. So we have businesses worth trillion and therefore we have backlog of about 2 years. These are the major highlights of the third quarter.Now, I would like to refer to specific details. Please refer to page 5. These are the highlights of the results for the third quarter only. Please look at the text above. For the 3 sectors we grew revenues 11% Y-o-Y basis, an increased adjusted EBITA by 18% organically.And please look at the table referring to the 3 sectors to the right. In terms of revenues, JPY 2.1289 trillion, up 11%. This is the growth of 11%. And 8% is the year-on-year changes, excluding the impact of foreign exchange rate fluctuations. At the 8% adjusted EBITA JPY 221.8, Y-o-Y increased by JPY 34.1 billion. And here the Y-o-Y increase of 18% has been achieved. Adjusted EBITA margin has also improved 10.4% for the 3 sectors.Net income has increased significantly as well, JPY 244.1 billion. Core free cash flows as also mentioned, this is an important KPI for our midterm management plan. And it has increased significantly to JPY 147.4 billion, increase by JPY 97.1 billion. In terms of foreign exchange yen is becoming weaker and therefore we are assuming JPY 148. The sensitivity will be explained further later.Now, please look at the Page 6. Page 6 and 7 are the results of the business segments. Page 6, Digital Systems & Services as well as the Green Energy Mobility. Page 7 is for the Connective Industries. Please look at Page 6. For Digital Systems & Services, on the very top Y-o-Y base has increased by 9%. Adjusted EBITA increased by JPY 16.1 billion. Therefore increase in revenues well as profit for the sector. Looking at the dynamics on the right-hand side. Front Business increased revenues and IT Services increased also revenues as well as profit. Service & Platforms revenues was flat. However, the cost reduction has led to increase in profit as shown below.GlobalLogic continues to grow strongly, increase in revenues as well as profits. Adjusted EBITA is JPY 87 billion is the highest-ever record for Digital System & Service.Next, moving to Green Energy Mobility, please look at the top line. Y-o-Y basis increase by 21% for revenues and almost flat, around JPY 100 million for adjusted EBITA. Hitachi Energy [ trail ] has increased revenues. But power grid related cost has increased somewhat. And that is the reason why adjusted EBITA is almost flat. Now, Nuclear Energy Hitachi Power Solutions is also mentioned here. Y-o-Y increased by 32% or plus JPY 0.6 billion. Hitachi Energy here there has been a significant contribution to revenue. Increase by 25% in terms of revenues and adjusted EBITA JPY 9.2 billion. The market environment as well as the framework agreement has had a positive impact therefore making significant contributions to the profitability related cost is also shown here.Railway Systems for the third quarter has had increase in revenues, but a decline in profit. This will be explained in further details in later pages. If you look at the, on a year-to-date basis, it is increased by revenues as well as earnings, but therefore this situation is special to the third quarter.Next, looking at the Connective Industries, looking at the very top. In terms of the revenues, flat. EBITA has increased by JPY 400 million. Down below, the Building System is as shown here, declined by 1%. Revenues increased in adjusted EBITA by JPY 1.9 billion. This is linked to the Chinese real estate market correction that is taking place. In our case there have been significant impact. But even with those revenues, profit is increasing. This is because the -- from hardware we are now shifting away to focus on services which is shown in this result. Smart Life & Ecofriendly Systems which is home appliances, minus and JPY 0.7 billion in terms of adjusted EBITA. We believe that this will be the bottom this year. Next year we are poised for recovery. The reason why I say this is because of the pandemic over the 3 years home appliances had a significant increase. So we are now in a reactionary decline. And this connection will be reaching a bottom this year. And next year we are poised for recovery.Next Measurement & Analysis Systems Hitachi High-Tech Y-o-Y basis minus 7%. Adjusted EBITA decreased by JPY 6.5 billion, decreasing revenues as well as profit. The Measurement & Analysis System for medical is growing very well. But semiconductor manufacturing equipment around this time last year, we felt that semiconductor cycle will recover but there has been delay of 1 year. Therefore this will be the bottom and therefore that is a reason why we have a decrease in revenues as well as profit, which will be the bottom. Industrial Digital, Water & Environment and the Industrial Products, industrial areas are posting increase in revenues as well as earnings, remain very strong. Here we are looking at the subsidiaries. At the very top we have the Hitachi Astemo. Both in October it has converted to equity-method affiliate. Therefore, on a Y-o-Y basis, the second half will be less therefore it is negative. Hitachi Construction Machinery, we only have 25%, so it is not in the scope. Hitachi Metals is also being deconsolidated and therefore there'll be no impact in the fiscal year.Page 9. Based on what I have explained, looking at revenues on top and adjusted EBITA on the bottom. This is the waterfall chart showing the movement. As for revenues at the top, at the left-hand side is the third quarter result for last fiscal year. Right-hand side is for this year. The movement is shown in the middle. First of all there have been the divestiture of Hitachi Metal, minus JPY 279 billion, divestiture of Hitachi Astemo minus JPY 383.6 billion. And foreign exchange was impacted positively JPY 65 billions. And there have been sales effort made and increase altogether by others JPY 163.6 billion. And we end up at JPY 2.258 trillion. So it is decline in revenues. For adjusted EBITA we start with JPY 231.1 billion. The items are the same, divestiture of Hitachi Metals, Astemo and foreign exchange and other efforts made. And we end up at 231.2 billion. As I have mentioned earlier, in terms of revenues, declining, but adjusted EBITA you can see that it remains flat. Revenues are declining, but profit is being secured in these results.Page 10, please. Here at the end the quarter, the balance situation is explained here. Cash flow situation is explained here. The gray area is as of December 31, 2023, end of the third quarter. Now we are at JPY 12.0732 trillion. And looking at the difference with last year in terms of asset, minus JPY 428.2 billion because of Hitachi Astemo. And below, looking at 51.5 days and in terms of cash conversion cycle this is increasing by 6.6 days. This is because of the cash flow improvement for Hitachi Energy. You can see that the cash conversion cycle is improving significantly. The ratio is also improving to 0.32 times. In fact, on a full-year basis, it'll be even better than this.In terms of cash flow, on the other hand, there is operating activities, investing activities. And free cash flow is around JPY 370.8 billion, increased by JPY 136 billion. Core free cash flow which is most important KPI, one of the most important, is increasing by JPY 193.6 billion to JPY 268.5 billion.Page 11, please. Now let me update you on Lumada's situation. So there are 3 tables. First, upper-left, far-left, and second one, this is the third quarter of FY '22 and '23. At the top you can see the revenue through the quarter fiscal '22 was JPY 476 billion, up to JPY 568 billion. So that's Y-o-Y 19% up. And you can see the legend, the revenue from the four quadrants. And the two on the right bar graph, this is the full year of FY '22 and FY '23 forecast. FY '22, this was JPY 1.960 trillion, up to JPY 2.330 trillion. So that's another 19% increase Y-o-Y. And then adjusted EBITA it's 1% up, from 14% to 15%.Next, the bar graph on the right. This is Lumada business ratio of overall. Left is revenues and the proportion of Lumada and the right side is adjusted EBITA revenues FY '21, '22 and '23 forecast. This year JPY 8.285.6 trillion and of which JPY 2.330 trillion is Lumada. So that is 28% of total adjusted EBITA. Likewise, Lumada proportion on adjusted EBITA base is now up to 41%, close to half is Lumada. Now you can see the horizontal bar graph. This is what I mentioned at the outset. FY 2023 revenue, the left side, JPY 2.330 trillion break down here. Digital Systems & Services JPY 1,040 trillion, Y-o-Y 21%. Green Energy & Mobility JPY 390 billion Y-o-Y 23% plus. Connective Industries JPY 900 billion, Y-o-Y plus 15%. And you can see the topics at the bottom of the page. One is the load dispatching system. This is the largest. This is completely Lumada and Hitachi Energy, for it overseas package will be brought in so it will be the international specification. This is big. And GlobalLogic on a smaller scale acquired digital engineering companies in Australia and the U.S. And Suntory Beverage & Food Limited and we have a collaboration. So, this is a traceability system for raw material receipt to manufacturing, logistics and warehousing. And lastly, Generative AI. We are now trying to utilize Generative AI internally and externally. We're seeing new movements. So that was to the third quarter.Now from page 13 we will have the full year forecast. Page 13, please. So, in all profit items we have revised upward in all items, 3 sectors Y-o-Y 8% up and adjusted EBITA plus JPY 104.4 billion, 14% up. The revenues three sector is JPY 8.2856 trillion. This is plus 8%. So this is the 8% that I mentioned earlier. And left side, this is the excluding foreign exchange factor. Adjusted EBITA JPY 829.3 billion, Y-o-Y JPY 104.4 billion and this is 14% up. Adjusted EBITA 10% net income attributable to Hitachi Limited stockholders, JPY 546.8 billion. So all profit items increased. We're revising all items up. And EPS JPY 588. And on the left side, core free cash flow up from JPY 340 billion to JPY 440 billion, up by JPY 100 billion. And ROIC is up from 8% to 8.2%.Now, the small table on the right side is the FX sensitivity. No change from the past JPY 140 to $1. So if yen depreciates by JPY 1, how much impact on revenues and adjusted EBITA is shown. So with JPY 1 depreciation, JPY 3 billion plus on revenue and JPY 200 million plus on adjusted EBITA.Page 14. So the earlier had 2 pages now summary on 1 page. Digital Systems & Services. So, if you could look at the entire sector, revenues JPY 2.550 trillion. And adjusted EBITA JPY 321 billion, 12.6%. This is the highest profit and Y-o-Y 7%, JPY 27.2 billion. And this is up 3%, 11% up from the previous forecast dynamics. Revenues and profits are up.In GlobalLogic both revenue and profit are up. Next, Green Energy & Mobility. The top sector part, revenues JPY 2.970 trillion. The adjusted EBITA JPY 190 billion and Y-o-Y plus 20%, JPY 26.4 billion, and plus 7%, plus JPY 4 billion against previous forecast dynamics.So first of all against a previous forecast revised upward by JPY 190 billion in revenue and JPY 4 billion in adjusted EBITA. Hitachi Energy revenues and profits are up. In Railway, as I said earlier, on a full-year basis revenue and profit are now up. Third quarter alone is not. But full year revenue and profits are up. Connective Industries, top row, revenues, JPY 3 trillion and adjusted EBITA JPY 330 billion, plus 1%, JPY 17.8 billion. Against previous forecast, it is flat.Building Systems, plus 3%, plus JPY 4.5 billion, so both revenue and profit are up. And Measurement & Analysis System, Hitachi High-Tech, because of the reasons I mentioned earlier, revenue is flat, but slightly down. Astemo is now equity method. It will convert to an equity method affiliate.Next, Page 15, please. Full year revenue and adjusted EBITA comparing last year and this year. So JPY 10.881 trillion in FY '22. Both Hitachi Construction Machinery, Hitachi Metal, will be divested and Hitachi Astemo. Foreign exchange will be positive and others positive. And so, it's JPY 9.450 billion adjusted EBITA. FY '22 is JPY 884.6 billion. And same increase and decrease items. Right side, JPY 880 billion. Revenue is down, but adjusted EBITA is flat, slight decrease, but flat. The listed companies will be excluded, and that impact is absorbed and achieving this level. So, that was the full year results. From '17 onwards, this is a cumulative first, second and third quarter. The big trend remains unchanged. [indiscernible] sector grew revenue Y-o-Y 12% and increased adjusted EBITA Y-o-Y JPY 83.4 billion, 17%. Revenues JPY 6.537 tillion, plus 12%. So that is the 12% you see on the first row. And 9% is excluding FX. Adjusted EBITA, JPY 581.5 billion. And plus JPY 83.4 billion is reflected here. So that is Y-o-Y, plus 17%. Adjusted EBITA margin, 9.6% and net income JPY 461.9 billion, core free cash flow JPY 268.5 billion. This is cumulative third quarter, 3 quarter cumulative.Next, Page 18. This is quarter 1 through 3, no change in trend. Digital Systems & Services Y-o-Y. So both revenue and profit are up. GlobalLogic both revenue and profit are up. Green Energy & Mobility, both revenue and profit are up. Hitachi Energy, a big jump. And Rail Systems will -- is also up in sales and profit.Connected Industries. Revenue is up by 2%, but adjusted EBITA because of Hitachi High-Tech, the semiconductor-related minus JPY 2.9 billion. In Buildings, no increase in revenue, but the business composition changes. So profit is up. And Hitachi High-Tech number is shown here, and Astemo, so total here.Page 19. Consolidated statement, profit and loss. You can see small numbers, but FY '23, the gray part, the numbers I already mentioned are listed, revenues JPY 9.450 trillion, and adjusted operating income JPY 740 billion. And you can see the ups and downs. Adjusted EBITA JPY 880 billion, and EBIT JPY 790 billion. And third from the bottom, 24.4% effective income tax rate. This is bigger than last year's 14.2%. But last year, because of the deferred tax asset and the deemed dividend, those were the factors. And 24.4% is a normal rate. Bottom, net income, JPY 530 billion.Page 20, please. This is up to third quarter cumulative by region, by market. You can see in black fox 3 sector total revenues and the composition ratio. Japan is 39% of the JPY 2.354 trillion; and China, down by 1% to 13%. Digital Systems & Services, 27% down. So China, you can see that's a big factor. And on the right side, back to the black box, ASEAN, India, 9%, that's up by 6%; and North America, 15%. This is plus 19% on a Y-o-Y basis. GlobalLogic contributed significantly. And Europe, 17% Y-o-Y. This is Hitachi Energy accounting for a big portion and other areas. On the far right, you can see third quarter cumulative overseas revenue, 61%. So over 60% is overseas.Page 21, by segment order results. Digital Systems & Services and then Green Energy & Mobility and right side Connective Industries.Digital Systems & Services, our Front Business in Y-o-Y, they're all strong. Order is growing from last year. Green Energy & Mobility fiscal '23 third quarter Y-o-Y. Nuclear Energy 32% down and Railway System 53% down. I will answer in the Q&A session both in FY '22 had large contract. And so it's a reactionary fall from that. Connective Industries on the right side. There are some triangles. We're building minus 7% and Smart Life & Ecofriendly Systems and 6% in High-Tech, this reflects the current circumstances. But the 3 industry BUs are up. I went rather quickly. But that was the outline of the material we delivered today. Thank you very much.
Thank you very much. We would now like to proceed to the Q&A session. [Operator Instructions] [ Sosung ], please.
I have 2 questions. First of all, by regions, you talked about North America. Please elaborate further on this matter. Second is regarding railway business. In terms of North America, increase in revenues, and you can see that the ratio is increasing. On the part of commerce and GlobalLogic increase has been mentioned. But by business segment, it seems that Green is growing rather than Digital, I take it. Is it correct understanding? Please confirm. And in the Green, I think it's Hitachi Energy basically. In North America, the growth that you are seeing, what I am interested in what kind of deals are growing in North America for Green? And you talked about the forecast. You said that North America is going to be the driver of growth going forward. Please elaborate further. In the context of Hitachi Energy, the second question is regarding Railways. Now when -- in the last result, I think there was some adjustment made in the third quarter it seems that there has been an upward revision, although small. Is that a correct understanding? Please elaborate. But why is it going up and down, down and up, control and forecast seems not clear. Do we have to be concerned about this? Or is there a different reason why this is the case?
Regarding numbers, Kato-san will provide further details. Regarding North America, I mentioned GlobalLogic is very strong. This is a company that is growing significantly. But as you have rightly mentioned, I would say that power grid, Hitachi Energy has been very strong. We don't have a plant in North America but because of the infrastructure-related legislation, this is having a significant positive impact. Railway business is one in North America as well. In the Green Energy, there is significant contribution made by North America. Regarding Huawei Systems, numbers are sometimes not fixed. I mean Thales inclusion will have to be adjusted in terms of numbers. Thales will be next year. Therefore, when there is -- or rather for fiscal year 2024. So now the situation is clear. That is the reason why we are presenting these numbers at the third quarter level. But at any rate, for the Railway Systems we have run major deals, not only in North America but also in Europe, but we believe that this business will continue to make contribution. I'd like to ask Kato-san to elaborate on the numbers.
Regarding North America, as Kawamura-san has just explained, Hitachi Energy is showing a significant increase, growing overall. Grade integration is as well as transformers are growing significantly. And today, we talked about the orders backlog. We have a significant backlog, and therefore we can expect further growth going forward. Thank you.
Next, [ Okara-san ], please ask a question.
Question, I have 2 questions. First is on Digital Systems & Services front, profitability. I think you mentioned this. The profitability is improving quite significantly. So the background, if you could elaborate on the reasons and the future outlook, please? That's my first question.
Thank you for the question. Is Front Business. First, the project management, the phase gate management is now done very stringently so that we will not -- to avoid losses. And this contributed a lot. So cost side contribution was large. And the other factor was large system update, renewal, continued finance, public and energy sector. These large system renewal upgrade was done and we captured that contract without fail. So that was a big contributor. If you need more numbers, Kato-san will explain in more detail, but that is a macro perspective.
My second question is on Lumada. Digital Engineering and the by segment breakdown, I think you changed from the second quarter. So, if you could explain on the changes, the amount is still small, but what is the change in your forecast by product or by segment, please.
Okara-san, sorry, the data at hand does not have by-product increase. I don't have the accurate number. But just roughly, ballpark, Kato-san will explain.
Fiscal '23 forecast is up, revised upward by JPY 20 billion. System integration-related and managed services. These segments, we think we can go higher, so we revised upward. So third quarter is 19% growth year-on-year and full year 19%. So this forecast, we think we can achieve this level -- so this is some macro rough numbers, but 3 sectors, year-on-year level, revenue, digital engineering, around 30% up and system integration 20% up. And connected products, hardware less than 30% up. So the 4 quadrant segments were all up by 20% to 30%. So they all pushed up the results. Thank you. I hope this answers your question.
Next, Hideo-san, please.
I have 2 questions. At the beginning of January, your market cap exceeded JPY 10 trillion. What is your take on that? And how to enhance the enterprise value of Hitachi going forward? What are your views on this? Second question is regarding the press release. Kawamura-san, it seems that this is going to be the last earnings call for Kawamura-san because of the changes that are taking place. Were you able to achieve everything that you hope to achieve in Hitachi after joining Hitachi. And please share with us your message to Hitachi people going forward.
Regarding market cap exceeding JPY 10 trillion, my thoughts is that this is only a midway point. Blue chip companies in the world and the companies that we benchmark with, compared to them, we believe that JPY 10 trillion in terms of Japan, we could be within the top 10. But we are a global company. That is our aspiration, and therefore JPY 10 trillion is only a midpoint in our journey, and we want to aim further higher levels. This is what I'm discussing with the president as well. How can we achieve this? We have to allocate more resources to the growth areas. This will be first and foremost. It's easier said than done, but there is customers and technology, and we have products and follow-up will be required. We can't do this all at once. However, in the midterm management plan, product customer regions wise, we have to focus our management resources as well as the effective utilization of assets that will be required. This is what I would like to ask the next generation to take on. Now I entered Hitachi 9 years ago. And whether you've done what everything that I have aspired to achieve is difficult to answer. About engaging in dialogue with you has been very useful for me. You've taught me a lot. I'm very happy and grateful that we've had a meaningful dialogue over the years. My aspiration was not so difficult, but I am -- regarding the dealing with assets as well as to define our relationship in the capital markets as well as disclosure and control, these are areas that I hope to improve. And I believe that I have been able to make a small contribution. So there is a sense of satisfaction on my part. From the next earnings call, Mr. Kato will be answering your questions. Thank you very much for your support over the years.
Next [ Omegaki-san ].
So I have a question on next year. So the economy slowdown may be expected, and the FX is unforeseeable. On the other hand, DSS and GEM and the market situation and your order backlog is strong. And so I think your general trend is revenue and profit increase. Are there any risk factors or things you need to be careful of? That's my first question.
Thank you for the question. Fiscal '24 in February and March, we have budget meeting to develop the FY '24 budget. So we do not have a concrete plan yet. But this will be the final year of the 2024 midterm management plan. So we have 3 plans. So this medium-term plan, 2024, we have measures. But if the current situation continues like the geopolitics and the financial market and the technology advancement, if this remains constant, constantly progress, then FY '24 will be a significant increase in revenue and profit, as you just mentioned. But there are many difficult things in reality. I don't want to talk much about politics, but there are many elections this year. On the Internet we see news like if Trump wins, the trade relations will change and the security situation will change. So it's not that a business environment or the interest rate or the FX or the trade relations. Sudden change is a big risk, that we have to be aware of. In March, the primary -- Super Tuesday will be held in the U.S. So we will watch closely and see how U.S. will handle this. And of course, the relations with China and Taiwan comes into play. So the security is a big factor. And on the business side, [ BOJ ] last week and this year is starting to send out signals this week. And so interest rate is a big factor. We are controlling debt. So there should not be a big problem impact, but the bond market will be impacted. So the feedback from the bond market may come if the interest rate moves and the FX may move accordingly. So the investment mindset may change accordingly. So FY '24 in terms of environment cannot be optimistic. So we have to factor in all these elements. And my successor will come up with a good 2024 plan, I think.
Page 20, by region revenue, you said China mainly on DSS, the proportion is declining. GlobalLogic does not have much exposure in China, if my memory is correct. And so, you -- I think you said that the challenges to grow in China. But maybe it's not going that well from the numbers. So what is your plan? If you have any plan you could share with us.
GlobalLogic is a U.S. company. So what to do with China business is a difficult situation, difficult theme. But we have not given up. If there are business demands, we will go in and move forward. So basic stance remains unchanged.
So I will read out the numbers. China, DSS. As mentioned earlier, GlobalLogic is down. It's not that GlobalLogic is down. Hitachi Vantara storage business. China government's policy focuses on China products. And therefore, sales is down.
[ Harada-san ], please.
I have 3 questions. The first question is somewhat covered by the other questions. The margin is high for the Front Business. So please talk about the continuity of this business. The Front Business is receiving many orders. And IT resources are incurring higher costs. There could be wage increases that is forthcoming. Is this going to have an impact on the margin? Would it put downward pressure on margins?
As you have rightly mentioned, system integration is a main part of the business. Therefore, the personnel cost is very important. And there are many major projects regarding Generative AI system engineer work will be replaced somewhat by such technology. So we have a large scale project that is ongoing so that the speed can be enhanced and absorb the HR costs. Numbers will be presented by Kato-san later. And for financial and public sector as well as energy in these areas, we believe that we have a significant backlog. We are assuming that orders will continue. And therefore, we don't think there will be a significant decline in the Front Business. It will continue to be a viable business for us with good profitability.
Now regarding the backlog, as I mentioned, late on Page 21, Front Business, the backlog is increasing by 10%. Therefore, it remains very strong. The IT service is also similar. Therefore, as Kawamura-san has already explained even with the cost increase, measures are being implemented accordingly. And therefore, more than ever, we believe that even higher profitability can be pursued.
So if anything, there is possibly an upside.
We believe that this business will continue to grow.
Regarding the second question is regarding Hitachi High-Tech, the semiconductor production equipment. You mentioned that recovery will come from next fiscal year. Is it going to be the second half or later part of the second half, what timing next year will we see a recovery?
According to industry consensus, I think it is going to be next second half. The semiconductor industry correction has run its course, but there is going to be somewhat of a time lag. Therefore, for our business, I think we'll see recovery in the second half of next year.
Now that point is regarding shareholder return. In the 3 years, JPY 800 billion to JPY 900 billion communication has been made last year to the tune of JPY 800 billion to JPY 900 billion. What about the share buyback, corporate cash flow, outlook has been increased and Renesas shares have been sold recently. And therefore, I believe that there are also asset sales made as well. So is there a possibility that you can increase this further? Or is it your remaining with JPY 800 billion to JPY 900 billion for the midterm management plan period? Please elaborate further.
Regarding the shareholder return, we have not started discussions yet. This is something that will be discussed going forward. In terms of the midterm management plan, story is that half of the core free cash flow will go to growth and half will be returned to the shareholder. That is the basic principle that we will be following. However, there are different areas of possible growth. We may accelerate investment for growth. So we have to look at the overall picture in considering the return to the shareholder. But basically, for the core free cash flow, half of that is what we are considering. This basic policy remains unchanged. And based on this premise, please look forward to further announcements. Now in terms of dividend as well as whether we are going to do a buyback or not, that has not been discussed yet, nothing has been decided yet on this topic.
Next, [ Inasima-san ].
You mentioned this earlier, but I have 2 questions on China. The Japanese companies that are in China, about 50% are planning to reduce their business. So what is your current status of China business? And in the short and medium to long term, what is your thinking on China investment? And the other question is Kawamura-san earlier you said China, Taiwan, geopolitical risk, the supply chain base will be shifted -- studied to be shifted to Japan or the allied countries. Is any update, progress in that initiative?
Thank you for the question. What we think of investment in China. We have big business blocks in China. One is elevator, escalator, elevator business. And as Kato-san said earlier, IT-related storage-related business and Astemo, Japan's -- with Japan OEM, we have parts. And so these are big businesses in China. So reducing China investment suddenly is not something we do or disinvest in China, no, we will not withdraw our investment. Fresh capital may not be invested in from Tokyo, but we already have capital accumulated on site. And so we will reinvest. And if necessary, we will use that. And the trade with Japan and trade with the U.S., we still have minimum level, necessary minimum level, but it's not like before where mass-produced products in China will come to Japan or the U.S. We're not doing that. So the business completes in China in trading and manufacturing and investment. So that is our current policy. As I said earlier, elevator business, initially there was the Evergrande problem. And so we were worried. But now in case of new installation, we get upfront payment. And in maintenance, we are now shifting to maintenance for. So we have quite good profit in China. Going forward, fresh money injection from Tokyo will be restrictive. And for trade, we will continue the current level. And the Taiwan issue -- at the beginning of January, there was an election and the Democratic party they won, and they are close to the U.S. How Beijing exerts its impact or influence will be watched. So it's difficult. Regarding supply chain, Shanghai regions, home appliance-related parts, we're partially manufacturing in China still but we are returning to Japan too. Initially we thought of somewhere in Southeast Asia, but now we are basically bringing this back to Japan. I cannot go into details and share with you the numbers, but we are on schedule. The supply chain risk is now diversified and we will bear this in Tokyo. And the biggest problem is the semiconductor problem. For Taiwan, we have various semiconductor-related business of the production equipment to Taiwan. So the geopolitical and security judgment needs to be made. Our current judgment is that China will not use the armed forces to Taiwan. We think that is unlikely. But in any case, it will be a Hong Kong style entry. So relating semiconductor, we're not thinking of taking any particular action at this point in time. Thank you. I hope that answers your question.
[ Takisuo-san ] next, please.
I have 2 questions. First of all, regarding GlobalLogic, what is the organic trend in the first half? There was impact of acquisitions, 6% or 7% growth was mentioned. From the third quarter, is it going toward recovery? Or is there still headwind?
Kato-san will answer that question.
Regarding GlobalLogic, as you have rightly mentioned, on the part of the customers, IT investments are slowing down. It is continuing to grow, but the speed of growth there is slowing down. And that is continuing from the first quarter to the third quarter. So organic growth is around 4% year-on-year. Therefore, it is declining somewhat. But compared to the previous quarter, it is increasing.
Now question. DSS, you said that there is an epoch-making deal that has been achieved in terms of the -- so your capabilities have been brought to bear in the acquisition of Diehl Steel regarding the load dispatching system with the involvement of DSS as well. So how can you capturing deals that transcend the different sectors? Please elaborate further.
You have explained as well. Now regarding Tokyo [indiscernible] business of load dispatching system, it is on one Hitachi basis through collaboration amongst our different sectors. Hitachi Energy has -- is providing the system HVDC converter system. So we are transcending geographical areas as well as business sectors working in collaboration. And GlobalLogic knowledge is also brought to bear. So U.S. is also involved. And this is epoch-making in that regard. In the power sector of Japan, it is epoch-making, but for Hitachi, was epic-making as well, Tokyo and Switzerland, the grid and U.S. IT have worked in collaboration to achieve this deal. So for Hitachi internally, this has been epoch-making. And I think this will become more prevalent going forward. And this will be a very good opportunity for us to pursue such businesses as one Hitachi. We will continue to do so.
This is Yoshikawa speaking. Prime vendor is Hitachi. Hitachi Energy is the secondary vendor. So, Hitachi GlobalLogic are not a contractual party, but they are providing a Hitachi energy package solution development support to Hitachi Energy. Therefore, we have undergoing collaboration amongst the different divisions of Hitachi. That's all.
[Operator Instructions] [ Win-san ].
I have one question. First question about wage increase. So what is your plan on the wage increase going forward? And the digital talents, IT engineers' wage increase. If you have any information you could share with us.
Wage increase, in our case, we have the electric union and the union is a big factor. So it is basically decided upon the negotiation with the union. But continuing from last year, we're planning on a big wage increase this year. We have confirmed that within the management. But the percentage increase is up to the negotiation. We have a basic principle though, added value and the productivity will determine the wage increase using a company logic. So it's not irrational. We will reflect the productivity improvement in the wage increase. And so this stance remains unchanged. At any rate, we will decide this with the union negotiation in March. And we're thinking of a significant wage increase and trying to budget it in the next year. And the digital talents. This is a difficult problem. Japanese company is -- it's very scarce. The engineering department, university graduates, it's mostly machine engineering. And so the talent supply is small, to begin with. And so the supply demand is very tight. So for Japan, we are -- we have to take some unique measures. On the other hand, if we try to hire the talents in Japan, the macro labor market factor is in play. So we have to hire on the other overseas side. GlobalLogic has a big function of hiring people in North America. Labor market in North America is also tight. So we acquire a company in East Europe to acquire talents or Latin America or Australia and the U.S. like we acquired this time. We will acquire companies and acquire engineers there. So we're doing this in a two-pronged approach. Japan and overseas. Thank you. I hope this answers your question.
You announced the human personnel refreshment. Abe-san and Tokunaga-san, the position change. So if you could explain the reasons.
I'm not the one with HR authority, so I cannot talk about the intention behind. But Tokunaga-san, in fiscal '24 will be heading the DSS and the growth strategy. So he will discuss the backbone of the next medium-term plan. But his role has basically been unchanged. Abe-san. [ Oda-san ] will step down this time with this announcement. So Abe-san will move after that. So Abe-san's assignment will be BSS to Connective Industries. Abe-san's change, the Connective Industries is the merge of the hardware and IT. This integration is crucial, and Abe-san understands both sides. So I think he is the best fit.
Next, [ Sagisaka-san ].
My question, I have 2 questions, both related to Hitachi Energy. The first is regarding the backlog of Hitachi Energy, how is that converted to revenues [indiscernible] manner. On Page 14, the supply chain management as well as strengthening of production capabilities are mentioned. Specifically, how do you intend to tackle this initiative? Page 20 regarding the regional aspect, green energy and mobility, other areas is growing by 42% to other regions. Which regions -- which products and solutions are growing in this category of other areas for Green Energy & Mobility?
Regarding Hitachi Energy, as I mentioned at the outset, the order backlog is accumulating. In the third quarter, the backlog is exceeding JPY 4.3 trillion. And how it is this going to be posted in the P&L, out of JPY 4.3 trillion for '23, 10% will be converted to profit and loss, '24 40% and the remaining 50% is '25 and beyond. So it takes about 3 years for the backlog to be registered in the P&L. And we need more capacity to enable this. Hitachi Energy will make a significant investment in -- JPY 8 billion to JPY 100 billion investment will be made so that our production level can be enhanced. There are many suppliers as well. So we will combine the resources of suppliers as well to increase capacity. Now regarding your second question, Kato-san will respond to the question.
Now other areas, specifically as Middle East, Hitachi Energy in Saudi Arabia has received the order for grid integration related as well as high-voltage products business is growing in this area. So the other areas is Middle East for Hitachi Energy. Now regarding CapEx increase for GEM sector overall for this fiscal year compared to 1 year before it, we are going to be increasing by JPY 30 billion. This is mostly for Hitachi Energy. So for this year as well, that is the investment increase that is going to be named as an increment.
Next, Ayada-san, please.
I have 2 questions. First is related to the earlier question. Hitachi Energy's third quarter margin, how do you summarize the margin? Year-on-year basis, the adjusted EBITA, 8.7%. So that is 0.3 percentage point improvement. First and second quarter year-on-year was 2 percentage point improvement. That was the pace. So the pace of improvement seems smaller. So how should we understand this margin? And for GEM as a whole in the midterm management plan, 10% adjusted EBITA margin is the target. So Hitachi Energy next year is expected to achieve over 10%. So third quarter summary and next year's margin improvement pace. That is my first question.
The way numbers are shown this year this time, revenue grew significantly, and the backlog goes to P&L and that seems margin is declining because of that reason. But towards the second half and fiscal '24. As I said earlier, order backlog margin is up higher than before, and that will be reflected. So we can see an improvement from the current numbers. Now our view on FY '24, we have not lowered the target. The strong backlog will be the foundation. And with the high gross margin, we will achieve this target. Hitachi Energy management and we are coordinating to make that happen. So 10% is our target that we are aiming for. Thank you.
My second question is Lumada. You mentioned earlier that GlobalLogic's organic growth. But for Lumada as a whole, organic growth, third quarter results, if you have that number at hand, please share that with us. And on a full-year basis, JPY 20 billion upward revision in Lumada. But the FX assumption has changed slightly. So is this because of the foreign exchange or other factors? So that's my first question. Numbers. And based on these numbers, Page 11, Lumada business expansion is explained. General AI-related order is over JPY 10 billion or more than 100 cases, projects. So you mentioned the augmented reality metaverse, Generative AI, Lumada business size compared to normal business, is it larger or smaller? And the current business, what kind of clients, what kind of business accounts for the big portion? I think it falls under digital engineering. If you could give us some more color on this business.
First, the Lumada details organic growth and others, we have only limited material, but Kato-san will explain.
Third quarter revenue was 19% up year-on-year. Roughly speaking, excluding FX, it is still up by 15%. So it's double digit, mid-teens growth. Full-year basis, similar story. 16% up, excluding foreign exchange. So Generative AI, Yoshikawa-san will explain.
So this 100 projects, GlobalLogic and DSS, mainly in Japan, these are the projects that we already acquired. In terms of the amount, the contribution to the total company is not large yet, but related -- they will lead to related systems in the future. So, we are developing them meticulously. Regarding generative AI, we've been working on this since last year, and the inquiries is increasing. In terms of industry, finance and bank and the insurance and government.
Yasui-san.
I have 2 questions. First question is running the power grid market in U.S. You talked about this issue. I think it was very difficult to gain approvals in the past. But with the introduction of renewable energies was not making headway. But beyond the European market do -- is there a possibility that is rising for North America. Is the market environment changing today? Second question was -- is related to the question that was raised earlier, regarding Kato-san, he will be the new CFO. Now it seems that executive changes seem to be rather significant compared to the past. So it seems that overall changes are being made. So what is your aspiration? And please talk about how you will deal with the opportunities and risks in the turbulent 3 to 5 years going forward? Please give us your outlook.
Now regarding U.S. infrastructure related and power grid, I would like to respond to that question. Under the Biden administration, infrastructure projects were emphasized, not just for grid but road parts and other infrastructure. U.S. grids as such that for the past 20 years, it was not receiving investment because of regulations, it is becoming older in terms of infrastructure. And with the Biden administration, renewable energies are being emphasized. Therefore, when investments are made in this area, we believe that the window is now open, although we have been struggling in the past now. But if the administration is going to change again, it would be reversed. So the grid business that is increasing could change in terms of the posture towards the environment by the possible new administration. So we have to watch this very carefully. In terms of the market growth numbers, I don't have the details with me today. So I would like to address that in the offline meeting. Now I would like to ask Kato-san to talk about his aspirations as he becomes the new CFO.
Now regarding the executive changes, what I was most surprised is that there is going to be a significant globalization for our company. 60% of our business is global and same for human resources as well. But in terms of [indiscernible], it was not so reflected, but changes have been made, especially in the corporate area, global talent has been increasingly allocated. As we pursue the growth strategy, new ideas and new experience network and diversity is called for. Therefore, we believe that we will have a strengthened executive team. And toward the next midterm management plan, we can be poised for further growth. What we have to be careful is that corporate is not just in Tokyo, they are dispersed globally. So we have to have more of a virtual corporate management. Therefore, we have to have a very close communication more than ever going forward. And I'd like to ask for your continued support as well.
I have a follow-up question. Regardless of digital numbers, would you say that the U.S. market is what you are going to pursue going forward? It is not growing significantly yet?
The situation is different in the U.S. compared to Europe. In Europe, the Ukraine issue is having a significant impact, even prior to Ukraine. The European gas pipelines are dispersed throughout Europe. But now with the Ukraine issue, there is a limit to the gas supply. And in Europe, the gas pipeline network is going to be placed by the transmission lines, distribution lines. And that is the reason why Hitachi Energy is coming to the fore. But in the U.S., they have not reached that stage. They have their own natural gas, they have also oil, and the pipeline doesn't have to be replaced for the grid significantly. So that is the difference between Europe and the United States. But under the Biden administration, they are focused on the environmental issue. That is the reason why we have made headway so far. In 2021 in Texas, there was a major black out. Therefore, the network is very old and modernization is called for. Renewal demand is very significant in the U.S. In South Carolina, there was a terrorist attack. And the grid security needs is also coming to the fore. In Maui, there was a fire and the grid is where the fire started. Therefore, the grid infrastructure in the U.S. is becoming obsolete, and therefore we need more renewal. That is our take.
We had everyone raise their hand, asked all questions. So with that, we would like to close the financial results briefing for the third quarter ended December 2023. Thank you for your attendance.