Hitachi Ltd

TSE:6501

Q2-2026 Earnings Call

[Operator]

The scheduled time has come, so we will now begin Hitachi Limited web conference on Q2 FY 2025 earnings. Thank you very much for taking time out of your busy schedule to attend today's briefing. The presentation materials are available on Hitachi Limited IR website and news release website. So please take a look.

Let me introduce the 3 speakers. Tomomi Kato, Senior Vice President and Executive Officer, CFO; Hiroaki Ono, Deputy General Manager, Finance Division; Shinichiro Tamai, Executive General Manager, Investor Relations division. Mr. Kato will first explain the overview of the financial results. Please wait for a moment while we switch screens. Mr. Kato, please.

[Tomomi Kato, executive]

First, I would like to explain the content. I will cover the key messages followed by the results for the second quarter of fiscal year 2025, the outlook for fiscal year 2025 business segment performance and the Lumada business in that order.

First, the key points of this earnings announcement, I will begin by explaining the performance highlights. Regarding fiscal year 2025 Q2 results, in addition to consistently strong performance of the Energy's power grid business, the domestic IT business also grew steadily due to expanding DX demand. This led to increased revenue and profit for Hitachi's consolidated total adjusted EBITDA and quarterly profit achieved record highs. Furthermore, core free cash flows increased significantly due to increased profits.

Now I will explain the 5 KPIs. First, excluding foreign exchange effects, revenues increased 8% year-on-year and adjusted EBITDA increased by approximately JPY 90 billion year-on-year, the adjusted EBITDA margin also improved. Quarterly net profit attributable to Hitachi shareholders increased year-on-year, driven by the improvement of adjusted EBITDA and the completion of the capital reorganization of the HVAC joint venture.

Furthermore, core free cash flows increased year-on-year, even excluding the temporary impact related to the completion of capital reorganization. Consolidated revenue, adjusted EBITDA and core free cash flow exceeded our internal targets.

Next, the outlook for fiscal year 2025. We revised our forecast for revenues, profit, cash flow and ROIC across the entire Hitachi Group. The revision reflects a stronger performance in the Energy segment, driven by the power grid business, Mobility and Connective Industries, even factoring in increasing strategic investments and the impact of U.S. tariffs growth in Energy, DSS, Mobility is expected to drive year-on-year increases in both revenues and profits.

Next, segment highlights. DSS recorded increased revenue and profits in Q2. Domestic IT business grew steadily, while overseas business saw a decline in storage sales due to customer investment restraint. However, profitability improved due to cost reduction efforts. For the full year outlook, while revenues were revised downward, the initial profit forecast is maintained due to overall cost reductions.

Energy. The power grid business continues to see strong demand for transmission upgrades and renewable energy connections. Q2 recorded increased revenues and profit, leading to an upward revision of the full year outlook.

Mobility. The Lumada business, including railway signaling systems performed well. Despite acquisition-related expenses, profits were maintained at the previous year's level, partly due to the effect of exchange rate revisions, the full year outlook has been revised upward.

In CI, although new installation demand for elevators and escalators in China decreased, profitability improved due to strong performance in semiconductor manufacturing equipment. We have revised our full year forecast upward.

Finally, regarding the Corporate Items & Eliminations, we have reassessed the business deterioration risk and the risk of impact from U.S. tariffs that were previously factored in. Specifically, business risks and tariff impacts previously factored in; and conversely, revised the forecast upward to reflect the expectations of the overall improvement. Based on the above, we have revised upward full year forecast for Hitachi Limited.

Next, progress on DSS Growth Strategy. Overall, the orders received for DSS increased in Q2 and both revenues and profits grew, achieving new record highs. The Front Business saw a robust domestic DX and modernization projects, achieving growth across all areas and realizing record high Q2 revenues and profits. The reactionary decline is seen in Q1 due to ATM renewals for new banknotes was resolved. Going forward, further growth is expected backed by increased orders and by pursuing productivity improvements through the utilization of AI.

Storage Business saw reduced revenue due to continued investment restrained by European and American customers; however, profitability is beginning to recover through rigorous project management and cost reduction. By focusing on high growth block storage and accelerating structural reforms such as operational improvements, the business outlook of the fiscal year is a decline in revenues, but increase in profit year-on-year.

As for GlobalLogic, profitability improved through increased capacity utilization. despite continued investment restraint. Furthermore, synergies with other Hitachi sectors are expanding. For the full year, we will strengthen our high-value service business driven by AI, grow revenues and maintain profit margins close to the previous year's level.

In addition to these measures, we revised downward the full year revenues forecast for DSS as a whole due to cost reductions across the entire organization, including headquarters. However, we were able to maintain the initial forecast for adjusted EBITDA. Progress in DSS GlobalLogic's growth strategy. Key initiatives focus on strengthening its technical capabilities in providing AI services, supporting AI implementation for customers and internal sectors and contributing to the expansion of the Lumada business.

As one measure to enhance AI technologies, we decided in September to acquire synvert, a German AI services company. synvert excels primarily in data advisory and the design and construction of data platforms. Integration with GlobalLogic will enhance our capabilities across the data value chain.

Going forward, we will strengthen solution development for Agentic AI and Physical AI contributing to the initiatives such as HMAX rollout. Additionally, GlobalLogic supports the expansion of Lumada business in other sectors by leveraging AI, combining Lumada revenues across each sector.

From the synergy creating activities with GlobalLogic, we achieved 17% year-on-year growth in Q2. We are currently advancing initiatives in Energy, Mobility and CI. Going forward, we will further expand and expand measures as one Hitachi to achieve our Lumada 80-20 long-term goal.

Progress on initiatives to enhance enterprise value will be explained. First, to expand Lumada digital services and accelerate Physical AI implementation, we executed growth investments in Mobility, DSS and Energy. We strengthened key capabilities related to digital and services, which are our M&A focus areas. Regarding portfolio restructuring, we completed the capital reorganization of HVAC joint venture in August.

While transferring our stake in the joint venture, we acquired a commercial air conditioning base to expand the Lumada business. Regarding capital allocation, we are proceeding as planned with this fiscal year's total shareholder returns of JPY 500 billion. The interim dividend for this period will be increased by 10% compared to the previous year's interim dividend.

Next, I will explain the results for the second quarter for fiscal year 2025. The actual figures were already explained at the beginning of this presentation. I will explain the breakdown of year-on-year changes in revenue, adjusted EBITDA and core free cash flows. Revenues increased driven by growth in Energy and DSS, even excluding foreign exchange impacts.

Adjusted EBITDA followed a similar trend to revenues. Adjusted EBITDA margin also improved year-on-year due to increased revenues, productivity gains and improved project management. Core free cash flows increased year-on-year, driven by the factors such as growth in adjusted EBITDA.

Next, our financial position. Total assets at the end of Q2 fiscal year 2025 was approximately JPY 13.9 trillion, an increase of approximately JPY 600 billion from the end of the previous fiscal year, driven by increased revenues and profits. Cash conversion cycle reduced compared to the end of the previous year due to an increase in advanced payments.

Next, regional revenues in Q2 of fiscal year 2025, driven by the Energy power grid business and Mobility's railway signaling system, Europe grew 17% and North America grew 10% year-on-year. In Europe, the large-scale power grid projects progressed, leading to significant year-on-year growth. Other regions recorded growth primarily in the Middle East power grid business. Meanwhile, in China, new demand for CI building systems continues to decline.

Next, I will explain the order results by business segment in Q2. In DSS, Services and Platforms decreased overseas, but orders in Japan, such as Front Business expanded steadily, resulting in an overall increase of 6% in both Q2 and the first half of the year.

In Energy, orders decreased year-on-year in Q1 due to large order received in FY 2024, but increased in Q2 and approached last year's levels in the first half.

In Mobility, orders declined, reflecting the absence of last year's large overseas project, but the order backlog has increased steadily since the end of last year.

In CI, orders grew steadily in both Q2 and the first half. Industrial Digital, in particular, performed well in Q2, thanks to the acquisition of a robotics SIer.

Next is the highlights of FY 2025 outlooks. The main contents were explained in the topics slide at the beginning. Revenue, income, cash flow and ROIC are all revised upward from the previous forecast. Regarding the assumed FX rate, the euro is revised to JPY 170 from the previous JPY 155 and dollar yen remains unchanged at JPY 145.

Next is the breakdown of year-on-year changes. Excluding the FX impact, revenue is expected to grow 7% year-on-year, driven by increases in Energy and DSS. Similar trend for adjusted EBITDA, and it is expected to increase year-on-year despite the impact of strategic investments, FX and U.S. tariffs.

Next, net income is expected to increase year-on-year, thanks to an increase in operating income despite fluctuations in factors such as the impact of the sale of air conditioning joint venture and nonoperating income and expenses. Excluding the impact of large advance received in FY 2024, core free cash flow is expected to increase year-on-year, thanks to higher adjusted EBITDA and improved net working capital, while CapEx for production increase will rise.

Next is performance by business segment. Digital Systems & Services, DSS revenue and profit increased, as I explained at the outset, thanks to solid growth in IT services business in Japan as well as Front Business. DSS revised its full year revenue forecast downwards, but our initial adjusted EBITDA forecast remains unchanged, thanks to the headquarter and other cost reductions.

Next is Energy. In Hitachi Energy, which operates the power grid business, revenue increased, thanks to favorable life cycle mix of large-scale projects in Q2 and solid execution of strong order backlog. Profits also increased driven by revenue growth, improved revenue profile and operational excellence. FY 2025 outlook was revised upward this time.

Hitachi Energy's Q2 revenue increased 31% on a U.S. dollar basis. But excluding the one-off impact of FY 2024, the increase is around 21% in the first half. We expect the full year growth at the same level as the first half. Nuclear Energy's revenue is expected to decrease this fiscal year due to the absence of a large project recorded in FY 2024.

In Mobility, both revenue and profit increased year-on-year, driven by solid growth in the Lumada business, including the Signaling System business. Reflecting the review of FX impact, we revised our full year forecast upward.

Next is Connective Industries, CI. For CI Sector total, demand for elevator and escalator weakened in China in Q2, resulting in a decline in Building Systems revenue. While new installations in China declined, Building Services business increased, including renovations. Meanwhile, most businesses other than Building Systems performed strongly.

In particular, revenue of measurement and analysis systems increased by 17%, thanks to the front-loading of semiconductor manufacturing equipment from the first second half. Regarding the full year outlook of CI sector, revenues will remain flat year-on-year, excluding the FX impact, but we will grow Lumada business, maintaining operating income at FY 2024 level and improve profit margin. We revised the full year forecast upward.

Finally, Lumada business revenues for Q2 of FY 2025 increased by 47% year-on-year and revenue ratio on Hitachi consolidated basis reached 41%. We revised the classification of Lumada business to 2 simple categories, starting from FY '25.

As a result of examining the target businesses, we identified businesses that should have been included in the Lumada business, such as managed services and software business included in digital services and SI business using products and AI included in digitalized assets. Therefore, decided to include these in Lumada business from FY 2025. Even by adjusting to last year's standard, Lumada sales in Q2 grew by approximately 20% year-on-year, driving Hitachi's consolidated CAGR of 8%.

Finally, let me introduce our initiatives to expand the Lumada business. First, to expand the AI ecosystem, we are strengthening our collaboration with partners, including NVIDIA, Google Cloud and OpenAI. Furthermore, regarding the status of solution development, we are taking a customer zero approach where we first treat our own company as customer #0, utilize AI and then provide it externally. We developed solutions using AI described here and released them externally.

In addition, this week, we signed an MOU with the U.S. Department of Commerce regarding the power grid business and the SMR we are jointly developing with GE Vernova is included in the scope of strategic investment between Japan and the U.S. We expect that this will lead to further growth in the future.

This concludes my explanation of the results for Q2 and the outlook for FY 2025. We will continue to implement management measures to achieve the long-term and medium-term goals of our management plan, Inspire 2027. We appreciate your continued understanding and support.

[Operator]

Thank you very much, Mr. Kato. We would now like to proceed to the Q&A session.

[Operator Instructions]

We will take questions first on the Japanese channel and then on the English channel. And we will take questions from the media, institutional investors and financial analysts together. And we are expected to close at half past 5.

We will take the questions from the Japanese channels first. The floor is now open.

[indiscernible].

[Unknown Analyst]

First point is regarding the Switzerland railway major contract was announced. Thales GTS acquisition, HMAX evolution have led to the transactions that you are able to obtain as well as the profitability. I would like to ask if this is the case. What has been the impact? And what are the trends in terms of orders received, although there seem to have been a slight decline recently. That's my first question.

[Tomomi Kato, executive]

I would like to respond to your question one by one answer. Regarding railways, in the second quarter, orders received was as explained for railways as well as for Hitachi Energy. These are types of business that are major projects. And that will have a significant impact whether we are able to obtain these projects, and there could be differences from quarter-to-quarter. In the first half for railway, there have been major contract projects, but there's a reaction decline in this quarter.

But in terms of the backlog, we are continuing to increase. Therefore, demand has remained very strong. For railways as well as for power grid, major projects when we participate in the bid, there is investment committee where I am the Chair that will be assessing the projects from all over the world. From the Americas, from Asia, from Europe as well as from the Middle East as well as other regions, we are receiving many orders from all over the world.

Basically, globally, when we receive orders for rolling stock for trains, depending on the project, we are also receiving orders for maintenance as well as operations and services. Therefore, the profitability of this business has remained strong in a steadfast manner, we are seeing improvements. In the mid- to long term, this backlog will be absorbed, and we believe that the profitability will be improved.

In addition, last year, we announced the Railway HMAX. This solution is an area we are seeing increased orders. As the ratio of services increase, and as you have mentioned, GTS has been acquired last year. And the train to the signaling system has changed in terms of ratio from 4:6 to 6:4. Therefore, we believe that profitability can be improved accordingly.

In the midterm as well as in the long term for railway system on the Investor Day as well as in individual IRs, we have been mentioning that we have a target we are aiming for and steadfast improvement is being made.

[Unknown Analyst]

Second question is regarding Energy backlog. You are saying that profitability is improving in that regard. What is the momentum of improvement? Is it at the same pace? On a Y-o-Y basis, is it accelerating or slowing down as well as the reasons?

[Tomomi Kato, executive]

Regarding the profitability of the backlog, it's very important as we look towards the future, we are always checking this. In that regard, we are seeing a steady improvement. There are no special significant difference. We believe that the backlog will be converted to the revenues. That means that profitability will be improving for us.

[Unknown Analyst]

Third question. Regarding storage, block storage is now your focus, which is high growth. With that from next fiscal year, is there going to be a top line growth in area of storage on a stand-alone basis? What is your view?

[Tomomi Kato, executive]

Regarding next fiscal year, the detailed business plan will be formulated toward the end of this fiscal year and the revision will be made. But for the time being, block storage, especially in the mid area, there is possibility of high growth, and this is going to be our focus.

Unfortunately, customers are restraining investment at the moment for the first quarter, second quarter. Therefore, compared to previous year, there have been a decline. But it is on a trajectory towards improvement. And I believe that next fiscal year, we can do better than this fiscal year.

[Operator]

Next, [ Toshi-san. ] Can you hear me?

[Unknown Analyst]

Yes. I have 2 questions. I will go one by one. First, U.S. reciprocal tariff matter. So in your results announcement on the full year basis, adjusted EBITDA and net income both improved. The external environment and Hitachi's own efforts, if we -- I think we can break this down into 2 components. So the customers are still restraining on investments, I believe. But what changes have you seen from when you announced your first quarter results and own efforts, energy, pricing pass-through? What was impactful positively to compress the negative impact from tariffs?

[Tomomi Kato, executive]

So your question on tariffs. On Slide 29, you have some information. Not much change. So I did not explain today, but if I could add some comments here. As you rightly mentioned, the full year forecast. As of Q1, compared to Q1 forecast, the risk is smaller. So last time, adjusted EBITDA, JPY 30 billion negative impact was forecasted. This time, we reduced that by JPY 10 billion. So negative JPY 20 billion is the impact. It's been 6 months. That is the big factor.

And so the impact are mainly twofold. Page 29, lower left, you can see the diagram. This is just an image diagram. Originally, the direct and indirect impact were anticipated. First, we understood the direct impact. With the tariff impact, cost increased. And if we cannot fully pass through the price, the loss, we incur the loss, that was the majority. That was what we captured accurately.

Now the tariff impact, this is the impact on our customers. Customers' behavior change and our sales opportunity reduce. We could not clearly see that. But now the direct impact because of the sales impact reducing, this impact is declining, but not a big decline from Q1, but it is on the decline. On the other hand, the indirect impact compared to our projection in April or at Q1, it is not emerging. The risk is not emerging. So both are declining.

This time, we reviewed the indirect impact, which did not materialize as much as we thought at Q1. And for the pricing pass-through, customers are understanding the situation. And by explaining this carefully, customers are willing to bear the cost. So they are understanding much, which we are thankful of.

[Unknown Analyst]

My second question is about the business update. OpenAI, and you signed an alliance agreement. And the other day, the Department of Commerce MOU was also signed. So the top summit meeting between Japan and the U.S. was held and the T&D and SMR investment may lead to your profit opportunity in the future. So this may directly impact this year's performance or next year's performance, but your alliance with OpenAI and your investment in the U.S., how -- what is your take? How much impact do you anticipate?

[Operator]

Your last part broke off. So could you repeat your question again? Hello? The very last part of your question, if you could repeat once again. Okay. So maybe the connection was a bit weak. He may not be able to hear me. So I understand that the question was about the investment in the U.S. Can you hear me?

OpenAI and the investment in the U.S., our forecast this year and next year. I think that is the gist of the question. Can you hear me?

[Tomomi Kato, executive]

Okay. So I take it that, that is the question. Yes. So first of all, the U.S. investment, I will answer and also about OpenAI. First of all, about Japan-U.S. relationship. As we already press released and has been covered by mass media, I think you understand quite extensively. This year, the Department of Commerce, we signed an MOU, this power grid business. Hitachi Energy is our group company. So Hitachi Energy, the transformer production and for the T&D equipment, local production, we will continue examining additional investment in the U.S. That is the content. The specifics will be fleshed out going forward.

We have not decided on all the specifics, but the background is, in September this year, over $1 billion investment was announced in the U.S., we will do investment to build our capacity in the plant. And this one is separate from that. Because the demand is so strong, apart from this $1 billion, we will study the possibility of additional investment. Please understand it like that. So we have not decided on all the concrete matters.

But if we invest -- after we invest and build the capacity, we take orders and ship out the products, it will have some time lag, a few year time lag. So this will not have a positive impact next year, probably during the Inspire 2027 period or the next medium-term plan period.

For the power grid business, up to 2030, we say this will continue growing. But recently, we're saying not 2030, but 2035. For the next 10 years, we expect a growth. So this is a long-term perspective. But in terms of our business opportunity, this is a tailwind. We appreciate it. So we want to utilize this opportunity. So next is OpenAI.

[Shinichiro Tamai, executive]

Page 25, Lumada business expansion measures. You can see some information there. On October 21, we had a news release. Next-generation AI infrastructure will be built. OpenAI will be leveraged. So we signed a strategic partnership. Next-generation AI infrastructure is mainly in utilizing AI, this will be the base infrastructure.

Data center. So for data center, we need to efficiently supply power and in transmission mainly. Hitachi will work with OpenAI and more broadly to penetrate AI, we will supply the necessary power. That is how we want to contribute. And inside data center, Hitachi Group has been contributing in the cooling technology, storage technology and data center construction.

So we will accelerate the AI infrastructure building. So that is the content of this partnership. We have come to an agreement. And as you see on this slide this time, OpenAI's cutting-edge technology will be leveraged so that we, Hitachi Group, can use AI, utilize AI, Hitachi Solutions and HMAX.

We will leverage AI and offer a higher value to our customers. That is another possible collaboration. So mainly 3 points under this agreement. This is more medium- to long-term partnership. So this may not have a positive impact this year, but we have high expectation as a growth opportunity.

[Operator]

Ezawa-san, please.

[Kota Ezawa, analyst]

I have a question on power grid DSS and investment for growth. Regarding the power grid, first of all, data center-related power grid business in the near term has been announced by the company. There have been much reporting about this business. Hitachi's high power grid business is the upstream high voltage is the main area. But data center is closer to the downstream, the consumption side according to my understanding, is that the case? What is occurring now is that for Hitachi Energy, mid-voltage as well as low-voltage areas could be poised for growth going forward?

Or for the data center, is it mainly the high-voltage substation business will continue to grow, is that the case? What is the new aspect of this business? Please elaborate further.

[Tomomi Kato, executive]

Regarding data center and voltage, the relationship between the 2 will be explained. Basically, as we set up new data centers, the power generation can be created together in some cases and it could be separate in other cases. So that will have a difference on the voltage, and it will also differ according to scale.

So we cannot say whether it is more high voltage or low voltage. That is not the case. For the time being, for data centers, we are receiving various orders. However, so far, Hitachi Energy's scale of receiving orders are mainly the renewal as well as connectivity for renewable energies as well as grid strengthening the main business.

And in addition to that, we have HVDC. But it isn't as if the impact is so strong that it will change the mix of the Hitachi Energy business overall. The conventional demand is growing and data center is added on top of that. Therefore, going forward, we have high expectations for this business.

[Kota Ezawa, analyst]

Second question is regarding DSS. In U.S., AI is becoming more prevalent and SaaS business is receding negative impact in terms of performance. This is occurring in the overall industry. For GlobalLogic, what about the U.S. business? Is there a similar impact? With the implementation of AI, are you seeing reduction in work or subject to price competition? Is this a phenomenon that is occurring in the U.S.?

In the recent past, there is a decline in performance. You said that this is because of the customer is restraining the investment. But what is the structural change occurring in the industry? Is there a deterioration -- unfavorable deterioration?

[Tomomi Kato, executive]

Regarding GlobalLogic, in terms of pressure for price has been occurring in the past 1 year. We believe the main reason is restraint in investment. But as you have mentioned, with AI, there is higher expectations of customers to increase productivity. Therefore, the factors are mixed. We cannot differentiate one from the other.

In that regard, against this backdrop, we have to try to increase the price so that profitability can be improved. As mentioned in the materials, AI is growing. Therefore, technological power must be enhanced for our side and provide more AI services dealing with data increasingly with higher capabilities so that we can seek growth and also increase profitability.

That is the reason why in September, as I mentioned earlier, we have acquired a German company. But this is a bolt-on type acquisition. It's not very significant. But by continuing on this direction, we hope that the capability of GlobalLogic to provide solutions to customers can be enhanced so that this will lead to further profitability of our business.

[Kota Ezawa, analyst]

Question regarding the investment for growth. Many of the companies with earnings results are saying that they have made investment for acquisition. So it seems that this is being welcomed overall. But what is the basic stance of Hitachi in terms of making investment?

Kato-san, you are the Head of the Investment Committee. What is the discipline that you are applying? Is it being more relaxed? Or is it becoming more stringent? Please elaborate further. And JPY 500 billion in terms of shareholder return was also announced. Do you think this is sufficient for this fiscal year? Because you're making a strategic investment, is this going to have an impact on shareholder return? Please elaborate.

[Tomomi Kato, executive]

Regarding our stance for investment for growth, I would say that according to the Inspire 2027, we need to seek growth in a steadfast manner, not just in M&A, but also we must make investment of growth organically as well. We have made this decision. This is the direction we are pursuing. But we will also seek M&A opportunities.

As I mentioned today, Lumada's digital service are the focus areas for M&A, basically bolt-on type M&A. But if there is opportunity before us, we will also consider major M&A as well. As we mentioned in April as well as in June, our discipline in investment is to seek returns. And also ROIC is very important. It has to have a positive impact. And even if it takes time, it has to become positive. This is a discipline that is unwavering for us.

On the part of the CFO, we are trying to seek investment for growth. But on the part of the Investment Committee, the discipline remains unwavering. It remains unchanged. A balanced approach is being taken according to my personal view. And similar question is received from Board members, and I'm responding in the same way.

To your second question, regarding the JPY 500 billion for shareholder return, according to the current pace, JPY 300 billion share buyback will be completed without fail within this fiscal year. So we have to consider what to do thereafter. We will take the financial position into consideration at that time. We are also reshuffling our portfolio as well. So proceeds will have an impact as well.

We will also look for opportunities for growth. All these factors will be taken into consideration. If there is no such case, we will consider shareholder return. Regarding share buyback, we will do that in an agile manner. Agile thinking will be applied.

[Operator]

Next, Yasui-san.

[Kenji Yasui, analyst]

So Tamai-san talked about OpenAI. If I could go one step deeper, other -- outside of data center, is it transmission distribution or the transformer and inside data center, 800-volt HVDC, and you said that this will be from 2027 onwards. So in the rack, where can you contribute in HVDC, 800-volt HVDC?

What is the size of the business? Could you be more specific where you can do your business? OpenAI has a big Stargate project. So in the next 2, 3 years, can this be opportunity that you can capture?

[Shinichiro Tamai, executive]

Thank you for the question. Kato-san mentioned earlier, outside of data center, first of all, it is the transmission. As Kato-san said, the location of power generation and the data center, how close or how distant they are. The equipment differs depending on the distance. In any case, the power generated cannot be brought into data center as is. It has to go through our switchgear and the T&D equipment. And right now, this is a strong growing area, which will accelerate even further.

So they asked us to work together, and that is why we signed this MOU. So our main business, power grid. This will be a big opportunity for our business. And 800-volt VDC. Recently, 800-volt, it's not that we have anything that is commercialized in this area. We need to do more development. But Hitachi Energy, as you know, has core competence, which is the conversion of voltage and the DC/AC. And the key expertise is power electronics, power semiconductor. We have in-house R&D.

And this -- using this key device, power controller, PCS and battery energy storage control and EV charger, we have these broad-based product offering. So PCS and EV chargers are close the spectrum to 800-volt DC. And as use case, we have the transformer for data center, the power quality. The voltage and the power quality is guaranteed, and we are now the top class track record in this area. So Hitachi Energy has a big opportunity, we think.

[Kenji Yasui, analyst]

My second question is the Japan IT services. Yesterday, Fujitsu and today, NEC also announced the order is now the low single digit or negative. So year-on-year, there may be large deals that impact the changes, but in U.S., SaaS may be a bit slowing down. So what is the IT projects in Japan? It has been strong. Going forward in the second half and last -- next year, is it a comfortable market environment or not, including AI, which is larger risks or opportunities?

[Tomomi Kato, executive]

Ono-san will answer.

[Hiroaki Ono, executive]

So Japan front businesses in Q2, 13% growth, 13% growth in our business. And IT is 3% growth. So Japan DX modernization projects are trending strongly. So in the second half and FY 2026, we expect more growth. So a little more comment. IT services. In orders, we showed you some numbers.

[Tomomi Kato, executive]

In IT service, the overseas projects are also conducted. On the overseas side, customers are restraining their investment. So that is a decline. But in Japan, we are seeing strong movement. So Q2 and in the first half, overseas portion is slightly down, may seem a little down. But in Japan, as Ono-san just said, DX and cloud-related projects are strong. That said, we need to watch closely, including the overseas market.

[Operator]

Tanaka-san, please.

[Takeshi Tanaka, analyst]

Regarding energy, power grid business is what I would like to ask a question about. As mentioned by Kato-san, for it, this is a business that will continue to grow into 2030 and even to 2035. I would like to ask the reason why this is the case? What is the response you're receiving in the recent past in terms of demand?

And recently, MOU has been concluded with the Commerce Department of the U.S. AI and data centers, outlook of demand, is it related? What is your outlook for the U.S. market going forward in this area?

[Tomomi Kato, executive]

In the long term, you're asking what we -- how we are evaluating the response. Regarding the major orders received, the bid or the business will be evaluated at the headquarters. And for railway, demand is strong globally. But we are only looking at the major transactions at the headquarters. This is also the same for power grid.

HVDC are the main projects when the scale is large for North America as well as Asia. And in Europe, we are seeing demand is very strong. We are looking at various transactions, and we are feeling that the demand is very strong. I am saying that growth should last to 2035. I believe this is feasible.

The background is driven by EV, the electrification as well as replacement because of old facilities. And with the renewable energies, there is a need for stability. Data center is also a new demand that is emerging, which is added to the conventional. Therefore, we believe that this will continue to grow in the long term.

Now regarding the MOU we have concluded with the commerce department, specifics are to be discussed going forward. With respect to the American market for the power grid business, we are evaluating that the demand is very strong. We have intention of producing in the United States, and we are increasing local production.

Demand is very strong. And it isn't as if we can respond to the strong demand totally in the United States. Therefore, going forward, we hope that production capability will be enhanced in the United States. This expectation is also reflected in this project.

[Operator]

We will move to the English channel now. Any questions from the English channel? [Operator Instructions]

We do not see any questioner so coming back to the Japanese channel.

We are coming close to the closing time, and we have many hands raised, but we will take 2 more questions. I hope you could understand. And the other questions will be followed up from the IR department. I hope you could understand.

So Hirakawa-san and Harada-san, we will take 2 more questions. Starting from Hirakawa-san, please.

[Mikio Hirakawa, analyst]

I have 2 questions. First is Hitachi Vantara, structural reform, storage structural reform. The cost reduction was mentioned. What kind of structural reform are you pursuing? And in the second half of this year and next year, what do you plan to do? And in Hitachi, so EBITDA ratio of 15% or above is aimed in Hitachi. Storage business in Hitachi may fall short of this level. So what is the positioning of storage business? Can you continue the storage business? What is your take? That is my first question.

My second question is, today, Hitachi Energy Investor Day will be held, so it's a bit early, but if you could give us a message. You mentioned the demand will continue growing until 2035. And so EBITDA rate, 16% to 20%. This is a very encouraging target. So what kind of message does the Hitachi headquarter have? Two questions.

[Tomomi Kato, executive]

First, Hitachi Vantara. The structural reform are mainly threefold. First, the key focus areas in -- so block storage, midrange is the strongest growing area. So we will focus on that area. It's not that we will not do other areas, but we need to focus our management resource there. So we will focus on this area.

And fixed costs, will be rightsized and reduced, including the personnel costs. And the rightsizing of the organization, we will rightsize the base, the sites. So those are the structural reform that is ongoing. And as mentioned in the material, we have various types of alliances and partnerships to enhance our capability. And in storage, you mentioned that we may not reach the target EBITDA.

Right now, yes, we are struggling. But this market is promising. Data center that we mentioned a few times today, data is included in the storage. So how to leverage this data is crucial in introducing AI. So this is a very important solution. So we want to somehow make our own efforts. And as mentioned today, form alliance. We have alliances. So we want to utilize alliances to be more competitive. So that was my answer for storage.

Next, Hitachi Energy. Because of the time, from my view, I think there are 3 main points. One is the medium-term -- medium- to long-term goal. Compared to the past, we are raising our long-term goal. So compared to the past, we are having a good traction for the demand, good view for the demand. So our target is raised. And as mentioned a few times today, we were talking about up to 2030, but now it is 2035, 10 years down the road. We can expect continuous growth up to 2035.

And third point, service business. Products are growing and the next growth pillar is service. As we news released, $1 billion investment will be made and the people, headcount, including 5,000 people. So we are trying to enhance our service businesses. So those are the 3 main pillars. Anything else?

[Shinichiro Tamai, executive]

Yes. Thank you. Growing our service business. Hitachi's capability will be utilized as one Hitachi. HMAX rail, it is developed in rail. So the key technology insight will be utilized to offer digital-based service, enhance our digital-based service. And the speed of development will be raised by utilizing the entire Hitachi capability, and we are stressing that point.

[Operator]

Harada-san.

[ハラダ, analyst]

I have 2 questions. The first question is regarding Hitachi Energy. You have been discussing this point today in terms of OpenAI. Now it seems that the business with the U.S. as well as OpenAI are long-term initiatives. And it seems that there is going to be a backup from the Japanese government as well according to what we have heard yesterday.

So if business risk is limited, in the past, you had overcapacity and you were quite prudent in terms of the capacity increase. But for Hitachi, is it easier now to increase capacity? And in terms of investment decision, risk is mitigated. Is that your understanding? Please elaborate.

Now regarding service business, it seems that hardware is growing, which will be followed by service business. I think it will take a longer time. But when will the service business contribute to the overall business in a full-fledged manner. On the part of GE and Siemens Energy are also focused on service business. Do you have a competitive edge against your competitors? Where is the value that can be created by -- uniquely by Hitachi?

[Tomomi Kato, executive]

Regarding Hitachi Energy, as we have explained today, in the mid- to long term, demand is expected to grow. But when we make capital investment, we are more disciplined. For example, most likely case growth scenario will be evaluated. And we want to make sure that even in the worst case, we have to be able to recoup our investment. That is the reason why we are very stringent, rigorous.

In the past, there was a period of low growth. Hitachi Energy members fully realize this. Therefore, risk management is always emphasized, but not losing the opportunity for growth. Striking the right balance is of utmost importance in making capital investment and planning. As we have been emphasizing from the past, framework agreement can be concluded with customers so that we can have surety in terms of future investment.

Regarding hardware, after order is received and the -- when we deliver, we can post revenues, but service business is not the case. It is not similar to the hardware business. Therefore, it will -- it is a type of business that will grow gradually. So we have to sow seeds for the service business. Andreas is a new CEO in this area.

And service unit has been established for this purpose. New company will receive an investment in this area. We are implementing various measures. And it is likely that within the next Inspire 2027, next medium-term plan, when numerical impact will be brought to bear. But this is very important. The competitiveness of Hitachi Energy will be explained.

And we are going to mention this in the Investor Day, we have been maintaining the #1 position. Therefore, footprint is most significant for us. This is our first and foremost strength. In this industry, we have a track record and products and solutions are areas of our strength. And we have the largest footprint in the industry in rolling out our service business, this is going to be a major weapon and advantage for us.

[ハラダ, analyst]

Second question is regarding a strategic issue for the whole industry. Regarding providing service business related to hardware, as conducted by your company, Mitsubishi is also trying to do the same. The SoftBank Group, ABB robot business has been acquired recently. Therefore, software companies are now making inroads into hardware. This is epoch-making, I believe.

You said that the footprint is very large. What about hardware companies going into software and software companies coming to hardware? Both are occurring, and there could be somewhere in the middle as well. What is your understanding of the changes taking place in the industry as a big picture?

[Tomomi Kato, executive]

In AI, we are increasingly moving to physical AI. Therefore, robotics are likely to increase significantly. That is our understanding as well. The stance we have for robotics is that in CI, we have what used to be JR Automation company. They have a robot line building business. Therefore, they are a system integrator, and they can construct lines for robots in factories.

So we are trying to strengthen this business as well. But we are not going to manufacture robots per se. But in terms of physical AI, we are very much focused. We provided explanation recently. As we have outlined in that meeting, within our business, physical AI is likely to generate added value in certain areas. Obviously, Hitachi Energy and Railway are area we have hardware.

CI sectors on a relative basis, each business scale is not that large. But by utilizing physical AI, we can provide higher value for the customers, we can expect that to occur. This is not just about products. We can also provide maintenance and other services as well. And we can provide better productivity for maintenance people and better safety for the workers. There are many applications. This is our strength. We have both IoT and products -- and we have products. So this is the strength of our company, and this is our significant position.

[Operator]

Thank you very much. With that, we will close this web conference. Mr. Tamai, IR Head would like to say a few words.

[Shinichiro Tamai, executive]

One piece of announcement. As mentioned earlier, today, October 30, U.K. Time 1700, Hitachi Energy Investor Day will be held in the U.K. Japan time, it will be midnight, and I'm sorry for the late time. And with this briefing, the material will be on the IR website in News Release column. So please take a look. Thank you very much.

[Operator]

So with that, we will end Hitachi Limited web conference on Q2 FY 2025 earnings. Thank you very much for taking time to attend today's briefing.