Hitachi Ltd

TSE:6501

Q3-2025 Earnings Call

[Unknown Executive]

It is now time to begin. So let us start Hitachi Limited's conference on Q3 FY 2024 earnings. Thank you very much for taking time out of your busy schedules to attend this conference. The presentation materials for today are posted on Hitachi Limited's IR site as well as on its news release site. So please check as appropriate.

Allow me to introduce the members on stage at this moment: Senior Vice President and Executive Officer, CFO, Tomomi Kato; Deputy General Manager, Finance Division, Hiroaki Ono. These are the 2 on stage. IR General Manager, Yoshikawa, will not be attending today, for he's not feeling very well.

Kato will now provide an overview of the earnings, but please wait for a moment while we switch the slides on the screen. Mr. Kato, please.

[Tomomi Kato, executive]

First of all, I'd like to explain the structure of the presentation materials. The presentation materials comprises the key messages for the Q3, fiscal year 2024 results, fiscal year 2024 forecast and performance by business segments and appendices.

I'd like to explain the key messages. First, the third quarter results for fiscal year 2024. The 3 sectors increased revenues and profit compared to the previous year. In GEM, Green Energy & Mobility, renewable energies and renewed demand of power grid facilities remained strong. In DSS, Digital Systems & Services, the expansion of demand for DX and modernization in the domestic IT market continued to benefit from tailwind. In the latest quarter, the Connected Industries (sic) [ Connective Industries ], CI sector, also grew both in Japan and overseas.

Let me explain the 5 KPIs. The top row shows the totals for the 3 sectors. First, revenues increased by 16% year-on-year, 27% increase in GEM, 10% increase in DSS and 9% in CI. Adjusted EBITA also increased in GEM, DSS and CI, resulting in a 34% increase year-on-year. Furthermore, the adjusted EBITA margin was 12%, an improvement of 1.6 points from the previous year.

Hitachi's consolidated figures are shown below. Profit attributable to Hitachi Limited stockholders was JPY 138.5 billion. Although there were increases in the 3 sectors, there was year-on-year decrease due to the impact of the gain on the partial sale of Hitachi Astemo's equity of approximately [ JPY 12 billion ] included in the previous fiscal year and foreign exchange losses in the current fiscal year. On the other hand, core free cash flows increased by approximately JPY 50 billion from the previous year to JPY 205.6 billion. This is mainly due to the increase in advanced payments received for large projects.

Next, let's look at the fiscal year 2024 forecast. We have made upward revisions in GEM where demand for GX is strong and DSS where demand for DX is strong. As a result, we have made upward revisions to 5 KPIs, revenues, adjusted EBITA, net income, core free cash flows and ROIC.

The 6 KPIs for this fiscal year are shown here while the following page summarizes the comparisons with the previous fiscal year. Here, I will explain the main financial KPIs in fiscal year 2024. There are 3 points. First, GEM and DSS are expected to grow significantly, and CI is also expected to be strong. As a result, the financial targets of the fiscal year 2024 medium-term plan are expected to be largely achieved.

Secondly, in addition to revenues and adjusted EBITA, net income and core free cash flows are also expected to grow compared to the previous year. In particular, with regard to cash flow, equal amount is forecast for net income and core free cash flow, resulting in conversion rate of 100%. Finally, shareholder returns, including the share buyback, will be JPY 389.2 billion, an increase of approximately JPY 140 billion year-on-year.

I will explain the figures in the middle table. First, the revenues of the 3 sectors this fiscal year of JPY 9.7 trillion is an 11% increase year-on-year. Even excluding the effects of foreign exchange, this is growth forecast greater than the 8% increase in fiscal year 2023. All 3 segments are expected to exceed the growth rate of the previous year. The adjusted EBITA ratio is also expected to be 11.4% this year, an improvement of 1.4 points year-on-year, which is greater than the 0.5 point improvement in fiscal year 2023. All 3 segments are expected to exceed the improvement achieved in the previous fiscal year.

The forecast for consolidated income for the current fiscal year is JPY 610 billion, an increase of JPY 20 billion year-on-year. But if you exclude the impact of the partial sale of Hitachi Astemo shares included in this fiscal year, the increase is expected to be more than JPY 100 billion. The forecast for core free cash flow is JPY 610 billion, a year-on-year increase. But excluding the impact of partial sale of Hitachi Astemo's equity included in the previous year, it is expected to increase by JPY 60 billion.

The table below summarizes the performance of Hitachi Energy, which is growing significantly in GX. The figures are in U.S. dollars. On a stand-alone basis, over the past 4 years, orders growing 35% year-on-year, revenues by 21%, and adjusted EBITA margin rate has improved from 6% to 11%, aiming for long-term growth going forward.

Regarding the third quarter for fiscal year 2024. The 3 sectors were able to increase both revenue and profit and also increase their profit margins year-on-year. On the other hand, net income for the period increased slightly year-on-year due to the impact of foreign exchange losses this year. Although Hitachi's consolidated net income for the period decreased year-on-year, excluding the gain on the sale of Hitachi Astemo's equity of approximately [ JPY 120 billion ] last year, net income increased by JPY 20 billion year-on-year.

Next, the breakdown of year-on-year changes in the sales and adjusted EBITA. Let's look at the top section, revenue, starting with the fiscal year 2023 3Q results. On the far left, I will explain from left to right. Although Astemo's revenue decreased due to the sale of equity in the previous year, revenues increased due to the acquisition of GTS business from Thales, and there was revenue increase, in fact, due to depreciation of the yen. Organic revenue was achieved. Increases are mainly in GX-related business for Hitachi Energy, DX-related business for IT Services and Front Business in DSS.

Let's look at the lower part, adjusted EBITA. The trend is similar. Others increased by approximately JPY 62 billion. With respect to the breakdown of the increase in organic revenues, changes in business scale, selling price change exceeded the impact of soaring procurement costs and increase in investment.

Financial position and cash flow. First, the total assets at the end of the quarter at the top, approximately JPY 13.6 trillion, an increase of about JPY 1.4 trillion year-on-year. In addition to the impact of increased revenues, assets increased due to the acquisition of GTS business of Thales and impact of the depreciation of the yen. Interest-bearing debt also increased by approximately JPY 610 billion due to the increase in working capital resulting from the increases in revenues and the impact of acquisitions as a result. The debt equity ratio increased to 0.3x.

Cash flow. Core free cash flow increased year-on-year in both the third quarter and the year-to-date total due to improvements in working capital resulting from advanced payments received.

Next I'll explain the revenues by region. The 3 sectors highlighted will be explained from left to right. First, Japan. The 3 sectors increased by 9% year-on-year. DSS Front Business and IT Services business grew solidly, resulting in a 14% increase for DSS.

Next, North America. The 3 sectors increased by 16%. Hitachi Energy grew significantly due to strong increases in orders for HVDC, switchgear, and as a result, the segment grew by 20%. In DSS segment, GlobalLogic grew, but there was a decrease in the storage business due to intensifying competition. And as a result, DSS segment growth was 7% in the third quarter. On the other hand, the CI segment grew by 16% due to the recovery in investment in semiconductor manufacturing equipment.

Next, Europe. There was a 35% increase in 3 sectors again. Significant growth was mainly driven by increases in the signaling business following the acquisition of GTS business from Thales, in railways and by the increasing orders for HVDC switchgear. And GEM was up 45%. And furthermore, the Healthcare business of Measurement & Analysis System for High-Tech grew. CI grew -- increased by 29%.

In addition, ASEAN, India and other regions, Hitachi Energy of GEM recorded growth.

Next, I will explain the order results by segment. First, DSS in Q3, on a cumulative basis, grew year-on-year. Despite a reactionary fall from previous year's large projects in the Front Business, IT Services and Services & Platforms increased by over 10 percentage points, respectively, during Q3.

Next, regarding GEM. GEM had large projects in Nuclear Energy and Hitachi Energy. Nuclear Energy project is a domestic one in Japan. The projects for Hitachi Energy are primarily ones for HVDC in Europe. Railway Systems saw an increase due to the favorable impact from the acquisition of Thales GTS.

Lastly, regarding CI in Q3. Excluding the Building Systems, which are affected by continuing corrections in China's real estate market, other BUs, by and large, were able to capture orders exceeding the previous year's level.

Now on to forecast for FY '24. The substance is the same as I delivered at the beginning. The foreign exchange rate assumptions are set as described on the lower right-hand side table, with the rate being JPY 145 to the dollar this time. U.S. dollar-yen sensitivity is such that JPY 1 change to the rate is forecast to impact our adjusted EBITA by JPY 200 million. This time as well, we have not included risk buffers in corporate items. Therefore, this forecast may be subject to change potentially due to, for example, nonoperating profit and loss, equity earnings of affiliates, impairment losses or ForEx gains and losses, conversely.

However, we made upward forecast revisions to 2 of our sectors this time, and our head office thinks that there could be further upside overall. Thus, we have added approximately JPY 15 billion to adjusted EBITA in corporate items. We assume the main source of potential upside will likely come from GEM.

Next, I will go through the factors affecting year-on-year changes in revenue and adjusted EBITA. First, on the upper part of the page for revenue. We expect Astemo revenue to drop, revenue increase from acquisition of Thales GTS and, lastly, others to drive growth in our organic revenue. Revenue is projected to increase mainly due to GX-related business in Hitachi Energy, DX-related business, Front Business and IT Services.

Next, to take a look at the lower chart for adjusted EBITA. The trends are, more or less, the same as those for the revenue. Others are expected to increase by JPY 210 billion. To break down the projected growth in organic revenue, changes in business scale and selling prices are to outweigh rising procurement costs and increases in investments, bringing adjusted EBITA forecast to grow year-on-year on a consolidated basis as well.

If I may now move to the performance by business segment. First, on DSS, Digital Systems & Services. DSS, overall saw a 10% increase in revenue for Q3. In FY '24, adjusted EBITA margin rose to 13.9%, bringing about increase in both revenue and profit. Revenue grew mainly from DX modernization projects in the Front Business. While in the IT Services, it was cloud and security-related Lumada projects that expanded the business. In the Services & Platforms, on the other hand, GlobalLogic grew by 18%, and domestic cloud business also increased. But the storage business declined due to intense market competition. So Services & Platform segment grew at 11% only.

For the full year forecast of FY '24 on the right, DSS total revenue and profit are revised upward from the last time. We are expecting to see a 10% revenue rising year-on-year.

Next, on GEM, Green Energy & Mobility. GEM, overall, in Q3, posted a 27% increase in revenue, 3.4% -- point rise in margin, achieving growth in both revenue and profit year-on-year. With respect to revenue, primarily Hitachi Energy and railway recorded double-digit growth, obtaining increases in both revenue and profit, respectively. Hitachi Energy achieved an increase in the business for devices, including transformers as well as in the Lumada projects, including those for HVDC and other systems integration, integrated facilities and asset management solutions.

Next, for FY '24 forecast. Because of the revenue review done on Hitachi Energy, we revised the forecast upward. As a result, GEM total is projected to attain 24% increase in revenue. But as mentioned earlier, GEM, in particular, since our head office is expecting to see further upside in revenue and AE, the projected upside is included in the column for corporate items and elimination outside the segment.

Moving onto the Connective Industries, the CI. In Q3, CI overall, achieved a 9% increase in revenue. Adjusted EBITA margin stood at 12.5%, increasing both revenue and profit. The margin improved by 1.9 points. Revenue grew in all the BUs. Note, in particular, that the Measurement & Analysis Systems and Industrial Digital grew over 10%. In the Measurement & Analysis Systems, the sale of chemistry -- clinical chemistry and immunochemistry automated analyzers used in health care performed well. In Industrial Digital, domestic SI business advanced.

For FY '24, CI in total is forecast to grow by 3% in revenue. But this forecast for the segment remains unchanged from the last.

Next, regarding Lumada business. Please have a look at the top left graph. Revenue in Q3 rose by 30% year-on-year. In FY '24, the forecast includes a 23% increase in revenue and margin of roughly 16%, a 1-point rise compared to the year before. This fiscal year's forecast for revenue is revised upward by JPY 110 billion from the last time due mainly to increase in GEM's performance. By the way, starting from this fiscal year, the actual revenue for each sector is disclosed on a quarterly basis.

As you can see from the table on the lower left, DSS, DX-related systems integration grew to drive the Front Business and IT Services. GlobalLogic's digital engineering business also increased. So overall 22%.

Growth was posted in GEM. There were increases in Hitachi Energy's managed service business as well as rail systems managed services to push to total -- to a 61% growth.

In CI, Industrial Digital systems integration business for industry and connected products offered by both Industrial Digital and Hitachi High-Tech progressed, bringing the total to a 26% rise.

HMAX, a solution utilizing AI-embedded GPU services -- or service to analyze the data from sensors installed on railcars, is generating a very robust, increasing stream of inquiries already from Europe, Asia and others. To augment this solution, we decided to acquire Omnicom, a U.K. company in January. We expect increasing growth and profitability from these Lumada projects will continue to contribute to Hitachi's overexpansion of revenue and profit in the future as well.

That concludes my presentation on the earnings. Thank you.

[Unknown Executive]

We would not like to proceed to the Q&A. [Operator Instructions] Now we will take the questions on the Japanese channel. [Operator Instructions] Hirakawa-san, please.

[Mikio Hirakawa, analyst]

I have 2 questions. Now the first question is the very strong business of DSS. And on the IR Day, you presented that CAGR is growing in the domestic market and for the -- and Front Business is going to be grow. And also, the -- why are you able to outperform the market? And do you think that -- well, please talk about the market today. And do you think this outperformance of the market will continue going forward? What is your take on this? Shall I ask my second question, too?

[Tomomi Kato, executive]

Allow me to ask -- respond -- answer. Regarding the market trends, IT market domestically in the several years going forward, we expect significant growth, first of all, in terms of customers' mainframe support, and they have to also deal with the increasing cost. In various industries, mission-critical systems replacement is a strong prevailing demand. And for the legacy system is moving towards the migration. And then modernization followed by DX. This is how we evaluate this. It depends on the customers. But up until 2020, this migration, modernization and DX trend is likely to continue.

And against this backdrop, the strength of our company is the following. Highly reliable system can be established. Operation capability is very high in the financial service as well as social area. Mission-critical areas, we have shown strength. And for the OT areas, domain knowledge in terms of energy, mobility and industry will be brought to bear. We have these 2 strengths, which is -- are unique to our company.

The market, DX trend, will be continuously captured going forward. And with the GenAI and state-of-the-art technologies, solutions and knowledge is something we have globally in terms of digital talent that we can brought -- bring to bear. And by so doing, we will pursue our business and continue to support our customers.

[Mikio Hirakawa, analyst]

I have a follow-up question. For next fiscal year, are you going to outperform the market? Is that the case? That's the natural course, would you say?

[Tomomi Kato, executive]

Specifically, '25 business plan will be presented later. But in terms of major trend, as I mentioned earlier, up until 2030, the trend is likely to continue. So I think your understanding is correct.

[Mikio Hirakawa, analyst]

My second question is regarding CI Building Systems. 14% is the adjusted EBITA, and this is very high. Following the second quarter, it seems to be further increasing. According to your explanation, China market is not favorable. How were you able to increase the profit margin so far? And when we consider the next fiscal year, do you think there will continuity? Please give us some information on this.

[Tomomi Kato, executive]

Regarding the evaluation of the third quarter for Building Systems, overall increase in revenues as well as earnings.

In terms of the content for China, the service business was increase in revenues. Elevators, escalators in Japan was very strong. So there was overall increase in revenues.

In terms of profit, on the other hand, in China, there was increase in revenues, and cost reduction was in terms of production, automation. As well as in terms of parts procurement, we were able to increase profit in China as well as in Japan. So the third quarter was very good for us.

But on the other hand, for the elevators, new build is decreasing because the real estate market in China is in a correction period. We don't know when this is going to recover. We don't have an outlook on the recovery yet. Therefore, on our part, inclusive of renewal business as well as other service businesses are expected to grow in China. We will continue to grow this business.

And for the buildings, BU, other than elevators, there is a facility management and energy management services that we are expanding our business to. We hope to grow these businesses in mid- to long term.

[Mikio Hirakawa, analyst]

I have a follow-up question. For the market overall, Chinese new facilities is shrinking. But what is Hitachi's performance compared to the market? But you were able to increase revenues. Is that because the service was expanded and service ratio is increasing? Is that a correct understanding? Please confirm.

[Tomomi Kato, executive]

And so for the third quarter, short term and this year and next year should be separated. For the third quarter, as I mentioned earlier, service business has expanded. Therefore, in the Chinese market, revenues increased. But for the fiscal year, the new construction orders are decreasing. Therefore, sales, overall, in China cannot expect to grow. But even we have shortfall in revenues, in terms of profit, we are able to remain strong by providing services as well as cost reduction. We can continue to increase profit. But for revenues, it maybe difficult for us to further increase.

[Unknown Executive]

Yasui-san, please unmute and start your questions.

[Kenji Yasui, analyst]

I have 2 questions. Orders for Nuclear Energy, JPY 140 billion in the first quarter. So it was very robust in the first quarter. I would like to understand the details. SMI is attracting a lot of attention for data centers. So is there a possibility of that for data centers and Hitachi GE, which is focusing on this?

And second, power grid. JPY 1.5 trillion of orders for this, very large. So that is the environment for your business. This business, in the beginning of the year, 10% growth. If it is going to happen, there will be further upside to the revenue. So you knew that the revenue will increase this much at the beginning of the fiscal year? Or did you realize that the business environment is becoming favorable and so you may be revising it upward? So upside, why did you put this upside number and based on what understanding? If you could please explain the background.

[Tomomi Kato, executive]

Regarding Nuclear Energy, in Q3, orders were very robust. And the projects -- we have a project in Japan. I cannot give you a specific name for the project, but it is construction to meet new standard. We received a very large order. We were able to capture it.

In the case of Nuclear Energy, depending on the project, it could either go up or down in Q3. Nonetheless, we received this large order. And this year, it's very robust. I have shown you numbers for the quarter and year-on-year, the increase is 196%. So that is the extent of growth. We're blessed with this growth this year.

On the other hand, what you mentioned, SMI, unfortunately, have we received orders for this yet? No. In overseas, there are a number of projects ongoing, although we have not received orders. But in Ontario, Canada, Ontario Power Generation, there's a company there. Darlington nuclear plant project, in that project, our group company, the JV with GE, GEH, has been chosen as technology partner, but not that it's determined that an order will be placed to that company. So FID, we are hoping that FID will be made soon. We're expecting to receive an order from this project. So that's the answer for Nuclear Energy.

And with respect to power grids, orders in Q3, we were able to receive very large orders for this in Q3. Centering around grid integration business, we received large orders by region, Europe, Middle East, India and ASEAN. A number of projects were captured to drive this number. A 35% increase year-on-year in Q3 was posted. So there's an increase there.

And what you asked, the extent of this increase in revenue, we're able to assume that or forecast that at the beginning of the fiscal year. Not everything actually. We knew that looking at the trend, there will be an increasing trend. But orders flowed in more so than we expected. And every quarter, we are making an upward revision. So we did the same for Hitachi Energy this time and as I explained using the presentation material.

On the corporate side, the number given for each segment, more than that, I think we will be able to drive further profitability, JPY 15 billion, for example. So that was included as part of corporate items and eliminations. So that was factored in, in the forecast that we have put out this time.

[Kenji Yasui, analyst]

So a follow-up question for power grid. It's performing very well. So FY '24 CapEx for power grid, if you're going to make any changes, if you could please explain that.

[Tomomi Kato, executive]

Regarding CapEx, GEM sector overall, FY '24 forecast is going to increase by JPY 32 billion, 28% up year-on-year. And the large bulk of that is to strengthen equipment for Hitachi Energy. Over the medium term, we have a CapEx plan for $6 billion. That was what we announced in the first quarter. And this is the plan in place, and we're on plan.

[Unknown Executive]

Next, [ Tsutsumi-san ], please.

[Unknown Analyst]

I hope you can hear me. I have 2 questions. Regarding Hitachi Energy, I have another question. It's a follow-up question to the previous one. In the past 3 months, it seems that more than expected, there had been upside in terms of your outlook with higher probability. Is the -- in terms of market size, is it growing more than expected? Or is it that the market size is along the expected lines? But Hitachi Energy's inquiries are increasing compared to your competitors. Is that the reason why there's been expansion more than expected?

In terms of power grid, I have also a following question. I'm sure it's difficult to respond. Regarding DeepSeek, there are some speculation regarding this. What is going to be the impact on your business? If you have any views, please share. That's my first point.

Second question is regarding -- not related to the results, but regarding the organizational change that has been announced today, strategy and new organization has been set up. What is the background? Why did you make the change and because of what challenges? And with the establishment of this strategic SIB, what do you hope to achieve?

[Tomomi Kato, executive]

Thank you for your questions. First of all, regarding Hitachi Energy, why is there such an upside is the gist of your question. Is it because of the market? Or is it because of our position in the market? It's very difficult to separate the 2, I must say. I think it's both.

Now our market position is very high, and therefore, we cannot aim for a higher ranking, but market is growing as well. And against this backdrop, our technologies have been further enhanced. And we have the track record in various countries, and customer use case are also proving to be very effective. Hitachi Energy acquisition was decided 4.5 years ago. That -- and at that time, the reason why we made the acquisition is because we wanted to make this business higher value with the power of our digital. Scale is very large, and we have made steadfast results, especially last year because Hitachi Energy has software to manage the assets of the customers.

And Hitachi's DSS IT has provided support to enable DX, bringing to bear the level of Lumada. And this is being deployed to the Lumada business, which is an achievement for this fiscal year. We want to show more results going forward, to bring to bear the synergies of the whole Hitachi Limited, so that we can enhance our presence in the market further. Volume has to increase as well in this world. That means that capital expenditures will also be required so that we can exceed the market growth rate.

In terms of generative AI, DeepSeek is receiving a lot of attention this week. It isn't as if we have fully evaluated this technology. But we believe that new technologies will emerge, and LLM will be made available at a lower cost. Utilizing such LLM at data centers, for example, demand can further be expanded. If that is the case, for our company, it's a major customer for us, and therefore, it will lead to increase in orders as well as revenues.

But on the other hand, from the point of view of rival companies, they will also have an impact, or it may not be positive for orders received for us. So there are both positives and negatives. But at any rate, we want to capture the wave of increase in demand. And we are benefiting from the tailwind of DX, and we would like to further capture the momentum going forward.

Now regarding the new organization. For the next Mid-term Management Plan, we are formulating this currently. And during the next fiscal year, we will provide an appropriate explanation. As mentioned in the release, in terms of the -- we are aiming to realize a true One Hitachi with digital at its core so that we can strengthen the digital-centric business.

And the key to success are several fold. Now this will be at the core in each business and working together and creating value for Hitachi and also capturing new opportunities for business. Social Innovation Business will be expanded globally. New opportunities for growth must be captured. And that is the reason why we have established -- we are going to establish a strategic SIB.

The focus in this area will be the data center-related business, batteries and health care. Currently, these are the areas of focus for us. But it's not limited to these 3. There would be a technological transformation. Business model will undergo change. We will capture this opportunity in terms of the corporate innovation, research and development so that business can be further created. So in that regard, it's a very significantly important business unit for us.

[Unknown Executive]

Next, [ Yumikaki-san ].

[Unknown Attendee]

[ Yumikaki ] from Toyo Keizai. I have a question regarding GEM, first of all. Are you going to increase by JPY 15 billion overall? I think that's the increase in financials. But the gap between corporate items and eliminations versus the sector, it's hard to understand why the gap. And so if you could please elaborate on that.

And another aspect about the organizational change that you mentioned. GEM is going to be divided into Energy and Mobility. That's one of the changes. And within the CI, BUs will change, it seems. So what is the respective objective of these changes? Those are my questions.

[Tomomi Kato, executive]

Thank you very much for your questions. In corporate items and eliminations, we included a stretch. And that may have been difficult for you to follow. Well, the sector or segment who's responsible for business and the head office who's looking at the business overall. And because of the timing, it turned out this way. But in the past, it was the reverse. The sector may come up with a number, but in view of potential upside, corporate items and elimination may have had a negative number included.

But we would like to put out an outlook or forecast that is easier to follow. So starting from this fiscal year, if we think that there could be further upside, then we would include an upside in corporate items and eliminations. But as I said earlier, we were talking with Schierenbeck, there's more expectation. There's a lot more expectation for more, we said.

Next, our new organization, GEM is going to be split into 2. And the reason for that is for each, power grid and railway, Hitachi Energy power grid, well, it's been mentioned several times already. For the last few years, it's been growing substantially. And each business is exceeding JPY 1 trillion mark. The projects that they handle are becoming larger and larger. And the business environment is becoming increasingly complex given those circumstances because this is a huge business. So it's going to report directly to CEO in the new organization, and by so doing, management speed can be increased.

Given the size of the business, risk management is going to be a very important factor. So we would like to strengthen that as well. And that is why we are dividing into -- dividing GEM into 2 sectors. Given the size of the business, I think it's only natural that we do so.

Next on CI. CI's mission is to gather strong products from Hitachi to relay that to digital and provide solutions to customers and, by so doing, maximize the value that we provide to customers. Customers and the attributes of businesses from these 2 perspectives, consolidating everything into 3 BUs, by so doing, simplifying the overall organization to increase management speed and to generate synergies between BUs to accelerate growth. That is the objective, so to have further growth going forward. GEM and DSS, these are growing very well. Conversely, CI still has room for growth. And that is why we decided on this organizational change.

[Unknown Executive]

Next, [ Oka-san ], please.

[Unknown Analyst]

I have 3 questions. The first question is regarding Connective Industries. For Connective Industries, overall, there seems that improvement is taking place. For CI overall, is there an overall effort underway? You talked about the productivity improvement in Building Systems. I think you've referred to synergy as well. Connective Industries is having increased profitability. What -- please give us more information on this business.

[Tomomi Kato, executive]

Compared to DSS and GEM, Connective Industries' revenues growth may not stand out, but the profitability is improving in a steadfast manner, and it is just continuing to grow. So it is a very reliable business for us. The reason why this is enabled is because growth is been pursued but with risk management in place as well. Furthermore, in terms of cost, currently, cost per se is increasing in terms of value, but we are trying to achieve a competitive cost. And for the inflationary impact, we have this reflected and passed on to price. We will continue this effort going forward. And the effort made so far has been reflected in this performance.

[Unknown Analyst]

Second question is on Page 20. Now you said adjusted EBITA, JPY 36 billion increase has been made. And this JPY 15 billion is GEM upside. But is that a correct understanding? Corporate items and eliminations, you have made upward revisions. I want to know more details about what is included here.

[Hiroaki Ono, executive]

Regarding JPY 36 billion, GEM sector improvement of JPY 15 billion is included. Furthermore, for the corporate section in terms of headquarters, cost is being evaluated further, and that cost is also included. And we were also forecasting risk, but we have excluded such a risk. So that is the reason why this item is improving.

[Unknown Analyst]

Third question. Regarding storage business, it seems that the improvement is not being made. How are you going to deal with this business? And please talk about the outlook of the business going forward.

[Tomomi Kato, executive]

Thank you for your question. Regarding the storage business. As I mentioned at the outset, the competitive landscape is very fierce, and the cost is increasing, and therefore, there was a decrease in profit for the third quarter. For the fourth quarter, the situation remains challenging. But fourth quarter and onward, we believe that the profitability will improve. For example, our procurement method is being reviewed, and cost reduction and price changes are being made as well. And toward the fiscal year 2025, AI-related business will be expanded. Hitachi iQ is a good case in point in terms of solutions. And storage functions are further enhanced. And therefore, in the fourth quarter and onward, we believe that improvement will be made.

[Unknown Executive]

Fukuhara-san, please unmute and ask your questions.

[Sho Fukuhara, analyst]

Fukuhara from Jefferies Securities. I would like to ask 2 questions. My first question is as follows. It's about Hitachi Energy. JPY 1.6 trillion of orders in Q3. Within that, are there large projects -- one-off projects included? I would like to confirm that. And given this speed of growth, on an annual basis, it seems that it could exceed JPY 5 trillion. The annual revenue plan, I think you have made an upward revision by JPY 100 billion or more. But going forward, how much increase do you think you can post in the next several years? And on top of that, what is the profitability of the projects that you have received so far? Is it up compared to the projects in the past? Is that the right understanding? That's my first question.

[Tomomi Kato, executive]

Thank you for the question. In Q3, there were large projects captured, especially for grid integration. These are large projects. So they may not continue to flow in every quarter, but it's not that they are one-off projects. We're getting various inquiries from our customers. So we would like to continue to capture such large projects. That is what we're expecting to do.

On an annual basis, if you could please have a look at Page 4 of the presentation material. Hitachi Energy, on a dollar basis, as you can see for fiscal year '24, 23% is the number given. I think we will be able to see an increase to that degree on an annual basis. It depends on the project. So there could be some ups and downs, but I think this is the level that we would be able to achieve.

And orders received this year, when will that be translated into revenue? Well, there are 2 things, HVDC, very long-term, large projects. That's one type. So it's going to take about 5 years after order placement before we can see revenue 3 to 5 years. And the other types of projects, transformers or switches, once orders are received, they were translated into revenue in 1 year. But because of increasing number of orders placed with us, on average, they may take 2 to 3 years before they can be reflected in our revenue. So revenue in the future will be stabilized because of these projects that we're receiving right now.

And the profitability of backlog, of course, is an important KPI. As we mentioned, we continue to monitor it. And profitability of the backlog is steadily going up, and we believe that we will be able to continue to improve that going forward.

[Sho Fukuhara, analyst]

Here's my second question, regarding cash flow. This time, core free cash flow was revised upward by JPY 130 billion, and advances, you mentioned. So that means that there will be one-off items this year, but next fiscal year, advances will be spent, and core cash flow next fiscal year and onward will normalize. Is that the right understanding? So that's one thing that I would like to confirm and ask.

Free cash flow is increasing, and this is also in relation to the medium-term business plan, but what is it that you're going to spend on investment for growth? But what about return for shareholders? If there's anything that you can share at this moment, please.

[Tomomi Kato, executive]

Thank you very much for the question. As you rightly pointed out, at Hitachi Energy, cash flow is growing, but -- and partly that's because of advances that we are receiving. More than the cost spend, some payment is made upfront before that as an advance, and that will be a spend for the following years. So earlier, it's a plus, but in the long term or after, it will be spent, a minus. But orders increasing in numbers, so the spend is covered and numbers up. And if the orders remain the same, the advance received upfront cannot be enjoyed later. It will have to be spent. So we would like to be careful in managing numbers, handling this in our recurring business.

And what are we going to spend the money on? Capital policy remains unchanged in principle. We're going to make investments for growth and shareholder return. These are the options that will remain. We're going to make a judgment based on that. It's not a single-year decision that we are making on this. So shareholder return ratio may not be 50%. But on a multiyear basis, we would like to level that so that we will settle on somewhere around that level, and depends on investment for growth. So we would like to be agile in making decisions.

[Unknown Executive]

At this point in time, we'd like to take questions on the English channel. Any questions on the English channel?

We will now take questions on the English channel. There seem not. So we will revert back to the Japanese. But time is very limited. And we have many hands up, but perhaps we will not be able to take all the questions. So please understand accordingly. But next, Inajima-san, please.

[Tsuyoshi Inajima]

I hope you can hear me.

[Unknown Executive]

Yes, we can.

[Tsuyoshi Inajima]

I have 2 questions. Honda, Nissan and management integration, what is going to be the impact on Hitachi Astemo? What is your take on this? With the management integration, there could be consolidation reorganization in the parts manufacturers. So what is your view, Mr. Kato?

Regarding DeepSeek, was mentioned earlier, do you have a personal evaluation? Have you used this? Do you have an impression in terms of the performance of DeepSeek?

[Tomomi Kato, executive]

Thank you for your question. Regarding Astemo, in terms of Hitachi's position is such that with the -- with our major shareholders like just Honda, we wanted to improve the corporate value of Hitachi Astemo that there is no change. And IPO is also considered in the future. There is no change. Honda and Nissan are considering this. They -- Hitachi Astemo, they are both important customers. Honda and Nissan are very important.

On the part of Hitachi Astemo, we want to be useful for the management integration and, at the same time, enhancing enterprise value of Hitachi Astemo. This is the request that we are putting forth. We are watching over the situation. And we hope that the company can be useful for the management integration so that our enterprise value can be enhanced.

Regarding second question, regarding DeepSeek, I have not yet used it. I would like to try it out. Sorry, I cannot give you further information.

[Tsuyoshi Inajima]

Regarding DeepSeek, because it's related to a Chinese company, some companies are restricting the use of DeepSeek. Have you also done this in Hitachi? What is Hitachi's view on this?

[Tomomi Kato, executive]

According to information that I've been privy to, I've not heard of any restrictions, but I would like to check, nevertheless.

[Unknown Executive]

Next, [ Himarasi-san ].

[Unknown Analyst]

[ Himarasi ] from [indiscernible]. Can you hear me?

[Unknown Executive]

Yes, we can.

[Unknown Analyst]

I have just one question. Regarding the wage negotiation upcoming in spring, what is your sense?

[Tomomi Kato, executive]

Thank you. Of late, there are increasing expectations for wage increases. We're very much aware of that here in Japan. In the wage negotiation in Shinto, the spring festive, we're going to negotiate. So I cannot give you specifics. But over the medium to long term, by increasing this trend of wage increase, we would like to create a favorable cycle of growth and distribution. And as a premise, we would like to achieve sustainable growth as a business.

[Unknown Executive]

Next, Harada-san, please?

[ハラダ, analyst]

I have 2 questions. First question is fourth quarter plan. Service & Platform and Railway Systems and CI areas, Industrial Products, Nano-Tech SB is improving. So can you give us some evaluation why you are bullish in the fourth quarter for these businesses?

[Tomomi Kato, executive]

Thank you for your question. For the fourth quarter Service & Platform. The storage I mentioned earlier, GlobalLogic, in European area, the clients' investment is decreasing. There is no change in this trend. But in the U.S., there is a recovery taking place. In reality, for the third quarter, GlobalLogic revenues, compared to the second quarter, was improvement of 2 points. So that is the reason why we have presented the numbers for the fourth quarter.

Furthermore, for Railway Systems -- for the Railway Systems, it depends on the orders received. We are looking at this in terms of project by project, in terms of the forecast. So because we have prevailing projects, we have these numbers presented. We are not being particularly bullish, but GTS has now been added. So this is an increment compared to 1 year ago.

For CI on the other hand or High-Tech -- Hitachi High-Tech overall, for the fourth quarter compared to previous year, increase in revenues and earnings is forecast for Nano-Tech, increase in revenues and earnings. Third quarter was also an increase in revenues and earnings. Semiconductor production equipment, foundry as well as memory, investment is returning -- is recovering. That is the reason why we have these numbers.

But for CI overall, the revenues for the fourth quarter. In terms of corporate, we feel it could further increase. That is the reason why we have included this number in the revenues.

[ハラダ, analyst]

Which subsegment is likely to increase?

[Tomomi Kato, executive]

In terms of CI, Building System and ID BU, industrial and digital, we believe that there could be upside.

[ハラダ, analyst]

Second question is regarding GEM. Orders remain strong, and the grid integration is taking place. Compared to the past, your profitability is increasing in this business. Adjusted EBITA, 10% to 12% is the target for GEM. With the larger projects, orders taking place from -- out of the 10% to 12% range, do you think it's going to achieve the upper end? Do you have -- is there a higher probability of achieving the higher end? Please give us more flavor on this. And is it like going to -- with grid automation, will that be necessary to exceed 12%? Are you receiving any inquiries in this area?

[Tomomi Kato, executive]

Now in terms of order backlog, profitability is being monitored as I mentioned earlier. And every year, we are seeing a steadfast increase gradually every year. And I believe this is going to have an impact.

But on the other hand, the orders received this year may not be posted as revenues next year. There is a lead time to consider. There is a lag in terms of timing. But in terms of our trend, it is improving. It's just a matter of timing.

Now the range of 10% to 12%, exceeding this range is what you asked about. In the second quarter earnings call, I mentioned that -- Andreas was also present, and he made the presentation at that time for service business, it must be growing. On our part, the customer base is not covered by all our services. There is room for growth going forward. As I mentioned earlier, bringing to bear the strength of digital. Digital services is what we would like to increase. That's major target for us. And if we are able to achieve that, I believe we can exceed this range. In the next Mid-term Management Plan, which is being considered now, we will give you more information at that time when we make the announcement.

[Unknown Executive]

It's past the time to close. We have not been able to take all the questions. We're very sorry. And those of you who are raising hand right now, our people will get in touch with you later.

So with that, we would like to conclude Hitachi Limited's conference in Q3 FY 2024 earnings. Thank you once again for taking time out of your busy schedules to join us today. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]