Hitachi, Ltd.
Q4 2022 Earnings Call Transcript

Published: 28 Apr 2022

[Unidentified Company Representative:]

It is time. We will now begin the briefing on Hitachi Limited’s financial results for the fiscal year ended March 31, 2022, and 2024 Mid-term Management Plan. Thank you very much for taking time out of your busy schedule to attend this session today. We will begin with an explanation of the financial results for the fiscal year ended March 31, 2022, followed by an explanation of the 2024 Mid-term Management Plan and Q&A session until 6 p.m. We plan to close at 6. The presentation material is available on Hitachi Limited IR site and the News Release site. So please check them accordingly. Let me introduce the three speakers. Keiji Kojima, President and CEO of Hitachi Limited; Yoshihiko Kawamura, Executive Vice President and Executive Officer, CFO; Tomomi Kato, Vice President and Executive Officer and Deputy CFO. First, Mr. Kawamura will give an overview of the financial results. Please wait for a moment while we switch the screens. Mr. Kawamura, over to you.

[Yoshihiko Kawamura:]

Thank you. At this moment, I would like to provide an outline of the consolidated financial results for the year ended March 2022. There are points to be covered in item #1. So I would like to comment on the qualitative aspects of this fiscal year’s financial results, FY 2021 results, FY 2022 forecast and appx. In the appx, for each business unit, what the results were for FY ‘21 and ‘22, the details are attached. So let me proceed in the order of the content. If you could please go to Page 3. This is the qualitative explanation of FY ‘21’s performance. Number 3 is about FY 2022, but please take a look at 1 and 2. The business environment surrounding us was tough as is noted here. Semiconductor issues, soaring material prices, pandemic continues. So the business environment is tough. But we were able to have a record high net income for FY 2021. If you could take a look at the first bullet. So record high net income of ¥583.4 billion was achieved. The prior year saw ¥501.6 billion. So it increased from that number to ¥583.4 billion, which is a record high. And in the 2021 Mid-term Management Plan, we reviewed our cost structure, increased profitability and implemented business portfolio reforms. We were able to create a stable management base. So despite a tough business environment, we were able to achieve this number. Now going to the middle part, Hitachi Energy, the power grid business and Hitachi High-Tech. For these businesses, orders remained firm. And Lumada business is on plan with Mid-term Management Plan. And GlobalLogic is also performing well. 7,500 engineers in Ukraine GlobalLogic has. But according to today’s report, their operations are back to 95% of what it was. And so they are doing quite well. And please take a look at the bullets below. Hitachi Energy’s orders, the order backlog is $14 billion, ¥1.5 trillion. This is the equivalent of 1 year’s revenue. So that’s the size of the backlog for Hitachi Energy. And Hitachi High-Tech, on top of semiconductor manufacturing equipment, and medical solutions, analytical solutions, are doing very well. So Q4 orders were up 16% year-on-year. And as we will talk about Lumada later, it’s also performing robustly, and GlobalLogic is performing well as well. And number three, so what’s going to be our view for FY 2022 given the circumstances? And as I will note in detail later, we have had five sectors that we have disclosed. But starting from 2022, we will consolidate this into three sectors. The business units will not change, but the sectors will be reduced from 5 to 3. So Digital Systems & Services, Green Energy & Mobility, Connective Industries, we will reorganize into these three sectors, plus Hitachi Astemo. And for all the sectors and Astemo, we’re expecting increased revenue and profit for FY 2022, and net profit of another record high of ¥600 billion is what we are expecting. So let me move on to Page 4. So for the latest quarter of Q4 FY ‘21, what’s been the business environment or risk factors. From semiconductor shortage on the horizontal axis, you will find risk factors vertically of the 5 sectors, and the first bullet explains about semiconductor shortage. It’s affecting Hitachi Astemo mainly. So semiconductors, so I nano, II nano semiconductors, these are not what we are talking about. Semiconductors, a generation ago, that’s used in automotive use, logic, analog, discrete semiconductors are constrained in terms of supply. So it’s been difficult to procure these. And second, steel and other material prices are soaring, and you will find specific numbers as to how high they have become and they’re affecting Hitachi Astemo, Hitachi Energy and others. And Russia has started aggression into Ukraine on February 24. But as far as our business operations are concerned, we are less affected. So starting from semiconductor shortage, take a look at the table, Hitachi Astemo highlighted, meaning that there’s significant impact. And Hitachi Astemo uses electrical steel sheet. So it’s affected. In terms of Mobility and Hitachi Astemo, it has had an impact. And to the right, the impact from Ukraine and Russia. GlobalLogic BCP is working very well. So for now, productivity is back to over 90%. Relatively little impact on the business operations there. And take a look at Page 5, please. So you can see that the levels of these four business areas are large. Clockwise, top left, GlobalLogic, please take a look at the numbers. FY ‘21, on a full year basis, AOI ¥24.9 billion, 22.1%. So very high growth was achieved. In terms of margin, look at Y-o-Y columns. So on a full year basis, 147%, ¥7.9 billion increase. It’s seen increase in both revenue and profit. Hitachi Energy, AOI ¥62.4 billion, 5.8%. Y-o-Y, you can see that there’s increase in both revenue and profit. And Hitachi Astemo, as I said, because of constrained supply of semiconductors, the business environment for Astemo has been tough. But AOI ¥58.7 billion on a full year basis, 3.7%. Y-o-Y, you can see increase in revenue and profit. And Railway Systems, Thales’ railway signaling business carve-out is being conducted, and this will start kicking in next year. But for now, AOI was ¥25.6 billion, 4.1%. Y-o-Y, increase in both revenue and profit. So the large parts of the portfolio are performing well. Please take a look at the next page, which is about the Lumada business. On the left-hand side bar chart, in order, so FY 2022 results, ¥1.1 trillion of revenue. And the number in brackets is Hitachi Construction Machinery’s number. In the middle, FY ‘21 results, ¥1.6 trillion. So this is according to the Mid-term Management Plan. And FY 2022, this is to increase to ¥1.92 trillion. As I will say later, Lumada’s disclosure is divided into core and related business. That’s the segmentation that we use. But from FY 2022, we will change this to four segments under Lumada. And the pie charts on the right, IT and Mobility is very large, 53% and 47%. That is the split between Japan and overseas. So it’s almost half and half between Japan and overseas. Now let me report to you the numbers for FY 2021 results, Page 8. These are the highlights of results. Revenue on a year-on-year basis, it was up 18%. Take a look at the graph below. So it’s now increased to ¥10.2 trillion. To its right, adjusted operating income, AOI, 1.5% increase year-on-year, increase in both revenue and profit. Take a look at the bar chart. So as of FY ‘21, ¥738.2 billion. And you will see a series of numbers on the right. Net income ¥583.4 billion, that’s record high. And cash flow from operating activities ¥729.9 billion. Core free cash flow ¥290 million. ROIC 7.7%. And we have determined that we’re going to pay ¥65 per share, an increase of ¥5 as we announced today. Take a look at the next page. Five sectors still because we’re still talking about FY ‘21. We have five sectors, Astemo listed subsidiaries, and you will find the total numbers as well. Top two revenue and AOI. Please take a look at these lines. For the five sectors, revenue on a Y-o-Y basis 109%. AOI, plus ¥127.1 billion. So both increase in profit as well as revenue. The same goes for Astemo as well as for the listed subsidiaries. So at the very bottom, the net income in total is ¥583.4 billion. Next, Page 10, please. So here, fiscal year 2021, revenues on the top and adjusted operating income, AOI, in the bottom half right side. So from fiscal year ‘20 to fiscal ‘21, far left to far right, you can see the track. Revenues. Fiscal year ‘20, ¥8.279 trillion. This is the starting point. The positive factors are, we had the reorganization of the business. So first, acquisition of power grid business. So that was a positive. And Hitachi Astemo, three companies, Honda companies were merged. That was a positive. And acquisition of GlobalLogic Plus, and foreign exchange was also positive. Far right, ¥10,264 billion. Adjusted operating income, far left, fiscal year 2020, ¥495.1 billion. The positive factors are the same as revenues, the acquisition of power grid, Hitachi Astemo, three Honda companies, and acquisition of GlobalLogic, foreign exchange and others. So on the far right, you can see ¥738.2 billion. Page 11, please. This is fiscal year ‘21. Adjusted operating income, to far right, net income. Far left, adjusted operating income, ¥738.2 billion. This is the right side of the previous page. So we start from there. Net gain on reorganization and others, and then we do structural reform. So that cost is negative. And then equity and earnings of affiliates are added, and EBIT in the center is ¥850.9 billion. And then we come down, the tax expenses in 2021. Usually, the effective income tax rate is 26%, but this time, it is 20%. The reason here is listed here, tax benefits from the acquisition of GlobalLogic in North America. So the DTA, deferred tax asset, was recognized and so our tax was that much lower. Far right, ¥583.4 billion net income. Next, Page 12, please. This shows our cash flow status. Cash flow, one feature here is, in the center, interest-bearing debt, fiscal year 2021 and March, ¥3.1 trillion. That is plus ¥729 billion with the acquisition of GlobalLogic. We used debt and so we have that much more here, interest-bearing debt. And D/E ratio, we’ve been repaying. So D/E ratio was 0.7 to 0.8 instantly, but now it is down to 0.58x. Cash flow items, operating cash flow ¥729.9 billion. And we had large-scale M&A. And so our cash flow from investing was negative. And free cash flow ¥318 billion. Core free cash flow ¥290 billion. So this was the report of fiscal year 2021. Next, let me go to fiscal year 2022 forecast. Page 14, please. So here, you can see revenues and adjusted EBITA. Adjusted EBITA is newly indicated here. I will talk about the reasons later. So we always wonder what is the best way to express our earnings. We had the capital -- the reorganization of the subsidiary. So we thought that adjusted EBITA is the best and that is why we introduced this concept. The biggest is the equity affiliated losses and gains. And so we thought that we should include that. And therefore, we are using adjusted EBITA. So revenues, 7% down year-on-year because the listed subsidiaries reorganization will start this year, so that is why it’s negative. The gray -- dark gray and light gray. Dark gray is the three sectors plus Astemo. And light gray is the divestiture of listed subsidiaries. Right side is the same. Dark gray is the three sectors in Astemo and light gray is the listed subsidiaries. So overall, on a consolidated basis, revenues and EBITA are both down. But three sectors in Astemo, left side, revenue ¥8,296 billion to ¥8.74 trillion. So it is up. And adjusted EBITA also up from ¥724.5 billion to ¥776 billion. So up by ¥50 billion. Net income ¥600 billion, and cash flow from operating activities ¥650 billion; core free cash flow ¥210 billion; ROIC 7.2%; and assumed fixed rate ¥120 to $1. It is up to ¥130 today, but we do the sensitivity analysis which is shown here. If yen weakens by ¥1 to against dollar, revenue plus ¥19.5 billion, and adjusted EBITA plus ¥1.5 billion. Page 15, please. Three sectors plus Hitachi Astemo and listed subsidiaries are broken down here. The table, please. Three sectors, Astemo and listed subsidiaries. Revenues, 104%, 113% and 39%. So they all increased. And bottom, net income. Those subsidiaries will be taken out, and so it will be negative, but three sectors in Astemo are both up, increase. Page 16, please. Upper half is revenues and adjusted EBITA on the bottom. FY 2021, on far left to fiscal year ‘22 forecast. So revenues, FY ‘21, ¥10,264 billion. GlobalLogic acquisition and then divestiture of Hitachi Construction Machinery and Hitachi Metals, foreign exchange, ‘22 forecast is ¥9.5 trillion. Adjusted EBITA, fiscal ‘21, ¥855.3 billion, and then GlobalLogic, then divestiture, and then foreign exchange and others. Fiscal ‘22 forecast is ¥820 billion. Page 17, please. Now this is net income trend. Adjusted EBITA, all the way to the right, so fiscal ‘21 and ‘22. Fiscal year 2021, far left, adjusted EBITA ¥855.3 billion. And then acquisition-related amortization, then net gain on business reorganization, structural reform expenses, interest, and then income taxes. This time, in fiscal ‘21, effective income tax rate is 20.1%. And far right, ¥583.4 billion net income. Now fiscal ‘22, we start from ¥820 billion, and then acquisition-related amortization ¥74 billion, and then ¥310 billion net gain on business reorganization, and ¥95 billion structural reform expenses. And then the effective tax rate will become normal, 24.7%. So far right, ¥600 billion net income. So that was a report for fiscal ‘22. From Page 19 onwards, we have the appendix. And so let me be brief. On Page 19, the macroeconomic environment has become tougher in April. That’s what is described in the table on a calendar year basis. IMF has changed its outlook on a global basis from 6.1% of GDP growth to 3.6% downward revision. So U.S., Europe, China, their forecasts are all down. So the global environment is becoming more severe. Take a look at Page 20. This shows the results of orders. So this is the status of the fourth quarter of FY 2021. Well, on a normal basis, on a full year basis, how much increase in orders do we see year-on-year, 10%. But second from the top, Hitachi Energy, as I said, orders are very, very brisk, 178%. And at the bottom, Hitachi High-Tech, 136%. So these two are leading in terms of order intake. And so once the supply of semiconductors is normalized, it will be turned into products and will contribute to the bottom line profit and loss. Take a look at Page 21. This is FY 2021 business segment results. So there are five sectors. Starting from IT, AOI ¥261 billion (sic) , 14.2% (sic) . Y-o-Y, 105%; AOI, negative 13% (sic) . As is on the right-hand side, in the hardware business, there was impact from semiconductor shortage. GlobalLogic PPA amortization is posted, therefore, a negative number. But individual businesses are as described. And Energy, ¥18.1 billion, 1.3%. So on the right-hand side, Y-o-Y, increase in revenue and profit. Hitachi Energy, ¥65 billion, 5.1% (sic) , ¥30.1 billion AOI. So increase in both revenue and income. And related cost at the acquisition of power grids, amortization cost was externalized. At this moment, ¥70.1 billion of related cost is posted. Page 22. This is about Industry, Mobility and Smart Life. At the very top ¥82.2 billion, 9.1% in revenue. Y-o-Y, you can see increase in revenue and profit. Mobility, FY 2021, AOI ¥87.4 billion, 6.1% increase in profit. Smart Life, AOI ¥79.2 billion, 7.7%. And it’s not increasing revenue and profit here for Smart Life. The reasons are described on the right. Image Diagnostics business was sold to Fujifilm and so there was a decline there. Page 23, this shows listed subsidiaries. Hitachi Astemo AOI for FY ‘21, ¥58.7 billion, 3.7%, its increase. And you will find other listed subsidiaries. And let’s take a look at revenue by market on the next page. Clockwise, North America, Europe, ASEAN, India -- or rather China, Japan, ASEAN, India and other areas. Other than Japan, 30% or so growth has been seen. It’s only in Japan where the situation is very tough. Overseas revenue, ¥6.077 trillion, ratio 59%. Next page, just the highlights for Q4 FY ‘21. Take a look at the graphs. On the left-hand side, revenue increased. AOI also saw an increase. And on the far right, net income attributable to Hitachi shareholders ¥132.6 billion. Please take a look at Page 26. This is only for Q4 for five sectors, Astemo and listed subsidiaries, for the five sectors. Please take a look at the top 2 lines, revenue and AOI, both increase in revenue and AOI. Astemo saw an increase in revenue, but because of semiconductor shortage, decrease in profit. Listed subsidiaries, both increase in revenue and AOI. And again, a highlight for Q4 by the business area only for the fourth quarter of FY ‘21. FY ‘21 AOI from IT and onward, ¥97.4 billion, 14.8%; Hitachi Energy, ¥14.8 billion, 5.3%; Building Systems, ¥9 billion, 5.2%; Railway, ¥15.5 billion, 8.5%; High-Tech, ¥22.1 billion, 13.2%; Hitachi Astemo, ¥24.1 billion, 5.4%. From Page 28 and onward, as I mentioned, when I talked about adjusted EBI, we have fine-tuned our disclosure. Page 28, so we changed the business segment. Old is left side and the new segment is on the right side. Overall, it’s not changed. But IT has changed from 2 to 3, IT service, Hitachi Solution, Hitachi Systems is included. So we will have three disclosures. And 29, the profit item will be adjusted EBITA. FY ‘22, the main KPI will be adjusted EBITA from adjusted operating income. Adjusted EBITA, as you see in small letters, is adjusted operating income minus acquisition-related amortization plus equity in earnings or losses of affiliates. And this equity in earnings of affiliates, as I said earlier, we use capital cost and hold the subsidiary’s shares. So it is better to take in the return to accurately reflect the status of the company. Now the conventional disclosure changing to adjusted EBITA, how much impact we will have is shown also here. Before change, FY 2022, so three low rows, 8.1% adjusted EBITA ratio. With the current definition, it will be 8.6%. So it will move upwards slightly. But basically, no change. Now Page 30. Here, Astemo disclosure will change, and the content is shown here. We had two categories

[A - Unidentified Company Representative:]

Kawamura-san, thank you. Now to continue. With respect to 2024 Mid-term Management Plan, Kojima will explain. Kojima-san, over to you.

[Keiji Kojima:]

Yes. This is Kojima speaking. I would like to discuss 2024 Mid-term Management Plan. First, on the goals and policies of the plan. If you could please proceed to Page 2. Our main goal is to create a sustainable society in which each individual can play an active role of protecting the earth, and that is why Hitachi’s Social Innovation Business is about using data and technology for this. In the past Medium-term Business Plan, so we have been promoting structural reforms to create a suitable form for our Social Innovation Business. And we made an announcement about the sale of Hitachi Transport Systems’ stake. And I think this signifies a milestone. And in response to this, the theme of the next 2024 Medium-term Management Plan is a change of mode towards growth. We’re moving to a management focus on top and bottom line growth through Green, Digital and Innovation and cash generation for growth and returns. Please go to Page 3. So needless to say, the most important factor in realizing our vision for Social Innovation Business is people. Hitachi is committed to providing value to its customers and society by mobilizing the strength of 370,000 Hitachi employees to help realize a sustainable society. We’ll enhance our internal human capital and utilize the capabilities and the power of human resources generated here as a driving force to provide healthy and comfortable lifestyles for society and our customers, supported by environmentally friendly, safe, and secure social infrastructure. On Page 4, I would like to talk about the promotion structure for our Social Innovation Business under the plan. Green Energy & Mobility, responsible for Energy and Rail business; and Digital Systems & Services responsible for IT, and it also is responsible as a mission to supply IT to other business areas, so that’s Digital Systems & Services. And Connective Industries responsible for Industrial and Urban businesses. So these three business sectors as well as Hitachi Astemo, which is responsible of our Automotive business. With all these under the structure, we will work together with our customers to solve social issues. The next page shows the key financial numerical targets for each sector and for Astemo. By joining forces in each sector, Hitachi Group, as a whole, will achieve revenue of ¥10 trillion, CAGR of 5% to 7%, adjusted EBITA margin of 12%, and ROIC of 10% in 2024. Now I would like to explain further Hitachi’s growth strategy. First, let me explain our basic thinking behind the business portfolio. So Lumada is at the heart of our growth strategy. During this Mid-term Management Plan period, we will almost double the revenue of our Lumada business and increase its profit to close to 1/3 of Hitachi’s total. Now on the other hand, we will also improve the profitability of IT, OT and product businesses, which are the foundation of our businesses outside of Lumada business, so that all of them can exceed 10% in terms of adjusted EBITA. Well, although I did mention at the beginning that major structural reforms have been completed, but we will continue with our policy to replace businesses that are judged to be unable to reach 10% adjusted EBITA. So let me further talk about Lumada, which is the core of our strategy. So Social Innovation Business is to increase customer value through a cycle that begins with understanding customer issues, followed by designing solutions, implementation, and operation and maintenance. So we run this cycle to enhance value for customers. By adeptly utilizing digital technology and others, we will run this cycle, so that profit can be generated throughout this cycle. That is the thinking behind Lumada business. So this cycle begins with Digital Engineering business, which uses design thinking to guide how issues are solved and continues with the System Integration business to build IoT systems that collect and analyze data, and connected products business, which reduces operating costs through introduction of products connected to the Internet and the remote and automated operation and is monetized by a managed services business, which lowers maintenance costs through predictive maintenance. In the 2024 MTMP, we intend to disclose revenue and profit margins for each of these businesses, so that the situation surrounding Lumada business is made easier to understand. Now I would like to present two typical examples of Lumada project at this moment. The first is an example of innovation in the manufacturing process. I’m talking on Page 9. The Lumada cycle here begins with an analysis of challenges in the manufacturing process with the customer. Next, we will build an IoT solution to collect data from robotics and IT devices. And we call this IoT solution IoT Compass at Hitachi, so that we will be able to identify and eliminate production bottlenecks and improve utilization rates through predictive maintenance. That’s what’s made available through IoT Compass. And so we began these co-creation activities of ours in the automotive industry first and have expanded to a variety of other industries. Now the second example is about innovation in asset management. The customer’s challenge is how to reduce management costs such as cost for inspection and maintenance of facilities that they own over a broad area. You have to send people to perform checks and inspections. So the challenge is how to drive the cost down. And the key to solving this problem is AI image diagnostics, which enables automated inspections of existing and newly installed equipment. This is a use case developed by Hitachi Energy in collaboration with electric utility customers. And in collaboration with other BUs, we are expanding these applications to Hitachi’s important customers in Railroads and Building businesses. Next, I would like to briefly describe the growth strategy for each sector, Page 11. First is the Digital Systems & Services sector, which is responsible for the overall IT business of Hitachi. This sector is at the core of Hitachi’s digital strategy. The largest growth engine will be GlobalLogic in Digital Engineering, which is planned to grow at 20% per year on its own, with the goal of growing at 30% per year through synergies with other sectors and additional bolt-on mergers and acquisitions. In addition, cloud-based managed services is an important growth area for us and we will invest proactively in this area. Next, moving on to Page 12, which is about Green Energy & Mobility sector, which is about Energy and Rail operations. As you know, decarbonization needs of clients are growing, and so there are investments in this as well. Therefore, this is a major tailwind for the sector. But we’ll increase R&D investment, mainly in Hitachi Energy, to develop and offer new products and services that match the market’s decarbonization needs and increase our market share. As explained in the previous case studies, Lumada business opportunities are working with other sectors, especially digital sectors. These opportunities are also increasing and we aim to achieve steady growth in digital as well. On Page 13, the last is Connective Industries sector, which includes Urban business for buildings and homes, Industry business for factories and logistics, and Advanced Technology business for hospitals and laboratories. In terms of IoT utilization, this sector offers the greatest business opportunity with Lumada business planning the strongest growth rate of the three sectors at 29%. The main point in this sector is North America. In North America, we have already acquired Sullair and JR Automation, which have recovered from the headwinds of the pandemic and are growing steadily. We will continue to invest in this region in order to achieve annual growth in excess of 20% in North America. Moving on to Page 14. Here, we’d like to provide a summary of Hitachi’s plans to create value for decarbonization in each sector and in Astemo, creating green value. So the contribution here will be brought about by Hitachi Energy. By providing clean power generated from nonfossil energy sources around the world, through its power grid, Hitachi Energy estimates that it can contribute to a reduction of more than 80 million tons of CO2 emissions by FY 2024. So energy conversion, electrification, energy conservation, in these areas or themes, the three sectors and Astemo together will invest R&D expenditures in these areas, so that we can contribute to CO2 emission reductions of 100 million tons by FY 2024. Next, Page 15, please, on Innovation. We think we are currently at a major technological turning point toward 2050. To keep up with this change and ensure the growth of the next generation, we will strengthen our advanced investments. We assume that technologies such as carbon negative, overcoming cancer, and quantum computing will form a large market beyond 2030. We will invest ¥100 billion in in-house R&D in collaboration with academia around the world and ¥50 billion in external start-ups to build the next pillars of our business. Next, I will talk about generating cash for growth and returns. The fundamental goal is to organically expand core free cash flow. To achieve this, we will expand operating cash flow by improving profitability and balance sheet efficiency, while carefully selecting capital expenditures. About half of the core free cash flow earned will be used for shareholder returns, and the remainder will be used to invest in growth and asset replacement along with asset sales. Today, we announced the dividend increase and share buyback, the acquisition of treasury or the common shares. We will continue to pay stable dividend and repurchase shares at an appropriate timing. Another key theme is EPS growth. Along with EPS, based on net income, we will introduce CFPS, core free cash flow per share as an additional indicator. We will focus on expanding core free cash flow, as I mentioned in the previous slide, and we’ll manage the business so that cash growth will exceed the growth in earnings per share. Next, I will talk about deepening of sustainable management, so Page 20. The most important theme of sustainability management is the decarbonization of Hitachi’s internal operations. We will devote all our efforts to achieving carbon neutrality for Scope 1 and 2 in 2030 and Scope 3 in 2050, which we have already announced. Our goal for 2024 is to reduce CO2 emissions by 50% compared to 2010 level. We will achieve this goal while restraining capital investment by applying decarbonization schemes that are appropriate to the types of electricity consumption at each site. Next, Page 21, please. To achieve global growth, we must improve the efficiency of the management platform using digital technologies, digital platform. A shortcut to this is to deploy and utilize the advanced global operation platform of Hitachi Energy for products and GlobalLogic for IT within the Hitachi Group. To achieve this, we plan to invest around ¥80 billion during the 2024 Mid-term Management Plan to achieve cost reduction of over ¥120 billion. Next, Page 22, please. Now the global risk management is a major challenge in achieving sustainable management, which is the case with all companies these days. Currently, the key company level risks that are assumed include economic environment, supply chain, geopolitics, environment, technology, pandemics, and large-scale natural disasters, and this may emerge at a high probability. So we have strengthened our governance by creating a system to aggregate information on these global risks at the head office and proactively respond to them to minimize the impact and balance the risks and opportunities. Next, Page 23, please. So as I mentioned at the outset, the most important asset for growth is human resource. In particular, it is essential to acquire and develop digital talent. And we plan to increase the number of employees by close to 30,000, both in Japan and overseas, to achieve the growth targets of Lumada business. Another challenge is to improve the engagement of our domestic employees. And we will change to a freer work style that facilitates work-life balance like we have done in other countries. And growth by Digital and Green requires cooperation across organizations and regions, and we will work to improve DE&I to support this. In conclusion, let me summarize what I want to share with you in this Mid-term Management Plan. Page 25, please. The key points of 2024 Mid-term Management Plan, which starts after the structural reforms of the past decade, is a mode change, change of mode to become a company that grows globally through Digital, Green and Innovation. To achieve this, we will focus on deepening the sustainable management, increasing profitability by Lumada, cash generation and shareholder return, and global risk management. This will be our priority focus. Thank you for your kind attention.

[A - Unidentified Company Representative:]

Kojima-san, thank you. At this moment, we would like to move on to your questions and answers. Those of you with questions, please use the hand raise button on the screen of Zoom. Among those of you are raising hand, we will choose a person. And so once we call your name, please unmute, state your name and affiliation before you’re asking questions. Once you no longer wish to ask your questions, please take them back by canceling the hand raise button. The camera of the questioner will not be turned on. First, there will be questions from the press on the Japanese channel, institutional investors, analysts, and then move on to the English channel participants. So first, we would like to take questions from members of the press on the Japanese channel.

[Unidentified Analyst:]

My name is Hiroi from Nikkei. There are two main questions. One is to clarify numbers. Page 17, taking a look at the graph, capital allocation in terms of growth investment. So subtracting shareholder return, ¥1.6 trillion will remain. So is that correct? I would like to clarify. And this growth investment, compared to the previous Mid-term Management Plan, is it an increase or decrease? And overall, you talked about an investment in the environment. How much would that be investment in digital? How much? So for each of the areas of priority, what would be the specific amount of investment in each?

[Unidentified Company Representative:]

Well, thank you for the questions. Kojima will answer. So answer.

[Keiji Kojima:]

So in terms of capital allocation in the diagram, growth event, as the questioner said, ¥1.6 trillion or so is planned. Compared to FY 2021 MTMP, next to that is 3-year total. The last time, I think it was around ¥1.8 trillion that was allocated for growth investment -- investment for growth. So a decrease of ¥0.2 trillion, but then we’re going to substantially increase shareholder return. So that is the split. And about the investment into the environment, our environmental business. In my presentation, I mentioned this, but I think Hitachi Energy is going to be the main player for Green Energy & Mobility. So R&D investment on Page 12, this is investment for growth. ¥210 billion or so of investment is planned there. And another, what page was it? Page 14. For Hitachi Astemo, inclusive of motor inverter, they’re investing much in EV components for electrification, and around ¥300 billion is to be invested. So inclusive of that, ¥500 billion or so will be the amount of R&D investment into the environmental business.

[Tomomi Kato:]

Well, this is Kato speaking. Let me add to what was said. At Page 17, capital allocation. So investment for growth. Well, how much is it? It’s not clearly shown, but in total, in ‘24 MTMP, cash generation ¥2.3 trillion, and the allocation will be considered for that. So it will be smaller than ¥2.3 trillion. On the other hand, in the 2021 MTMP, power grid, GlobalLogic, so ¥1 trillion investment was done in two transactions. So ¥3 trillion, that was the size of investment back in FY ‘21 MTMP. So in terms of the absolute number, there’s going to be a decline.

[Unidentified Analyst:]

So in other words, M&A will be reduced, but return will be increased?

[Tomomi Kato:]

Yes. I think that understanding is correct.

[Unidentified Analyst:]

So my second question. With sector reorganization, Green, Digital, and Industry, you divided into three. And in the Green Energy & Mobility area, Kojima-san is heading as the top person. What is the intention behind that? Why President heading this area? So what are the challenges and the growth prospects for Green Energy & Mobility given that Kojima-san be head?

[Tomomi Kato:]

So in the Green Energy & Mobility area, if you could please take a look at Page 12. On this page, profitability compared to the profitability of other two sectors is lower in Green Energy & Mobility. And that is why Kojima-san is taking responsibility for this sector, so that this can be further boosted. As I said, there are quite a bit of digital opportunities here. So I, myself, is going to take the lead, and we’re going to take initiatives. And until a clear direction is identified, Kojima will be responsible for running this.

[Unidentified Analyst:]

Another question on a follow-up basis. On Page 30 of the results paper, in the segmentation for Lumada, I think Green Energy & Mobility business in Lumada is smaller compared to the other businesses. And that is why you’re going to head this up?

[Keiji Kojima:]

Well, Lumada’s CAGR in terms of the growth rate. Green Energy & Mobility will see the lowest growth rate because Green Energy & Mobility is 16%, the other two sectors 20%. And the reason behind that is this sector, this has large long projects. And so generational change is low. All kinds of solutions that are prepared take time before they’re applied, because of the nature of the projects being large and long tenured. And so if we wait for that, it will be too slow. So on an installed basis -- for the installed base, I think we can bring in digital technologies. There are opportunities there and this can be ramped up more quickly. So that’s the area of focus as I lead this business. That’s the basic thinking behind this.

[Unidentified Company Representative:]

Hyouka-san please unmute yourself.

[Unidentified Analyst:]

This is Hyouka speaking. Thank you for the explanation. I have two questions. First is on the financial closing about the foreign exchange factor impact. Today, it’s ¥130 to the dollar. Yen is weakening. Last fiscal year, revenue and operating income, or this forecast is pushing up numbers, but the net resources and the parts -- raw material cost is going up. So could you share with us your view on the advantage and disadvantage of this?

[Yoshihiko Kawamura:]

Thank you for the question. First, FX. The assumption is in the financial report closing material, Page 14. In dollars, sensitivity is in ¥1, the adjusted EBITA ¥1.5 billion. So if this is ¥10, it’s ¥15 billion. And the positioning of this number. Of course, there’s positives and negatives. Positive factor is dollar-denominated profit increases. Of course, that’s an advantage. But dollar-denominated liability, we have that too. So that increases as well. So on net -- this is the net impact. In the financial performance presentation, Page 4, you can see various risks. Here, we saw the Q4 results. But on the other hand, second point, so the parts, raw material price increase, this is also continuing and the chip shortage is also increasing and continuing. So the positives and negative factors, we have these factors. And now taking all of that into account, we have the sensitivity analysis. That said, the material prices, the unit price is another risk. So this is just focusing on the foreign exchange factor.

[Unidentified Analyst:]

Another question, if I may please. So question. President Kojima talked about the Hitachi Transport divestiture. So now it has been completed, came to one phase. You will continue collaborating with Hitachi Transport, you said. So in which area do you want to continue collaborating?

[Keiji Kojima:]

Thank you for the question. So there were so many listed subsidiaries in the past. And after various events, we had a scenario of all of them growing and graduating from Hitachi, if you will. So we’ve been working with many listed subsidiaries over the years. And so it touches my heart. I have big emotions for this, but Hitachi Construction Machinery and Hitachi Transport Systems, from Lumada perspective, we did so many things together. So going forward, there are many areas we can -- we believe, we are confident we can work together. So we are peers. So we are colleagues and that has not changed. We want to work together in many areas. When it comes to logistics and transport, distribution, factories, manufacturing, and logistics distribution, we had the division between them. But now, in the total supply chain, there are integrations. They’re being integrated, and EC is a typical example from order placement to manufacturing to delivery. It’s a total business. So how can we, using Lumada, create customers’ benefit? So the industrial-related equipments, robots in factories, and logistics distribution, warehouse, they have to be connected smoothly. So we plan to do that together. And that is our plan with Hitachi Transport. So we will have good collaborative relationship to serve our customers. Did that answer your questions?

[Unidentified Analyst:]

Yes.

[Unidentified Company Representative:]

Let’s move on to the next person with questions. Please unmute and start your questions.

[Unidentified Analyst:]

My first question is as follows, and that’s about financial targets that I would like to ask about. So key KPI, adjusted EBITA. Mr. Kawamura, the CFO, talked about this. And he said that Hitachi has had to think a lot as to what key indicator to use to present the business results. And so why did you choose adjusted EBITA. By increasing or decreasing the adjusted EBITA, what will change? For example, operating cash flow, that’s an easy indicator to show how much increase or decrease has been seen on ROIC as well. These other indicators are quite easy to follow and see what’s happening. But adoption of adjusted EBITA indicates that you wanted to show the bottom line in how it’s changing? And so what was the thinking behind this?

[Yoshihiko Kawamura:]

Well, equity in earnings of affiliates, this is not cash that we enjoy -- or accounting-wise, that is the case. As Kojima-san said, as we consolidated or deconsolidated our listed subsidiaries, we’re going to still hold some equity in Hitachi Transport or Hitachi Construction Machinery. Well, it’s equity in earnings of affiliates, it’s not going to hit our profit and loss directly, but then there’s capital cost to hold share, and that needs to be recognized. That is our thinking. So in the future, things could change. For example, if dividend payment is to be made, of course, it will be considered as cash. But in view of the capital allocation, what is the indicator we should use and we decided on adjusted EBITA.

[Unidentified Analyst:]

So the earning power, cash-generating power, that was what you wanted to show? Or are you not concerned about that?

[Yoshihiko Kawamura:]

Of course, it’s relevant to that ultimately. Capital and management of resources is very important. And so in view of how much we’re allocating, how much return are we getting out of that? Can we recognize that cash? So in view of cash-generating capability, we have adopted this indicator, adjusted EBITA.

[Unidentified Analyst:]

Another question. This is a question for Kojima-san. So increase in revenue in the next 3 years is going to be high. In the real world, digitization takes time. So you have to be patient, you said before. Well, we have to be patient in terms of capabilities as well as for the customers. Customers have to be prepared. It takes time. And you also have to consider about society. But the fact that you’re going to grow digital business substantially, does that mean that you are able to increase digital resources, and with COVID-19, society has changed, and has society changed enough, so that you are now able to put your foot on the gas rather than the brake?

[Keiji Kojima:]

So yes, as you mentioned, if I may answer, DX digitization has become a major trend today. So it’s time to put our foot on gas, if you will, time to accelerate. And as I said, when I talked about energy, in the real world, when you have to build something physical, it takes time. But on the other hand, as I said, if there’s an installed base, if there are installations, then digitization can be applied quickly. So there are two things that we need. One is to look at existing assets, or in other words, installed base. We have a very large installed base, which is important for us. And the other is having sufficient digital resources. If we have two, then for the first time, we will be successful. Well, DX is already a major trend. There is a robust demand for it. And so with the two combined, we will be able to start the business right away. So ABB Power Grid acquisition, this was a very big impact. We were able to get very large business and customer footprint, and acquisition of GlobalLogic. These two acquisitions had a huge meaning as we prepared ourselves to put our foot on gas, if you will, to accelerate this effort.

[Unidentified Analyst:]

MRR and others, these indicators will perhaps be more important in the next 3 years?

[Keiji Kojima:]

I said that Lumada will be segmented into four categories. And the last one is managed services, not in 3 years’ time. The recurring business model will be adopted increasingly in the next few years, not even 3 years. So we are going to divide into four categories. And the last one, the fourth one is managed services. In this area, in particular, what kind of recurring business will we see increase? Well, as we get used to disclosing this, we would like to show that going forward. But for the time being, I think managed services is indeed one area where recurring business model is going to be quite applicable.

[Unidentified Company Representative:]

Next question, please.

[Unidentified Analyst:]

So as was mentioned in the previous question. So you said that the divestiture process has come to one milestone and you will pursue large-scale reform going forward. So once again, I’d like to ask you a large-scale reform. How do you understand and plan to pursue this growth? And one more question. I’m sorry, it’s about your competitor, but Toshiba is now exploring their direction going forward. They may need to separate the nuclear business. Is there an option or worthy of consideration of you buying their business?

[Unidentified Company Representative:]

Thank you for the question. So Kojima would like to answer.

[Keiji Kojima:]

First, about our reform. I mentioned that we will still continue being aggressive. So with subsidiaries, the individual growth model is now being drawn up. And so we have come to one milestone. Next, in Hitachi, we have large-scale joint ventures. So we have to think how these joint ventures can grow further. This has to be discussed so that the joint ventures can be a winner in the world. So that is the next stage of reform. That is another high priority matter for us, because this will directly lead to our growth. So in the 2024 medium-term plan, we will think of this important theme seriously. And your second question is just a hypothesis, and it’s a bit difficult to answer. I rarely have that idea. It’s barely an option.

[Unidentified Company Representative:]

I see another questioner. So please unmute and start your questions.

[Unidentified Analyst:]

I would like to ask about Lumada business portfolio. Through subsidiary deconsolidation, you have streamlined the business portfolio. And now the growth of Lumada business is going to determine the fate of Hitachi going forward, I think. So as Hitachi, you want to grow Lumada. And what is the rationale behind that? So digital solutions, if it’s an IT company -- if it’s a global IT company, every global IT company would be in this area. But what are the strengths that Hitachi can rely on to increase orders in this area? Who are your peers or competitors? And vis-à-vis, your competitors, what are your strengths or advantages? So what is the rationale that you think that you can grow Lumada’s business?

[Unidentified Company Representative:]

Well, thank you for the questions. Kojima will answer the questions.

[Keiji Kojima:]

In my presentation on MTMP, if you could please turn to Page 8 of the material that I used. So I talked about gaining profitability from Lumada’s business. Well, I think Hitachi is unique. Well, customers’ CapEx, OpEx is optimized and supported. That’s the cycle that we have. And we can enter from the engineering part or from the product’s perspective. So these four quadrants, if you will. In all four quadrants, we’re able to generate profit, and that is what is unique about Hitachi. And that is why we believe that we can achieve very high growth in this area. That’s the biggest point. So there are companies based in digital engineering, and there are those specializing or concentrated in connected products. There are different layers. But we cover all four. Whichever is the entry point or whichever the area or quadrant, we can create business. That is our strength. IT, OT products, we have all three. We’ve always said that that’s our strength. And it’s really saying the same thing in a different way. But in all these four quadrants, four areas, we are able to generate business. And this will be the source of growth, and we believe we can rely on this as we look to drive growth.

[Unidentified Analyst:]

So do you know what the global market shares are? Do you have any clear numbers that you can share with us? That’s another question.

[Keiji Kojima:]

Well, customer account-based business, that’s what this is. For each customer, of course, what the share of wallet is, we can look at. But for the four combined, what is the market? Who has how much market share? I don’t think there’s anyone who’s analyzed that as far as I know.

[Unidentified Analyst:]

Your strength is four quadrants, right.

[Unidentified Company Representative:]

I see many hands, but we have spent quite some time. So we want to now move to the Japanese institutional investors and analysts. I hope you could understand. So next question from the Japanese channel institutional investors and analysts. So next question, please.

[Unidentified Analyst:]

I have two questions. First, as you develop your MTMP, EBITA is the new KPI, and there are changes. And I understand these changes. So when you developed the MTMP, were you -- are there any other companies that you benchmarked? And which were the focus points when you benchmarked and took -- developed your MTMP?

[Unidentified Company Representative:]

Kojima would like to answer.

[Keiji Kojima:]

So this was also touched upon in the earlier question. Lumada has four quadrants and we will operate this cycle. I don’t think there are other companies that are doing this, but there are strong players -- competitive players in each quadrant. So in that sense, from a digital point of view, Accenture and Cognizant, TCS, TATA. So including their performance, we benchmarked ourselves to them. Now product oriented -- product OT players is one Schneider, for example, and Emerson. They are active in demonstrating good performance, including digital. So we benchmark ourselves against them. Overall, the closest company, the IT is different, but Siemens is the closest player. Siemens, we learn a lot from them. So those are the companies we benchmark as we developed our MTMP.

[Unidentified Analyst:]

My second question is enhancement of the business portfolio. So consistent, continuous business portfolio. Adjusted EBITA 10% or above is your goal. Now in the financial target, Hitachi Astemo, your 3-year target is 9%. Is this 9% satisfactory for you? Because there is a gap between this and the overall trend. So I want you to elaborate. And related to that point, President Kojima, you’ve been President for 1 year, and I understand this division, so the product OT platform business. In 2021 MTMP, EBITA was only a little over 7%. So why only 7%? What is lacking? Or maybe not the best positioning? Maybe there are different factors, different reasons. But for 7% to grow to 10%, what are the necessary components or factors? How do you analyze the current status?

[Keiji Kojima:]

Thank you very much for the question. So regarding the portfolio, in the 2024 MTMP, there are areas that fall short of 10%, you’re right. So beyond 2024 MTMP, we want them to grow and achieve 10%. And we are confident that, that will be the case is the key point, key judgment factor. So the business that we believe will exceed 10% and continue growing, we’ll keep. And the others, we will divest or reconsolidate. So that is the guideline or policy. We will continuously review the portfolio, that is what we plan to do in 2024 MTMP. And if there are businesses that fall short of the criteria threshold, we may take action. So we hope we will have good communication with the capital market so that we will not give them any surprise. The other point about the platform, IT OT products, profit margin is not sufficient. And so the question was how we plan to grow this. In 2021 MTMP, what I reflect on most, the biggest lesson I learned was the risk management; poor risk management, that is my honest view. Pandemic or this unforeseeable risks do emerge in the world. And the Russian invasion in Ukraine is another event. So we need to weather these challenges. Otherwise, we cannot achieve 10%. Because if we don’t have that capability, 10% drops the 7%. So this risk resiliency is the key to building a business that can achieve double-digit, 10%. So I talked about risk management in my presentation, too. But this is what we want to focus in 2024 MTMP.

[Unidentified Analyst:]

One follow-up question. So continuous portfolio review, you said. So in the next 3 years, I’m not giving you a moratorium. So you will make a judgment every year? Am I correct that you will do that?

[Keiji Kojima:]

If we spend too much time, the situation may change dramatically. So we will not wait for 3 years. No. By no means, we will do that.

[Unidentified Company Representative:]

Let’s continue. So the next questioner. Please unmute and start your questions.

[Unidentified Analyst:]

Well, thank you. This is the questioner speaking. I have two questions that I would like to ask. And this is a follow-up to an earlier question that was partially answered, but I would like to ask the following. So what I would like to ask is MTMP, the plans, and the aspirations. Hitachi, so far, often times ended up not meeting the plans or aspirations. I think there were often times that was the case for Hitachi. So this time, with the new MTMP, how are you going to go about convincing those who are listening to this? And you’re going to continue with business transformation? Well, Hitachi Metal, Hitachi Transport System, Hitachi Construction Machinery, you’re still working on these listed subsidiaries. So for Hitachi Metal, procedure is being delayed with rising geopolitical risks. I have a concern about this transaction. Will this deal go through successfully as was planned initially? So if you could please comment. If there’s any comment that you can share? So that’s my first question. And the second question is as follows. The new MTMP contains ambitious numerical targets. And as you look to achieve the goals and targets, how would management be different this time, so that you can say that you will be sure to meet these goals compared to the past MTMPs? You talked about risk management in the past. But on top of that, the basic level of commitment for achieving these targets, if there’s any change to that, please comment.

[Keiji Kojima:]

Thank you very much for your question. So to address your first point, in your first question. So is this a question that’s specific about Hitachi Metals? Is my understanding correct? Well, if so, as you know, how to obtain clearance in terms of antitrust law, and the accounting division is mainly working on that. From what I understand, China has become the greatest issue. But the possibility of getting the antitrust clearance is high. But then trying to disclose information that’s convincing enough for people to be persuaded, it’s hard to come up with such information, so I can’t come up with a good answer for your question. And I can just tell you to believe what we’re saying. But when there are major problems that are occurring, we try to communicate with the relevant parties as soon as possible. And so when we are silent, it means that things are moving quite successfully. Well, that’s the only kind of explanation that I can offer at this moment. I hope you will understand. If there’s a clear problem that is occurring that could potentially impact the outcome of the deal, then we would like to try to communicate that to the relevant parties and the market as soon as possible. And about your second question with respect to our commitment. Well, the main KPIs individually that we want to achieve, how are they evolving? What progress is being made? Of course, internally, we’re being thorough in monitoring and following up on these numbers so that these can be met. We’ll have a structure in place for that. And with the capital market participants, we would like to have close communication as to the progress of this. As I mentioned, in terms of risk management, the situation in the world has become very difficult, and it also differs from one region to another. So given those circumstances, there is no other way, but to have close communication with the relevant parties, including the market.

[Tomomi Kato:]

Well, to what Kojima-san, let me add a few comments. And on a more practical note, as I said at the outset, the market conditions have become very volatile and unstable. The circumstances are such that it’s very difficult to have clear judgment. And we have to secure the bottom line as per Kojima-san’s instructions. There are two things. There are still low profitability businesses that remain. For example, revenue profit ratio at around 5%, 6%. Such low profitability businesses must be addressed and worked upon in the next 2 to 3 years. That’s one area of focus. And in large-scale businesses with large assets, there are those who are not performing as well as we expect. And we have a number of working groups to improve them, to improve the bottom line. So as backstop, we are taking a number of initiatives to address these areas.

[Unidentified Company Representative:]

So we’ll move on to the next question.

[Unidentified Analyst:]

I have 3 questions. First, so double-digit growth, high growth rate. From an outsider point of view, still GlobalLogic, Energy, I think, is promising from an external environment. But other than that, in the next 3 years, any other businesses where you can expect double-digit growth? That’s my first question. Second question is about digital talents. You will increase your digital talents. So this is IT service domain or including M&A, number of talents? So 50% increase, 1.5x? If you just increase the headcount, the cost will increase. So how do you plan to increase them? Third question. Fiscal year 2022 guidance, so ¥123 billion company corporate eliminations. ¥700 billion is the adjusted operating income. And so it seems like you’re talking about more like ¥820 billion. So if you could say this ¥523 billion, if this is a buffer, it makes us feel better. So could you elaborate?

[Keiji Kojima:]

Thank you so much for the questions. So the ones that we can expect double-digit growth are the ones that are supported by the market. So as you rightly mentioned, those businesses that you mentioned, plus in Connective Industries, the orders are strong, and high-tech related will grow strongly, we think. And JR Automation, these robotics were automation-related. Since the pandemic, this is enjoying a tailwind. So we think this will also grow strongly. Next, IT side, hybrid cloud is a growth sector, growth domain and we can expect double-digit growth. So how this can be linked with our growth, including organic measures is a big -- inorganic measures is our big theme going forward. And next is the talents. So GlobalLogic business area, this engineering area has big growth potentiality and growth rate. But as you know, the number of people equals sales, that’s the nature of this business. And so to grow GlobalLogic at this plan means we need 20,000 more people. Now GlobalLogic, the most interesting, intriguing part, capability, is recruiting, I think. In all regions of the world, they have great compelling recruiting network and acquiring digital talents. For example, with the Russian invasion, we need to hire people in different areas, too, different regions. And so we are deploying to other regions to acquire the digital talent. So they are a recruiting machine, if you will. So we will thoroughly utilize this capability. And when I explained my MTMP, GlobalLogic and Hitachi Energy, I mentioned we will use their global operation infrastructure. This digital talent recruiting network is what I’m talking about with GlobalLogic. So using this capability, we will hire people. So that is the answer to your second question. Third question will be answered by Kawamura-san.

[Yoshihiko Kawamura:]

Yes. So whether it’s a buffer or not. Let me explain the breakdown. So President Kojima talked in MTMP, out global risk management. We are taking good care of it. There are very difficult assumptions here. But on gross basis, gross means before taking various measures, how we look at the global risks. So a little less than ¥200 billion risk is our estimate. One is Ukraine-Russia impact, sales will decline. And with inflation, various procurement will be impacted. And again, with inflation, the wage is going up around the world. And with the geopolitical issue, we may have to impair impairment. So total a little less than ¥200 billion risks, and we will take measures to address this. And I want to explain this on another occasion. We will take various measures. So a little less than ¥200 billion risks. About half, around ¥70 billion to ¥80 billion, are in global risk. So this may be the buffer. But this kind of risk is now being included in the operating and nonoperating basis.

[Unidentified Analyst:]

Additional point to the second question. So GlobalLogic, the DevOps, and agile development, maybe there are no other good examples in Japan. So GlobalLogic operations, Hitachi as an IT service player, you can be a unique player, I think. So of the 30,000, how many in Japan, if you could give us the number, I’d appreciate it?

[Keiji Kojima:]

Roughly speaking, 20,000 overseas and 10,000 Japan. In Japan, Hitachi is doing digital engineering in this IT sector. We have subsidiaries that do digital engineering. And Hitachi were as a subcontractor. But they have engineering expertise, capability. So like you mentioned, GlobalLogic has agile, DevOps. We want to sell this externally -- sell externally. If we can make this transformation, we can transform from just an internal work to a big weapon, big ammunition for us. We think this is a big opportunity. So as you rightly mentioned, I agree with you. GlobalLogic Japan was established. This will be used as the core and aggregate the engineering in Japan and transform radically. This is a big opportunity that we are thinking of.

[Unidentified Company Representative:]

Moving on to the next person. Please unmute and state your questions.

[Unidentified Analyst:]

I would also like to ask two questions. Question number one. Page 8 of Mr. Kojima’s presentation material. So Lumada’s revenue outlook. There are four categories

[Keiji Kojima:]

Thank you for the questions. At this moment, in FY 2024, 16% of adjusted EBITA overall, I said. Now as of FY 2021, now that we have precisely equated what our adjusted EBITA is, but it’s roughly 14% or so. So we would like to increase adjusted EBITA by 2 percentage points or so in the next 3 years, and that’s the action that we’re going to pursue. And connected products, as you rightly pointed out, this area is going to see substantial growth. And the resources necessary for that is that Hitachi has always had large product teams and OT teams as well surrounding product teams. And the newly acquired businesses also have large resources. So I don’t think we’ll have any problem with respect to resource allocation.

[Unidentified Analyst:]

And I’m sorry for revisiting the question that was brought up earlier about risk management, the thinking behind risk management. Just to summarize what you said earlier, you’re going to have close communication, you’re going to dispose of unprofitable business and by so doing, drive profitability. In a nutshell, that’s what you said. But from a different perspective, from the external perspective, if you can explain as to how risk management is being improved, so that it becomes convincing enough? So for example, day-to-day operation, the quality of execution is improving compared to 3 years ago, or digital technology can be used for risk management, so that it can be visualized. If you could explain in different ways to supplement what you said earlier, please?

[Yoshihiko Kawamura:]

Okay. This is Kawamura speaking. Allow me to answer that. For the past 3 years, during the FY ‘21 MTMP period, we purchased large companies, large deals, and the risk of investment is rising. Rather than risk of hard operations and others, I think investment risk is rising. So we are strengthening risk management for investment. There are two things. One is as we decide on the investment from various perspectives, we scrutinize the investment deal, not just in terms of financial return, but PMI, how much of that can be achieved post acquisition? What are the synergies that can potentially be generated? We are looking at all these details as we determine on a deal. And once we can judge that our capital allocation cost can be recovered, we will go ahead and invest. And even after investment, we conduct very close monitoring of the business acquired. And of course, we have the plan initially. And so what’s the gap with the initial plan? If there is a gap, what measures are we going to take? And are the synergies being generated? We are monitoring. So with these large deals, you may think that we’re taking on a lot of risk, but we are actually applying very stringent risk control. So the balance sheet is not becoming too large. And basically, we believe that we have adequate risk control. And transaction on a day-to-day basis, large transactions that exceed a certain threshold is not just decided by the line manager. Well, on top of the investment, we are also taking a look at large transactions in the business. So how they’re being hedged, whether it’s paid, what is the status of the customer. For these day-to-day transactions, we also make decisions as they are escalated to us. And we are applying very strict risk management to both the investment as well as transactions.

[Keiji Kojima:]

This is Kojima speaking. Let me add to what was said. We have executive management meeting. We take up a number of issues there. And we have a risk management dedicated meeting as part of the executive meeting and actually Kawamura-san is responsible for the risk management part of the meeting. And so there also potential risks are identified and measures are taken to eliminate them. So as management, that’s what we are doing. We have to collect large volume of data, and that is why we’re using digital technologies to do so. And we’re looking to increase efficiencies by applying digital approaches.

[Unidentified Company Representative:]

We see more hands, but be mindful of time. We want to go to the English channel. And then if we have more time left, we will come back to the Japanese channel. Any questions from the English channel? Please use the raise hand button. We do not see any questions on the English channel, so we will come back to the Japanese channel again. So next question, please.

[Unidentified Analyst:]

I have 3 questions, 2 on Lumada first. First is Lumada’s strength. You showed us the 4 quadrants as the strength of Lumada. President Kojima, Page 11, Page 13 in your slide, digital systems services, managed services, connected industry, connected product will increase. I think there are many aspects. So why, this digital systems managed service is growing and why it’s preferred by your customers? So that is my first question. So connected product. Why connected product will grow? I would like to understand better.

[Keiji Kojima:]

As you rightly mentioned, so depending on sector, which area is easy to grow or appropriate? It depends on the character of the sector. In digital systems and services, big opportunity is in cloud, hybrid cloud. So GlobalLogic is on board, and we now have a solid foundation. So Hitachi Vantara does storage service and cloud-type services. GlobalLogic’s digital can be connected and meet customers’ needs and receive inquiries. So after engineering, the needs to link to cloud service is one request, one inquiry we received from the customers. So this is a new market opportunity. Synergy sales, we want to grow this part. So as I mentioned earlier, we will consider M&A to increase our resources. So that is the plan behind this part. In Energy & Mobility and Connective Industries, product, OT, it’s product OT. So connected products, we have big opportunity. So connected to Internet, and remote operation is increasing. So this will naturally grow. We can expect this part to grow like I mentioned here. And so automation and the pandemic was a trigger. So remote operation is a big means that is growing. So we expect these products to grow.

[Unidentified Analyst:]

So Connective Industries, connected products will grow, you said. And growth in North America, I think, will be the case. But are other growth areas, could you elaborate?

[Keiji Kojima:]

Same story here. So connected products, this is used in factories or in warehouses. So it’s related to automation. So due to pandemic and the workstyle changes, the remote operation and automation is a big flow, big trend. And so these products will grow. So that is the industry-related area, especially for the factories and logistics distribution. So that is why we think this will grow.

[Unidentified Analyst:]

My second question on Lumada is on Page 9 and 10. You said horizontal deployment. So to leverage on your conglomerate advantage, this horizontal deployment is the key. So in Lumada, in order to deploy horizontally, what are the ingenuity or creativity that you are trying to use or your strength that others don’t have?

[Keiji Kojima:]

Horizontal deployment, so scaling. So first, from automobile OEM, we start, but same needs in all areas and Hitachi has so many accounts, so we can deploy scale to those areas. That is the best way to scale Lumada business, we think. And when we do that, two key points. One is to have a solid CRM, global CRM. So we do this with various customers and find out which customers have similar needs and can be applied. So we must understand the customers to be able to do that. So global CRM is established and use this global CRM to accelerate our scaling. So that’s one key. The other key is the global marketing and sales team. The sales team is crucial. So IoT Compass and those commonly used measures need to be developed. So this is the second key. So we need the control tower, if you will, in the U.S. Hitachi Digital will serve that purpose. Mr. Taniguchi, who I trust very deeply, will take the lead. He is the lead CEO of this company. And using this company, we will scale, horizontally deploy this business. So Hitachi Digital will be in Silicon Valley and Taniguchi-san is assigned there. So we will use that as a base to deploy and scale this business.

[Unidentified Analyst:]

Third question, Page 17, cash generation and capital allocation. So you said you will continue your reorganization. So asset sales, when you sell your asset, in this diagram, it says it’s not free cash flow. So this part will not come to shareholder return. It will go to the growth investment? Or you will think of the capital allocation for those cases?

[Keiji Kojima:]

So the way we think about the shareholder return, core free cash flow, half of core free cash flow will be allocated to shareholder return. Now asset sales, asset divestiture, the cash from asset sales will not come to shareholders, or it will not be used for share buyback? Well, share buyback can be considered as one form of investment. And we think the timing is right. We may use it. We may do it. So we will have the flexibility to do that. The basic guideline and this basic policy is what’s shown on this slide.

[Unidentified Company Representative:]

We are fast approaching the closing time. So we would like to go to the last person for questions. So I’m calling the name. Please unmute and state your questions.

[Unidentified Analyst:]

There’s just one question that I would like to ask. As Kawamura-san explained, Russia’s invasion into Ukraine is not causing a large impact on your business. The impact is limited. But going forward, what’s your outlook? So evacuation of your local employees to outside of Ukraine. Even with prolonged war, impact on performance and operations, does it continue to be limited? What’s your outlook, if you can share that with us?

[Unidentified Company Representative:]

Well, thank you for the question. Kojima will answer.

[Keiji Kojima:]

This conflict is likely to be prolonged. That’s our take. So from that perspective, the offices and business spaces that we have in Ukraine may need to be relocated to outside of Ukraine. And when that happens, will that have a large impact on business? There are two aspects. One is one-off expenses, expenses of relocation and travel. And another expenditure is for setting up new offices and bases. And if we relocate the offices and bases, we will have to start recruiting new people in the new area and HR costs will have to be spent for that, which will have an impact. In total, will these have major impact? We do not think so at this moment. So growth rate and gross margin, will there be a major hit to these numbers? In terms of operating margin, I think 22% to 23%. It could be pushed down by 1% to 2%, but that’s the order of the impact that we’re looking at, at this moment.

[Unidentified Company Representative:]

It’s now time to close. So with that, we would like to conclude the earnings announcement session. So FY 2021, adjusted EBITA 12%, for Lumada -- so 12%, just said. And June 13, Hitachi Investor Day, 2022, we are going to organize that online and the details of the event will be informed and communicated to you later. Once again, thank you very much for your participation despite your busy schedules. There were lots that we presented, but I hope you will continue to look forward to our business and its growth. Thank you.