Hitachi, Ltd. (HTHIY) Q3 2023 Earnings Call Transcript

Hitachi, Ltd. (OTCPK:HTHIY) Q3 2023 Earnings Conference Call February 2, 2023 2:30 AM ET

Company Representatives

Yoshihiko Kawamura – Executive Vice President, Executive Officer, CFO

Tomomi Kato – Vice President, Executive Officer, Deputy CFO;

Masao Yoshikawa – Executive General Manager of the Investor Relations Division

Conference Call Participants

Kota Ezawa – Citigroup Global Markets Japan

Junya Ayada – JPMorgan

Tomomi Kato

The time has come to start the Hitachi Limited briefing on the consolidated financial results for the third quarter ended December 31, 2022. Thank you very much for attending this briefing despite your busy schedules. We have the information available in the Hitachi website for your reference.

We will now introduce the speakers for today: Yoshihiko Kawamura, Executive Vice President and Executive Officer, CFO; Tomomi Kato, Vice President and Executive Officer, Deputy CFO;

Masao Yoshikawa, Executive General Manager of the Investor Relations Division.

The CFO Kawamura will be providing the outline explanation of the results. We will be switching the screen. Kawamura, please start.

Yoshihiko Kawamura

Thank you very much for attending this briefing despite your busy schedule. I would now like to present the consolidated financial results for the third quarter for our company.

Please refer to page one. This is the content. There are four areas to cover, points – key points. Second, is the cumulated results to the third quarter results and fiscal year 2022 focus and appendix. Here we have presented the third quarter results for your reference. Please proceed to page three.

These are the key messages for the third quarter, one to four. The first point is the numbers for a third quarter and second is orders and the third area is the portfolio reforms. And the fourth part is the forecast regarding the third quarter and one.

Revenues was ¥8,108.7 billion, which is a 10% increase year-on-year. Adjusted EBITDA was ¥624.2 billion, and net income was ¥292.2 million. On a YoY basis there was a decline. It is mentioned below. And that because of the shift to the risk-sharing corporate pension plan and Hitachi Energy’s goodwill impairment and that is accounting for the second composition of this negative number.

Second, orders remained very firm. Digital and Green Energy & Mobility have remained very strong. For Digital Systems & Services for the third quarter, well this was ¥651.3 billion year-on-year, 22% increase. For Green Energy & Mobility between Quebec and New York, AC transmission electricity was gained. We have been able to be awarded this contract. And for Railway’s we have won major project for Ontario Line. It’s about ¥1 trillion overall. This is being received, this order.

As a result, Hitachi Energy for Q3 orders was ¥554.4 billion and we have the backlog of ¥2.5 trillion. So in terms of completion, its ¥1 trillion, so it has increased by ¥2.5 trillion. Railway Systems was ¥666.5 billion, YoY 135% and backlog is ¥3.9 trillion, so orders have remained very firm.

Third, is the portfolio reforms. As we have been reporting from the past, we are making the steadfast progress in this area. Hitachi Energy, ABB had 20% stake, but in December we have taken back this 20%. Therefore it is now a wholly owned subsidiary. For Hitachi Metals in the beginning of January we have completed the selling of shares. Proceeds have been obtained. For Tender – and Hitachi Transport System is also proceeding well as well.

Fourth point is the focus for fiscal year 2022. Revenues is ¥10,550.0 billion, 1% increase on previous forecast. Adjusted EBITA, ¥877.0 billion, no change to the previous forecast, while core free cash flow, ¥270.0 billion increased by ¥20.0 billion from the previous forecast. For net income we will make upward derivation. We have reported ¥600 billion, but recorded high of ¥630 billion has been recorded.

Now page four. Let’s now look at the Macro Economic Outlook. This is from the Tokai Research Institute and also from the World Bank. IMF has also provided focus from 2023 from the second half, the outlook looks positive. But this is based on the World Bank forecast, so therefore it is more conservative, 1.7% global.

As you can see on the right hand side, PMI, Purchasing Managers Index should be referred to, regarding the outline going forward as presented. For major countries it is currently below 50. 50 is the medium, so this global outlook is 1.7%. Japan is 1.0%, the U.S. is 0.5%, Europe is 0% and therefore out of this Japan is relatively high. China is plus 4.3%. Overall for fiscal year 2022, as well as for 2023 economic outlook cannot be too optimistic, but based on this understanding we will be managing our company.

Positive factors on left hand side. Below there are various measures implemented, especially economic measures has been turned here. Forexample, the resilience program in Japan as well as in the United States infrastructure investment and economic measures are presented, such as like CHIPS and Science Act, and Inflation Reduction Act.

China is also promoting infrastructure construction as well. There are negative factors on the right hand side as well as shown in the middle. For fiscal 2023 interest rates are likely to rise further. There is likely limit, but interest rates will go up. This will have impact. Therefore, we have to watch very carefully about the negative factors going forward.

Please refer to page 5. Here I would like to talk about the Semiconductor and the material impact on our business. As a mentioned in the caption above, semiconductor shortage is affecting mainly Hitachi Astemo, especially in the automobile area. So this is not high end, rather logic, analog and discrete semiconductors.

Supply and demand remains tight and Astemo has been impacted. For material prices, this is having impact on Hitachi Energy as well, as well as Hitachi Astemo. And steel sheet, electrical steel sheets remains very high.

To the right, in terms of energy, electricity price is rising in Japan and elsewhere. But this is having an impact on our factory operations for Ukraine and Russia. In the beginning, we were very concerned, but so far the impact for our company has remained minor. It is [inaudible] that will have a significant impact on our performance.

Page six, please. Here I would like to talk about the Q3 results. Left hand side should be reflected starting with the Digital Systems & Services and global uptick is now included, and connective industries, and Astemo are shown here as well. As you can see in the bottom, the orders are shown here as well. For Digital Systems ¥578.1 billion, adjusted EBITDA is ¥70.8 billion and ratio is at 12.3%. So increase in revenues as well as EBITDA.

Below is GlobalLogic. This is on a sentiment basis, ¥54.8 billion and to the right an increase of revenues by 46% and adjusted EBITDA is 3.7 and remaining very strong. Green Energy & Mobility should be referred to as ¥652.1 billion and ¥46.1 billion, 7.1% increase in revenues, as well as profit to Hitachi Energy, ¥388.4 billion and ¥32.8 billion increase in revenues as well as EBITDA.

Connective Industries, ¥742.5 billion in terms of revenues and ¥78.2 billion adjusted EBITDA. 10.5% increase in revenues as well as profit. Below, Hitachi Astemo ¥493.1 billion and its 5.7% lower than other sectors. Last year was very difficult, so this year Astemo is increased in revenues as well as EBITDA. Third quarters have been strong for all the sectors.

Page seven, these are the Orders Results for the third quarter. YoY should be referred to from Digital Systems & Service, 22% increase in third quarter. Hitachi Energy increased by 15%, Railway Systems increased by 135% and Building System increased by 9%. So you can see that orders are increasing. Hitachi High-Tech is minus 28%. Last year there was a significant order, so therefore it’s a reactionary decline.

Page eight, Lumada business is presented here, left hand side graph should be referred to. Left hand side is the three quarters of fiscal year 2021. To the right is the three quarters for the fiscal year 2022 and to the right is for the whole year, fiscal year 2021 and to the right of that is fiscal year 2022 forecast.

As you can see, the right, if we compare the two fiscal years, so the – ’21 was ¥1.393 trillion and this year ¥1.9 trillion increase by 36%. And in terms of adjusted EBITDA is 13%. Numbers have not changed. At the very top, the light red is GlobalLogic. Here Digital engineering is the business and therefore it is showing steadfast growth.

Now, please look at the right had side, composition by segments are presented. The right hand side is the fiscal year 2022 forecast and if you look at the breakdown of ¥1.9 trillion, Digital Systems is ¥810 billion. Connective industries is ¥800 billion accounting for more than half. The Green Energy & Mobility was ¥280 billion, so that is the breakdown. And the results of the breakdown between overseas and Japan, 50% each are presented.

Now please look at the lower side. We are taking measures for the next growth, especially for GlobalLogic in Romania, as well as Uruguay DX companies have been required. Delivery personnel and customers have increased. Therefore GlobalLogics service capability has been announced. It is being sold to all these acquisitions. So those are the highlights for the third quarter.

Please now refer to page nine. Q1 to Q3 fiscal 2022 results are presented. Referring to page 10, this is on a cumulative basis, Q1 to Q3. Left had side is revenues and in the middle adjusted EBITDA increase in revenues as well as earnings, left hand side is revenues. The dark gray is the three sectors and Astemo. The light gray is for listed subsidiaries. Please refer to these numbers.

Right hand side, overseas revenues is ¥5.235 trillion YoY, 70% Lumada business, ¥1.361 billion plus 51% and the net income was ¥292.2 billion, decrease by ¥158.5 billion. This is because of the pension shift and Hitachi Energy impairment are reflected here. EBITDA, ¥881.6 billion. The cash flow from operating activities is ¥380 billion, increase by ¥122.9 billion. This is because of a tax effect as well as operating profit, which are reflected in the slide. Our KPI is core free cash flow, ¥74.9 billion, year-on-year increased by ¥123.4 billion. You can see that all the items, the performance has been very strong.

Page 11, these are the results of the three sectors. Three sectors on the left hand side, Astemo, and the Listed Subsidiaries are shown. The three sectors are submitted here, increasing revenues as well as profits and ¥5.408 trillion for EBITDA, as well for net income we have seen an increase. And for Astemo last year was very difficult. Therefore looking at the slump shot, it looks like revenue increase and profit increased, but as you can see at the very bottom net income is minus ¥26.4 billion because of the FX impairment, as well as pension shift. That is the reason why it is negative.

For the Listed Subsidiaries on the other hand, the two companies are different. For Hitachi Construction Machinery, a reduction in revenues as well as earnings. We have sold all the shares. Hitachi Metals are both increase in revenues as well as earnings. On a consolidated basis, revenues was total is ¥8,108.7 billion and the net income was ¥292.2 billion.

Now from next slide onward let’s look at the business segment. Please refer to page 12. At the very top there is Digital Systems & Services, so ¥1,678.0 billion or ¥188.3 billion EBITDA. Ratio is 11.2%. Front Business YoY EBITDA is minus ¥5 billion. This is because of the transportation as well as power have led to a reduction in investment on the part of the customers, so this has had an impact. For some projects the cost have increased, therefore we have a slight negative, but we will recover this going forward

Next is Green Energy & Mobility, ¥1,723.7 trillion or 5.3% as well as ¥91.9 billion in terms of EBITDA. Hitachi Energy ¥1,018.4 billion, adjusted EBITDA was ¥69.7 billion, 6.8%. On a full year basis it looks different, but this is for the three quarters. Railway System at the bottom part are ¥509.7 billion, ¥28.4 billion, 5.6%.

Page 13, Connective Industries are shown here. Revenues was ¥2,170.3 billion and adjusted EBITDA was ¥227.4 billion, 10.5%. Water & Environment report is the second area, Smart Life & Ecofriendly Systems. This is home appliances minus 5% in terms of revenues and minus ¥8.5 billion for adjusted EBITDA. Because of end of year, revenues were lower than expected and in Shanghai lockdown has prolonged the impact.

Page 14 should now be referred to. I’d like to talk about the Astemo as well as Construction Machinery as well as Metals. Last year was very difficult, therefore if you look at December YoY 20% increase in revenues and adjusted EBITDA is ¥2.5 billion, so it has increased in both revenues and profit.

And next page, page 15 this shows the FX quarter through the third quarter. You will see the fiscal ’21 on the left hand side and the fiscal ’22 and at the top is revenue and at the bottom in adjusted EBITDA.

I’d like to talk about adjusted EBITDA. On the left hand side the ¥575.2 billion for fiscal ’21, ¥10.7 billion because of the GlobalLogic acquisition and then the divestiture of Hitachi Construction Machinery minus a ¥28.5 billion, and then foreign exchange positive ¥ 64.5 billion and then others. So on the right hand side, fiscal ’22 three quarters. The total is ¥624.2 billion.

Next page, page 16 shows the financial position and cash flow and in the middle gray, the hedged area is as of the end of December 2022. Please look at the total. Assets which is at the top, ¥13,281 billion and down the table the cash conversion cycle, it came down to 56.7 days, nearly 20 days reduction.

In order to have data, more cash and be prepared for the conversion and the trading and the total Hitachi Limited Stock Holder Security Ratio 34.1%, a 2.8 percentage point EBITDA, D/E ratio. They improved up to 0.59 times and they are at the bottom of the page. Cash flows and the operating cash flow ¥380 billion increased by ¥122.9 billion and the investment on the cash flow negative ¥145.2 billion. On the free cash flow the ¥234.8 billion, which is on the year-on-year basis increase of ¥1 trillion and the core free cash flow ¥74.9 billion.

Please go to the next page. This is the revenue by market. The second from North America. In the circle you see the percentage which is the increase, 32% increase and Europe 21% increase. China, this is different form the other years, 5% increase. So this means that China is not expanding, so it is a very difficult situation and below that Japan is also struggling, and the Asean and India 18% increase in other areas, 6% increase. As you see at the bottom, the overseas revenue of ¥5,235.6 billion, 65% overseas ratio. 4% increase year-on-year. That is the increase of the overseas ratio.

So far I talked about the numbers up to the third quarter. Now I’d like to talk about the full year forecast for the fiscal 2022. Please go to page 19. This is the highlight of the forecast.

Left hand side revenues and in the middle you see adjusted EBITDA. So you see increase both in revenue and the EBITDA. On the right hand side you see some notes, Lumada business revenues, ¥1.9 trillion, and then net income ¥630 billion. Positive impact is because of the construction machinery, the sale of shares, of these group company and well it comes up to ¥630 billion. EBITDA, ¥1,390 billion, and the cash flow, the operating cash flow of ¥110 billion, quarterly cash flow ¥270 billion and the ROIC is 7.4% and the Assumed foreign exchange rate and also the sensitivity. So the adjusted EBITDA, the impact is positive ¥0.2 billion and also ¥4 billion the impact for the revenue when yen changes and it weakens against the dollar.

Next page shows the forecast by three sectors, Astemo and Listed Subsidiaries. As you see at the top, the three sectors increase the revenue and the profit and Astemo likewise. But just like the third quarter, the bottom line the profitability is negative ¥8 billion. That’s on how we have recovered. But this is the current status and the Listed Subsidiaries, and both revenue and profitability decreased. And on the right hand side, the revenue total and the ¥10,550 billion adjusted EBITDA ¥877 billion and then, so these are the numbers we are going to announce, and their net income as well.

And the next page onward, you will see forecast by business segment. So at the top Digital Systems & Services on a full year basis, ¥2,290 billion, ¥300 billion for adjusted EBITDA, so increasing revenue and profit.

Green Energy & Mobility, ¥2,440 trillion, ¥559 billion, 6.5%. Once again increasing revenue and the EBITDA. Hitachi Energy, which is the third from the bottom, ¥1,396 billion or 7.5% or ¥105.2 billion. So they have both increased in the revenue and the profit. And the Railway Systems ¥726.9 billion, ¥45.8 billion, so both increased in the revenue and profit. In the Connective Industries on the next page, ¥2.84 trillion, ¥303 billion for revenue and EBITDA, 10.7%.

So the second from the top, Smart Life & Ecofriendly Systems. As you see on YoY basis, adjusted EBITDA is down by ¥4 billion. This is a quite difficult business right now. And then High-Technology, which is the Hitachi High-Tech Measurement and Analysis Systems. Here the business is quite solid to making contribution.

Page 23 please. Astemo is shown here. Astemo adjusted EBITDA ¥92 billion. So here in the first quarter, we still have the semiconductor supply issue. So we have to see, wait and see how it will help them. But the 4.9%, ¥92 billion, that is what we expect and therefore Hitachi Astemo.

Next page, which is the trajectory of the revenue and adjusted EBITDA. Therefore the fiscal ’22 total, and if you could take a look at adjusted EBITDA it was ¥855.3 billion in 2021. We have some positive impact on the acquisition of our GlobalLogic, but they are negative because of the divestiture of the companies and therefore in exchange and others have several items. And on the right hand side, well and the forecast for ’22 is 877. And the adjusted EBITDA on this page, page 25. So how is it reflected on the net income. At the top is 2021 and at the bottom is 2022. I’d like to use the bottom part.

So the 877 which was shown on the previous page, appears here once again on the left hand side. And then we have acquisition related amortization, ¥83 billion negative and then 297 positive for the net gain on business reorganization. And then the structure reform impairment and the 100, the income taxes and the others. So the pension and the issue is also included, tax is deducted, and then it comes down to ¥630 billion.

So as you see, for 2022 listed and divestiture of listed companies contributed to the performance of the company. Please go to page 26. So this is the consolidated statement of profit analysis and you see cumulative quarter one, quarter three over fiscal 2022 and you see other details. So the — starting from the adjusted operating income and going down, we have the equity in earnings and the affiliates acquisition related amortization and then we have adjusted EBITDA and then we get the EBIT, and then after that we have interest, interested taxes, non-controlling interest and the net income is ¥630 billion as you see on the right hand side.

And then we have appendix, and here in the appendix part we only have the page 28 for example. These are the numbers only for the third quarter. Page 29, once again these are the numbers only for the third quarter. Page 30, 31, so all these pages cover the numbers in the third quarter alone, so the – sorry, I rushed through with the materials, but so much for my presentation. Thank you very much.

Question-and-Answer Session

Operator

Thank you very much. We would now like to proceed to the Q&A period. If you wish to ask a question, please use the raise hand button on the screen, we will call your name. And when your name is called, please unmute, state your name and affiliation and ask your question. If you no longer need to ask the question, please release the raise hand button.

We will not show the video of the person asking the question today. We will take questions from the press on the Japanese channel and then institutional investors and analysts and then go to the English channel. So this is the procedure we would like to follow today. So we would like to take questions from the press on the Japanese channel first. Please indicate if you wish to speak by the raise hand button.

[Inaudible] please unmute and ask your question.

Unidentified Analyst

I have two questions. The first question is the evaluation of the results, and for next fiscal year and onward what is the outlook of the performance, especially for next fiscal year and onward, what are the prevailing risks that you invested in geopolitical as well as foreign exchange and industry. Please elaborate further.

Question number two is regarding customer. It is still negative in terms of the net income. EBITDA is positive in profit, but why is it negative in terms of net income. Why is this the case and what are the measures you intend to implement?

A – Yoshihiko Kawamura

Thank you for your question. For your first question regarding the evaluation of the results of the third quarter, the management environment has been very difficult. There was a pandemic and there was Ukraine issue, so the environment is very difficult. But in the third quarter we have been able to record the revenues according to our forecast and we have been able to also make an upward revision as well. So we are quite happy with this result internally.

For the next fiscal year, as I already mentioned, the macroeconomic environment may not recovered in the second half. Therefore, we believe that the environment will remain difficult for the fiscal year. Foreign exchange 130 and is likely to remain at this level. The difference in the interest rate, as well as the prices between Japan and the United States will have an impact as well. So there’s still a weakened and strong dollar trend is remaining. But they will look into the prices.

The inflation rate that in Japan is lower compared to the United States. The difference in the foreign exchange as well as the prices difference will lead to adjustment going forward. I don’t think it is going to, again it is going to deteriorate, depreciate further, that is not the case according to our outlook.

In terms of foreign exchange, foreign exchange remains ¥130, so there is no significant impact. For interest rate we are concerned. In terms of our borrowings, our debt has been controlled and therefore interest rate increase by 1%, 2%, we can absorb that. But when interest rate goes up, it will have the impact on the asset value. Therefore, this will have an impact on the real economy. That is a concern, because it could have a negative impact on the economy. So we are watching the interest rate environment very carefully.

Against this backdrop for next year, we hope that profit can be generated similar to this year. Astemo has issues regarding semiconductors. So for next year you know it is likely that this situation will continue for about six months. But there is demand for automobiles and the resources to the earlier gratification demand that is very strong. So if this recovers, we believe that the similar levels can be achieved for next fiscal year according to our budget.

Regarding Astemo net income level, there is the impairment, as well as a shift in the pension system. If you need details, Kato can provide information, but this is a one-off impact. Therefore, it doesn’t say if management measures will be required for Astemo. This will fall off next year.

Regarding the third quarter evaluation, let me get further information for the third quarter. Compared to what we had expected, the impact of foreign exchange is very significant about the 100 billion upside was obtained, and there’s about 85 billion was foreign exchange, and organic with the three sectors and for Astemo there were upsides recorded as well.

In terms of profit level, 12 billion upside was recorded and 9 billion was foreign exchange. 3 billion is for the three sectors. You know there were upside for the three sectors, especially for the Green Energy & Mobility, Hitachi Energy, as well as Railway Systems have had the strong orders apart from positive impact of foreign exchange.

For fiscal 2023, as congress has already mentioned, foreign exchange inflation must be taken into consideration, and regarding the pandemic, there could be further increase, the resources of geopolitical risk that are concerns that we have identified.

For Astemo on the other hand, on page 20, the outlook for the year has been presented. As you can see here, the adjusted EBITDA, you can see that the profit is provided. But although it is not written here, non-operating, about 60 billion is expected. This is impairment as well as the corporate pension plan shift. These are all one-off measures. It will not be prolonged in terms of the net income before tax is positive and therefore for the next fiscal year we have high expectations; that is all.

Unidentified Analyst

Thank you.

Operator

Thank you very much. Next, [Inaudible] please unmute and ask your question, please.

Q – Unidentified Analyst

Thank you very much. Can you hear me? I like to ask Mr. Kawamura, and this may not be related to financial results, but they are domestically in Japan. The prices are rising in Japan in wages and salary. What is your view about the compensation and the salary schemes on the – of the company. Can I have your comment?

Yoshihiko Kawamura

Yes, so thank you very much for the question. Yes, wage increase and also increase of the composition and annual income of the employees. This has become the national agenda in Japan, and Hitachi is also looking at this in a sincere manners. So how much the salary increase is possible? Will spring enable negotiation we will be starting and that will lead to the conclusion. But we like to take as much response as possible to the question. What we are thinking is that the wage increase, a compensation increase, it shall be sustainable. If it is done only one or two times, it is not sustainable.

Unidentified Analyst

So basically what we should do?

Yoshihiko Kawamura

Well as we learned from the economic theory, you know the labor productivity has been raised by increasing the wages. So we have to improve the labor productivity, and that should be reflected on the higher salary, so that shall be the basic structure, so that it’s going to be the sustainable program on the – amid the long term basis.

Q – Unidentified Analyst

How much base up is possible?

A – Yoshihiko Kawamura

As you know, it is up to the labor negotiation to decide, but we’d like to take as much on the actions as possible to this question. Thank you very much for your question.

Q – Unidentified Analyst

Thank you very much.

Operator

Thank you very much. [Inaudible] please unmute and ask your question.

Q – Unidentified Analyst

I hope you can hear me. Now, this time in terms of revenues, as well as the net income bottom line attributable to the parent company have been revised. What are the factors that has led to this revision? Compared to October, you know what has changed. Can you please elaborate?

A – Yoshihiko Kawamura

Details will be presented by Kato some later, but in terms of macroeconomic point of view, up to the third quarter there have been impairment measures implemented, and therefore compared to the beginning of the fiscal year risk factors was not necessary for the fourth quarter. That was a management decision made.

Secondly, the revenue remained stronger than expected, so therefore we have decided to make the upward revision at this time. So the macroeconomic factors as well as the revenue generating capabilities have increased. That is the reason why we have done the revision. Kato will provide more detailed information on this matter.

First of all in terms of revenues, on page 21, by segment information is provided for the fiscal year. Out of this, Green Energy & Mobility, we have made upward revision, ¥130 billion. Hitachi Energy and railway systems mainly.

The foreign exchange impact up to the third quarter, as well as order has been very strong. The revenues are increasing. Therefore we have decided to make this adjustment. But semiconductor prices are increasing, as well as personnel costs is also increasing, therefore in terms of profit it is being suppressed to a certain level. And for the adjusted EBITDA it has remained flat from the last time.

Regarding net income, we have made upward revision. Please refer to page 25. The adjusted EBITDA through the waterfall chart is presented. Around the middle there – the 10 billion in terms of global risk. Last time we had estimated this to be 40 billion impairment and unexpected events and to the end of fiscal year. But after ending the third quarter, there is only the fourth quarter remaining, and we don’t think that there are significant risks. Therefore we have reduced the global business risk to 10 billion. So that is the reason why for the net income it is 630 billion. Thank you.

Operator

Next, [inaudible] please. Please unmute and ask your question.

Unidentified Analyst

Thank you very much. This is [inaudible], thank you very much. Can you hear me?

Yoshihiko Kawamura

Yes.

Q – Unidentified Analyst

Hitachi Energy and you mentioned that the supply/demand is very brisk. And in the previous meeting and once again you mentioned that the business is brisk for statute energy, so the environment, business environment surrounding the company and also about the product and services of the company, could you please explain more about the briskness of the business?

And also the energy is security and also energy price is shooting up and that’s negative to your cost. But your energy related businesses, how does it affect the demand for your business in the energy sector?

Yoshihiko Kawamura

Yes, thank you very much. This is the answer. The reason why the business over at Hitachi Energy is so brisk is because microscopic environment is one factor. In Europe there was a Ukraine situation, so well the transition to Green is slowing down mainly in Germany. But basically the passing towards the Green Energy is very strong.

So what’s going to happen, for example in Germany, the wind, the wind power, they operated in the northern part of Germany mainly, and there is no industrial area in the northern part of Germany. And then they have [inaudible] in the middle and Munich over the area. Surrounding Munich is the industrial area. So the wind power and we have technology to bring the power generated in the northern part of the country down to the southern part of Germany.

And also looking at the Middle Eastern countries, the petroleum or the natural gas if the price changes. So they want to change them into the power. So from Saudi Arabia to Egypt, yeah the cross on the [inaudible] across the national border. So these are also related to these situations in the oil producing countries and the conservations for the Green Energy. So GE, Siemens are the competitors and we are trying to get business in this competitive environment. That’s microscopic energy environment.

And the technology wise, Lumada is something that we can use. So the India and the bigger station, the transformation station we can put Lumada in order to optimize the distribution of the power, that’s what we are doing in this business. So in the field of software, new technology is making progress. So related to Lumada, these are what we are doing. So microscopic environment and also when it comes to technology, Lumada is contributing a lot to this business.

And as for the energy, the national security point of view, the private company alone is not able to make the big trend. So we have to work together with the governments and we are having the discussions with the regulators or the government offices. So the natural gas is expensive, but we have to burn the fossil fuel to generate energy. However, in the long term perspective we have to incorporate and embrace some more on the Green Energy. So the high voltage and the transmission is where we are good at and also the energy that can be based upon all natural resource and they can also be utilized.

And also I was looking at the government policy, the reassumption of the nuclear power plant is what the government is talking about and we also have the capability there. If the nuclear power plant is to be resumed, that is another area we can contribute. So not just the fosse fuels, but the transmission lines, renewable energy and in some cases probably the nuclear power generation maybe part of the efforts and with all these activities, we like to make contribution. That is all. Thank you very much.

Operator

Thank you very much. Next we will take questions from the institutional investors as well as analysts on the Japanese line. Those of you with question, please indicate by using the raise hand button.

[Inaudible] please unmute and ask your question.

Unidentified Analyst

Thank you very much for this opportunity today. I have three questions. First question is regarding Astemo. In the third quarter, if we look at the revenue it is a Q-on-Q plan, but what are the – but still you made improvement, why was this the case. You said that non-operating basis 60 billion for the year was mentioned for the – up to the third quarters or for the full year. For the non-operating area, what is the relevant risk as well as the impairment alleviating the cost because of the impairment. Please elaborate further.

Yoshihiko Kawamura

In terms of Astemo, revenue is not growing, but profit has increased. This is because of the past business in the automobile in the first quarter, second quarter and third quarter movement are seen. In the third quarter and fourth quarter the price adjustment are often made for the third quarter. Although it is not really related to revenues. There have been priced adjustments made. And against this backdrop, profit has been impacted. Towards the fourth quarter, we are still negotiating this area.

So if this is generated, it will be incremental. We believe that the risk, remaining risk can be absorbed. The price adjustment is having an impact on the profit, even in the absence of increased revenue.

And for the second point, I’d like to ask Kato sir to address in detail. Regarding non-operating expenses, the 60 billion was mentioned for the year. Although it is not detailed numbers, I would like to give you the scale information in terms of impairment and as well as pension shift was one-third each in terms of impact. As far as I mentioned earlier, these are one-off factors.

Unidentified Analyst

For the third quarter, Astemo and profitability is such that it looks inflated, is that case or is it a result of negotiation? Has the price been set and therefore we assume this to be an appropriate level or what about continuity?

Yoshihiko Kawamura

Every year this is occurring toward the end of fiscal year and therefore we can expect the same for this fiscal year as well. It’s not just product volume and revenues and profit. This is a commercial practice that is continuing, therefore the numbers are likely – therefore it has been factored in.

Unidentified Analyst

Thank you. Question number two. It was mentioned in the first questions, next year macro-economic conditions may not recover in the second half. Why is this the case? What is your take on this? Furthermore, if it is not going to return in terms of the environment, what are business domains that is concerning for you?

Yoshihiko Kawamura

This is regarding the economy, therefore there could be different views, but we are looking at the environment with a conservative perspective, there are three or four factors to consider. First of all pandemic seems to have run its course as you can see in China, but the variance are emerging. So we don’t know when the next round of pandemic will occur.

Secondly, the interest rate is also to be considered in our company. 1% increase in interest rate does not mean a negative impact on funding, but there is the impact on the assets having an impact on the environment. But in terms of foreign exchange, according to – compared to the real economy, just this is not met yet, therefore the interest rate is concerning going forward.

Another factor is geopolitical, as well as U.S. and China, as well as Taiwan. And in terms of Ukraine, this is as if the exit is clear. Therefore, compared to before the pandemic and before Ukraine, the comfortable environment that we had prior to these are unlikely. Therefore we believe that the macroeconomic environment will continue to be very difficult. That is the basis of our management operations.

Unidentified Analyst

Core free cash flow has increased ¥20 billion. For your three years, capital allocation plan, based on that core free cash flow, is there an upside or has it remained the same in that context? Related topic, is about half is to be returned to the shareholders. ¥200 billion of the buyback was made. What is the schedule in terms of buyback as well as shareholder return enhancement for the second year and third year, upon the point of view of core and free cash flow. Is there an upside? Please elaborate further.

Yoshihiko Kawamura

In the current environment, core free cash flow remains the same as when we announced our midterm management plan. So we are not going to change as a result of upside. As I have already been emphasizing, fiscal 2023, we cannot be overly optimistic, therefore we must achieve the results for the midterm management plan in a steadfast manner, therefore we are not going to change at this time.

Therefore in terms of shareholder return, the half to be returned is a policy that remains unchanged. Cash flow situation will have an impact, because how cash flow is generated is subject to volatility. But so the dividend, as well as share buyback policy in terms of shareholder return policy will remain unchanged. Thank you.

Operator

Next, Mr. Ezawa please unmute.

Kota Ezawa

Thank you very much. I have two questions. It may sound a little abstract. But in the previous, the second quarter and this time third quarter the business is quite solid, performance is solid. But you cover very extensive business areas and in many areas the business is improving. At the same time, there is no major – the difficulties or the – it is noteworthy that you do not have any segment which is the assembly blocks so to speak. So the – and the business is going quite smoothly, and I know that you’re making a lot of efforts to run it smoothly. And are there any changes to the approaches taken by management team?

Mr. Kawamura if there is anything that you can talk about. For example, the business is expanding in a stable manner. Is it just happened that way that they turned out to be stable or the management team made a different commitment? Do you have a higher sense about the urgency, new attitude or something new happening in the management team to stabilize the performance. Could you please explain?

Yoshihiko Kawamura

Thank you very much for your question. So the question related to underlying concept of the management. So in the – under the current President basically a approach to the business has not been changed. So what we are trying to do is that we approved the businesses under Power Grid and Railways and GlobalLogic and high-tech, Hitachi High-Tech. These four businesses, these are the engines and when they are stable, then that stabilizes the entire Hitachi business.

So these are the four, the major assets. And we, the management team, executive team are paying close attention, so that we can closely monitor the performance of these four engines, and if something goes wrong, then we’d like to provide the correction, so that’s the attitude.

And as for the low profitability business, unprofitable business, in terms of OP they are 5% contribution that is the threshold and we looking into that. Even if it is a cash generating business, if the ratio is below 5%, then we are trying to combine that business with others or divestiture possibly, so that we can minimize the unprofitable businesses. So it is a low key step-by-step activities, but this kind of activity is also supporting the profitability.

And the management, particularly now Mr. Kojima is the President, and what is noteworthy is we are focusing a lot of attention on the cash flow. So of course the P&L is important, but ultimately cash is the king. So how to generate the king and the cash and how to secure that and how to share that with the investors. That is quite an important agenda for us, and that is the notion of shared by all the management executives and all the management team. So the forecast management of the four important portfolio and also the management action is to focus more on the cash flow. It is a commitment, so these are the features of our management approach.

Kota Ezawa

If I may ask another question. So as you mentioned, Energy in the railways business, the macroscopic environment. Looking at the environment in North America and Europe, the growth rate is not so significant, and it is a difficult business in these markets. But yeah, the center of your activities is in the North America and Europe and currently or next year the macro, the environment may slow down in the Europe and the U.S, but do you think this business is sustainable and will be viable. Yes, a power grid…

Yoshihiko Kawamura

Power grid and Railway business, yes, these are not commodity business. We have to go the market and sell and buy with the customers. We are not the type of business that is affected by the market condition. It is infrastructure and both also in North America and Europe we are their regular.

We are the security funding to make this project long standing on the long term basis. So regardless of the changes of the market and the sentiment, these are quite the resistant to the changes in the market.

Particularly in the U.S. as I mentioned earlier, well the currently under Biden administration, they made it clear that they invest heavily in the establishment of the infrastructure. So the power grid, as well as the Railway businesses will benefit from that. So our intention is to get to business there.

And in case of Europe, well there is the Ukraine situation. It’s quite difficult to foresee what’s going to happen, but still as the power grid business and yeah, we were able to capture it and the railway business is running quite smoothly. It is an infrastructure business. So, it is not the – it is quite resistant to the cyclicality of the market. So we believe that we can continue this business in fiscal 2023. Thank you very much.

Operator

Thank you very much. [Inaudible] please unmute and ask your question.

Unidentified Analyst

Thank you. Question, I have three questions. I think for equipment, I think you can make profit. Well, generally speaking I think you should have more profit in Digital System. Digital System & Services, a ¥20 billion increase in profit is our focus. GlobalLogic is about ¥20 billion. So if you exclude that, that means that you are not making money, profit, but the environment has been very good. So what is the background to this. What is the outlook for the next fiscal year, that’s my first question.

Second, for power grid. The ¥2.2 trillion at the beginning of the year and has now increased from ¥1.2 trillion to ¥1.4 trillion. But in terms of the profit there’s been hardly any change. It could be the impact of foreign exchange, but please elaborate on the difference over the change.

Third is the Railway Systems revenues are going up. It has increased, but in terms of profit, operating profit, 368 is now 336, it is a reduction. Adjusted EBITDA is almost flat. Why is this the case? The business environment should be good. Compared to the top line favorable, it seems that there is no upside in terms of profit. Please elaborate further on this point.

Yoshihiko Kawamura

Answer, for the individual numbers, Kato will make a follow-up. But regarding IT, first I would like to address your question. As I mentioned at the onset, for some customers there have been costs increases and suppression of investment. Generally speaking, IT investment is D/X investments are increasing, but there is customer circumstances to consider. That is the reason why growth is limited to where we are today.

Regarding power grid, revenues are increasing and what about profits, that was your question. The revenues ¥88 billion, ¥90 billion, it has increased on a net basis, but the profit has not been generated, because of the semiconductor issues, as well as employee bonus. Because we have all these other incentives to be paid, so there have been cost increase, reducing the profit.

Regarding Railways System, the profit recognition timing is different depending on projects. This is having an impact. Kato will provide further detailed information.

Tomomi Kato

Thank you for your question. Please refer to page 21. I think that is what you are referring to. It is true that – and compared to Hitachi Energy, revenues increasing by 30%, profit has increased by ¥40 billion approximately. So your question is regarding this.

The recent impact of foreign exchange, revenues look inflated or very significantly increasing. From the beginning of the fiscal year, we have mentioned that price increase is being reflected. So because the material cost is increased and only 30% of the country can reflect that on price, but now it is increased to 70% and it can be reflected in price increase and we are trying to negotiate further.

There are customers that are more willing to accept this. But generally seeking, the raw material cost is not fully reflected in the price, in our price. But what I would like to emphasize, that the revenues are increasing and profit capabilities on a similar basis is improving by 1.4.

For Railway System, foreign exchange impact has meant the revenues have increased, but depending on projects there are ups and downs, it’s mixed. Therefore 1.7 point on profit, the ability improvement has been achieved compared to [inaudible]. Compared to the last forecast, for Hitachi Energy, for our associate cost as well, it has increased in profit. For Railway the System has increased as well. But the sector rule, profitability improvement is under way. Hitachi Energy and affiliated cost has been accounted for. Therefore Hitachi Energy Railway Systems have not changed.

Yoshihiko sir will also provide more information regarding energy. Semiconductor has had an impact, therefore high profit grid automation. Product mix improvement is forthcoming. Going forward, the scanner system monitoring, as well as process control, enterprises management software. This profit is high compared to hardware driven business. So as we increase the ratio of these businesses, for the backlog installed basis, we will be able to visualize a significant portion of this, which means that the profitability can be improved significantly going forward.

Regarding the Railway Systems in the long term, 6% plus close to more than 6.5% margin is – compared to our peers, European peers, we are becoming closer, and in fact we are exceeding them in this fiscal year. It is our long term business. Based on the installed base, we have to establish that fully and signaling business can be improved, further increase by improving the mix. We will be able to generate more profit. That is how we would like to generate more profits going forward,

Unidentified Analyst

Regarding these three businesses, what about the margin profit? You think margin profit, what is your view on that for the next fiscal year?

Yoshihiko Kawamura

This is this is Kawamura speaking, answer. Regarding margin profit, that we are always considering this. For the three businesses we don’t have the numbers with us to give you details. So the IR department will be able to give further information at a later date.

Unidentified Analyst

Thank you.

Yoshihiko Kawamura

Regarding three, it’s not just limited to three businesses, but for Hitachi overall, in terms of gross margin, it’s not margin profit, but in terms of gross margin for the three quarters compared to the previous year there is hardly any change, but we want to increase this further. But in the recent past there have been cost increases having an impact, and that is the reason why we have not been able to increase the gross margin. But we want to reflect this in our prices further and profit mix will be improved as centering on the Lumada business. We want to increase the ratio of Lumada by certainly where we believe that gross margins can be improved. Thank you.

Operator

Mr. Ayada, please unmute and ask you question, please.

Junya Ayada

This is Ayada. I have three questions. Number one Green Energy and the profitability there. I would like to know more about this point. Earlier, the Railway Systems of profitability shall be raised, and they tell us the business in the U.K. seems to take more time than you expected, that’s what I heard. So acquisition – the timing of the acquisition, the feasibility, whether it can be realized. Could you please give us your comment?

And when it comes to Green Energy, the strategic team on the Green Energy, Mr. Kawamura is no longer the member. So could you please explain the significance of that?

Yoshihiko Kawamura

Yes, thank you very much. As [inaudible] the Railway Systems. In the corporate side we were involved and we are paying close eye on what is happening there in the original contract. And sometime in March come out, we’ll be realized and it was supposed to be consolidated. But as you mentioned, in the UK because of the competition low in the UK and also EU, the French and the competition is low, it has taken more to satisfy these requirements. Particularly in France, Phase 1 is already completed and the refiling in the second phase and to reassure that we can go ahead to that stage and it’s going to be cleared in the near future.

And as for UK, it is quite interesting, but specifically there is the low business, but the UK regulator is talking about the anti-competitive situation. So locally we are taking actions towards the regulator. So right now, in fiscal ’23, sometime in summer time in ’23 or by the end of the calendar year ’23, we hope that we will be cover everything so that we can – and they cover this out and bring this to our side.

So the HR IT accounting, well they are not evaluating the gun jumping. We hope to integrate and this business once and it is caped out. Immediately after the capping out, we will be ready to incorporate this business to us.

Any other comments on the [inaudible]?

Tomomi Kato

Yes, I will make some additional comment. In the EU – in the European Commission, submission to the commission, well we already submitted the application. But in November last year we decided to withdraw the submission, because once the examination process is over, then we can start negotiating and talk with the Commission once again and the process wise and we judged that it is more positive for this entire project. So that was the judgment we made and so now we are having the prior discussion right now. And the once that is done, then we will submit once again the application to start the official procedure.

And as for the Green and the HR matter, Mr. Kojima used to the person who led this initiative so far, and there are things that we are not able to disclose, but now we have a clear target as to what to do and we have the clear story about the investment. So Mr. Kojima has the other businesses to attend, and a lot of them, so the Kojima and the position shall be transferred to the [inaudible]. And it will be the executive and the Vice President and he will be overseeing this business. And now we have a clearer idea about the direction of this on the project. So that is a reason for this change of the membership. Thank you very much.

Second question, DSS and the top line. In the third quarter alone the 22% increase in the order, but how is it divided into Japan and the Overseas and how does it look like and also on the sustainability of the business. The third quarter number, is this the number because you have the large project or the GlobalLogic and the Lumada made the contribution. So in this addressable market, continuously do you think that you can outperform in this market. So this is my next question.

Yoshihiko Kawamura

Thank you very much, and as for the sustainability and supply demand, Mr. Kato will respond.

Tomomi Kato

Yes, I don’t have the breakdown between Japan and others, but we have three sub-segments in our disclosure. And talking about them, well three of them means the front business, IT services, and the services and platforms, these are three, and the 22% positive for the total, from the 24% positive IT service 12% positive. Service and platforms are 21% positive. So respectively they contributed the growth, double digit growth.

In case of upfront business, well the financial DU is doing quite well. They are large deals with banks and also frontloading of the projects.

Next, IT services. Hitachi Solutions is a company invoked in this. So in Japan and also North American orders that they are receiving in these countries are increasing. So in the industrial area, the security assist and cloud shift, these are the businesses that we are getting. And the services impact platforms, domestic clouds and the DA projects are increasing and hardware storage server business are increasing, and storage overseas are also increasing in orders. So the business are quite smooth and this is partly because of the exchange rage situation, but excluding that well the growth is higher than 20%.

Unidentified Analyst

Thank you for the response and you also asked about the energy and Railways in the third quarter. Do we have – yeah, so we happen to have our large deals. And is this sustainable? Will this continue in the fourth quarter onward?

We are monitoring large projects and the transactions even before we submit tender. Now there, once we get the project, then the risk will change. So they have to control the portfolio, that is an important conservation. Specially, it is difficult to disclose right now, but to submit the tender to the system for Power Grid and the Railway systems, there are a lot. So we have many opportunities and we are chasing them.

In the revenue systems, about 10 cases and power grid 10 cases we are chasing and the tracking the different on the tender opportunities. Sometimes we can win, sometimes we lose, but we are tracking and we have the mechanism to track all these large deals. And sometimes we are successful, sometimes not, but in the fourth quarter and the next year we believe that we will be able to get the large deals one after another.

But as I mentioned, another aspect of the question is how to control the cost, the risk. So that’s the management decision to balance the risk and opportunities. Thank you very much.

Unidentified Analyst

And lastly, I have one more question. Connective industries, four key businesses and also Hitachi Hi-Tech. The demand is declining in the third quarter, fourth quarter. It is because of the supply demand and it may hit the P&L next year probably.

So if Hitachi Hi-Tech will be struggling in the next year, how about other businesses for example. The businesses in the pipeline. Are there any areas that you can expect the growth in next year? Because this may have the macroscopic – the macroscopic environment may have an impact on this segment. But if you have the promising areas, please share information with us.

Yoshihiko Kawamura

Yes, as for Hitachi Hi-tech, we were able to get a lot of deals. And so that is the reason why it looks quite slow. However, business is doing quite well. There are two pillars, the semiconductor producing equipment and also the medical diagnosis and the analysis system, and they are contributing a lot and the market condition is favorable.

So compared to last year, it looks a lot like last this year. However, constantly this segment can make a continuous contribution. And also, the household appliances or the Smart Life concurrently may have a difficulty. But if Shanghai’s situation recovers, then our refrigerators and washing machines, I believe that we will get more demand. Our demand will come back.

And as you see, industrial digital business. So the – this is about the manufacturing, the DX and the robotization of the manufacturing facilities factories and this is where we can expect the growth. And also industrial products, which is the mainly hardware business on Page 13. It is contributing to the profitability of the company.

So this is not the 1 trillion business like high-tech. However, all these businesses are positive. So connective industries, of course it is subjected by the market conditions, but they are still and they are resistance to some extent, so we hope that we can continue performing well in the next year. Thank you very much.

Yoshihiko Kawamura

This is Yoshihiko Kawamura. In high tech, this is not only semiconductors. There are complementary businesses. The immunity type of the business, even if high-tech is the business is volatile. For example, even if the semiconductor is down in vitro business and they can compensate for that. So 60% is – even if 60% is a semiconductor, the others, this is in the appendix, but the medical technologies in the Europe.

Well, the high tech and the non-semiconductor business of Hitachi Hi-tech that is contributing. The industrial machineries is growing in the U.S. for example, so in industries these businesses are complementary with each other.

Deal systems, building systems in China for example, supply chain is a very strong and that was programmed, and at the same time it is a country where many accidents happen. So the manufacturer’s warranty is important in the building systems, the maintenance and also the contract based upon the warranty is increasing. The volume is increasing and the wallet is increasing, TAM is getting higher. So in the sense of building systems it has become the resilient business. So that was the supplementary comment I wanted to add. Thank you very much.

Operator

Thank you very much. Thompson, please unmute and ask your question.

Unidentified Analyst

I have just one question. For Lumada, ¥1.9 trillion is for this year. There is no change. But for the first three quarters – in the fourth quarter, plus 10% is the revision made. It seems like digital engineering and it seems you’re looking at lower revenues. Is that a conservative outlook – is there an upside that can be expected?

Yoshihiko Kawamura

Kato sir will respond.

Tomomi Kato

Regarding ¥1.9 trillion, it is not an easy target in the first place and Lumada business is receiving many orders. There is opportunity for upside indeed, that’s all.

Unidentified Analyst

Thank you, I have a follow-up. Upside is in service. Is that the case for the second quarter and third quarter? ¥150 billion for the second quarter and third quarter and ¥130 billion for the third quarter? I think this is very conservative. In other words, looking at the run rate, it could be increasing. Is this a positive factor?

Yoshihiko Kawamura

Regarding managed service, this is where there is most significant potential. So we have high expectations on this.

Unidentified Analyst

Thank you.

Operator

Well, we are running out of time. So we’d like to switch over to the English channel. [Operator Instructions].

Well, we see no hand right now. We still have some time, so we would like to go back to the Japanese channel and we see many hands on the Japanese channel, but we have to welcome one last person to ask a question and I appreciate your understanding.

[Inaudible], please unmute yourself and start your question.

Unidentified Analyst

Thank you very much. I have two questions. On the Hitachi Astemo, on the previous meeting I asked the question and you mentioned that you will be able to achieve the annual plan. And well, the profitability of the motorcycles business, the re-campaign, good expectations. So what I understand is that, that is the key to achieving your annual, the plan. So could you please clarify on this point?

Yoshihiko Kawamura

This is Kawamura. Thank you very much for your question. Yes, in the third quarter, basically the structure of the business has not changed. So the motorcycle accounts for 50% of the business performance. But speedily we are switching towards the digitalization. So the models invertors are also ramping up.

One year ago, well the motorcycle – we depended very heavily on the motorcycles. However, motorcycles account for 50% of the performance. But the vehicles are struggling because of the shortage of the semiconductors and that also helped the ramping up of the EV. And now the 50% of the profitability is generated by motorcycles, as you mentioned.

Unidentified Analyst

Thank you very much. If I may, I’d like to ask the second question. In the connected industry segment, Building Systems and Hitachi High-Tech, I’d like to ask about these two. In the fourth quarter, just the deduction, but the building systems and the profitability appears to be quite limited or small in the fourth quarter. Is this a temporary situation?

And in the next fiscal year, well, will you be able to maintain the same level of profitability concerning the Chinese environment right now. So that’s the question about the building systems. And the industrial, the charging and the semiconductor business is affected significantly by the market and conserving the contribution next year. It seems that there is a risk of the significantly lower profitability in the Industrial business. And could you please elaborate on this point?

Yoshihiko Kawamura

Thank you very much. As for the elevator, the new businesses in Japan, China is struggling, but we have significantly the base of the business. The remote maintenance and the repair and maintenance is the major part of the business. So rather than depending on the new projects, we are doing more on the maintenance side. So we do not foresee any significant downside here, and at the same time, it is not possible to see the skyrocketing of the profitability. But the stable profit contribution can be expected from next year onwards.

As for the industries and also semiconductor, this is not about the low end of the automobile, but the high-end semiconductors are related. And as you know, the recovery is the same in the investment on the semiconductors, high-end semiconductors. So the high tech and the high end, the semiconductor side, I don’t think the impact is not as big as the automotive. But still, we’d like to pay close attention to this, but in the connected industries, and we do not foresee any significant impact because of the semiconductor situation.

In the Building Systems fourth quarter, on a Q-on-Q basis from third quarter to fourth quarter last year, the profitability declined and the market is still, we just have to foresee. In excluding the exchange rate, it maybe a breakeven or the same level and there is a sense of the uncertainty. So that is the basis of the first quarter assumption.

And as for Astemo, the four wheel and the motorcycles, they are not separate. So we have the powertrain Axel, the technologies based upon the passengers and that can be utilized for the next generation of motorcycles. So our intention is to combine them together. So we are not separating the vehicles and the motorcycle separately, we’d like to combine them for the future.

Unidentified Analyst

Thank you very much. It was informative. Thank you very much.

Operator

The time has come to bring this meeting to a close. We still have many people with their hands up, but we would like to now close the meeting. If you have any questions, please refer the questions to the department in charge.

With this, we’d like to bring the Hitachi Ltd. briefing and the consolidated financial results of the third quarter ended December 31, 2022. Thank you for your attendance today.