Hitachi Integrated Report 2022

CEO Message

Introduction

Whatʼs Hitachi

The Story of Collaborative Value Creation with Stakeholders

Value Creation

Materiality

Business Strategies

The Value Creation Process

Sustainability

Mid-term Management Plan 2024

Data45

Financial Strategies

CFO Message

Corporate Governance
Human Resources Strategies

Financial Strategies
In the Mid-term Management Plan 2024, we will shift into growth mode, achieve further advances in revenues and profitability, and take additional steps to enhance our ability togenerate cash through organic business growth. To achieve Hitachi’s growth through a financial capital strategy, we will continue to work on four priority issues: (1) further improvements
to earnings capabilities through ROIC management, (2) improved capital efficiency through higher business asset turnover, (3) reduced WACC utilizing appropriate levels of leverage
within the bounds of appropriate financial discipline, and (4) improved total shareholder return (TSR) by implementing shareholder return measures that consider share buybacks inaddition to dividends.

Strengthening Cash Management
In the Mid-term Management Plan 2024, we will step up efforts to ensure that cash can be generated organically by our own business. To strengthen cash management, we will revise businessprocesses while improving accounts receivable collections, ascertaining the impact of strategic inventory, and enhancing monitoring.
The challenge of generating cash is about not only maximizing operating cash flow, but also optimizing capital investment. Hitachi makes capital investments totaling around 400 billion yen each year.
Going forward, certain criteria will be applied to select these investments with greater care. Capital expenditures in tangible fixed assets such as machinery and equipment will be carefully examined
one by one. In addition, we will promote the digitalization of cash management, including the visualization of the entire supply chain, by spreading IT to manufacturing sites as well.

Capital Allocation
Over the three years of the Mid-term Management Plan
2024, we will expand core FCF to 1.4 trillion yen throughthe operating cash flow earned from organic growth andthe careful selection of capital investments. Combinedwith the cash gained from the sale of assets, we will
allocate capital in a well-balanced fashion between growthinvestment in the areas of digital, green and innovation,and shareholder return.
Specifically, around half of core FCF will be allocatedto shareholder return comprising dividends and sharebuybacks. The remaining core FCF and cash earned fromthe sale of assets will be allocated to the growth areas ofdigital, green and innovation. While targeting a D/E ratioof 0.5x as a guideline for financial discipline, we will also
implement our strategy by utilizing debt as needed.

Cash generation
Shareholder returns:

0.3 trillion yen

Shareholder returns:

0.2 trillion yen

1.2 trillion yen

2.1trillion yen

0.7

2.3 trillion yen

Asset sales

0.9 trillion yen

Core FCF

1.4 trillion yen

1.2 trillion yen

Core FCF

Core FCF

0.9 trillion yen

MMP2018(3-year cumulative)

MMP2021(3-year cumulative)

0.5 trillion yen

Shareholder returns:
Approx.
trillion yen

Asset sales

Asset sales

0.7 trillion yen

Capital allocation

MMP2024(3-year cumulative)

While keeping D/E ratio of around 0.5x in mind,
use debt flexibly as required

Strengthen strategic growth areas byasset replacement• Focus on Digital, Green, and Innovation
Growthinvestments Investment criteria• Profitability: Adj. EBITA 10％+• Asset efficiency: ROIC 10％+Return approximately 50% ofcore FCF to shareholders
Return toshareholders • Dividends: Stable dividends based onbusiness growth• Share buyback: Implement based on funding
demands and business environment, etc.

Hitachi Integrated Report 2022

CEO Message

Introduction

Whatʼs Hitachi

The Story of Collaborative Value Creation with Stakeholders

Value Creation

Materiality

Business Strategies

The Value Creation Process

Sustainability

Mid-term Management Plan 2024

Data46

Financial Strategies

CFO Message

Corporate Governance
Human Resources Strategies

Basic Policy on Shareholder Returns
Returning profits to shareholders based on medium- and long-term business plans and achieving growth in total shareholder return (TSR) through the formation of appropriate stock prices arepositioned as important management themes for Hitachi. Our policy is to provide stable dividends while securing the internal capital required to execute the R&D and capital investments that are
essential to maintaining market competitiveness and increasing profits. Under this policy, we make decisions based on overall consideration of performance trends, financial conditions, and dividend
payout ratios, among other factors.
In April 2022, we announced share buybacks of up to 200 billion yen. Going forward, we will issue stable dividends while also considering share buybacks, ensuring that the profits earned frombusiness growth are properly returned to shareholders.

Improve profitability

Progress on ROIC Management
In fiscal 2019, Hitachi introduced return on invested capital(ROIC) as a new corporate management index. ROIC indicates
how much profit (after-tax business profit) can be generated
on capital invested in a business. To improve ROIC andexpand corporate value, returns must at a minimum exceed
the weighted average cost of capital (WACC), which is thefinancing cost of the invested capital. Since introducing ROIC,
we have promoted management that considers the cost ofcapital in addition to profitability throughout the group as awhole, and the ROIC tree has been tied directly to concrete
actions at each workplace. Given a changing macroeconomic
environment and other factors, we were unable to meetthe 10% ROIC targeted in the Mid-term Management Plan
2021, but we have again declared this target in the Mid-termManagement Plan 2024, and will further advance activities
based on this target including action in each sector andbusiness unit, revisions to business strategy itself, and othermeasures.

ROIC increase drivers

Example of major action items(to be further broken down and assigned to each division)
Expand orders,determine appropriate orders received

Optimize customer portfolio

Expand profitablerevenues

Expand overseas revenues
Expand Lumada revenues

Increase adjusted
operating income ratio

Reduce materials cost, outsourcing expenses
Improve production efficiency
Improve business efficiency
Reduce costs

Increase after-tax
business profit

Implement structural reforms
Strengthen project management
Reduce loss costs
Withdraw/replace unprofitable business

Increase ROIC* 1

Reduce tax expenses

Implement appropriate tax management

Increase equity inearnings of affiliated companies

Realize joint venture alliance synergies

Improve asset efficiency (Improved invested capital
ROIC increase drivers
Increase working
capital turnover
Improve businessasset efficiency(Increase asset
turnover ratio)

business asset efficiency)
Example of major action items(to be further broken down and assigned to each division)
Early collection of trade receivables
CCC* 2improvement

Reduce inventories
Trade payables: Set appropriate payment dates
Acquire advance payments

Increase fixed
asset turnover ratio

Implement pre-investment checks and post-investment monitoring
Review held real estate, sell idle real estate assets
Manage goodwill
Review cross-shareholdings and equity-method investments

Reduce cash on hand andinterest-bearing debt

Improve accuracy of cash flow forecasts
Expand pooling*1 ROIC = (NOPAT + Share of profits (losses) of investments accounted for using the equity method) / “Invested Capital” × 100
NOPAT (Net Operating Profit after Tax) = Adjusted operating income × (1 – Effective income tax rate), Invested Capital = Interest-bearing debt + Total equity*2 CCC: Cash Conversion Cycle

Hitachi Integrated Report 2022

CEO Message

Whatʼs Hitachi

Introduction

The Story of Collaborative Value Creation with Stakeholders

Materiality

Business Strategies

The Value Creation Process

Sustainability

Mid-term Management Plan 2024

Corporate Governance
Human Resources Strategies

Data47

Financial Strategies

CFO Message

Growth through the Digital Management Platform

Financing and Capital Costs
Financing is carried out through the means deemedmost appropriate (e.g., cash on hand, borrowings, andgains from the sale of assets), based on a variety ofconditions, including the timing and amounts requiredby the business. When financing through borrowing andother forms of debt, our financial discipline is to maintaina D/E ratio of less than 0.5 times and an interest-bearing
debt/EBITDA ratio of less than 2.0 times. Regarding thecost of capital (hurdle rate) used for individual investment
decisions, calculations and judgments are made on acase-by-case basis considering interest rates, country
risks, and expected returns in the country where theinvestment will be made.

Ensuring Financial Stability
Ensuring the stability of the financial base is an importantmanagement issue for Hitachi. For this reason, we willcontinue our financial discipline policy of maintaining an A
rating on issued instruments and a D/E ratio of less than 0.5times. At the same time, we will ensure a return of profits with
an awareness of shareholder returns, for example, throughgrowth investments and continued increases in dividends.
Our ability to generate cash is increasing steadily, and ourratings are as shown in the table below.
Rating company

Value Creation

Long-term

Short-term

S&P Global Ratings JapanInc.

A

A–1

Moody’s Japan K.K.
(Moody’s)

A3

P–2

Rating and Investment
Information, Inc. (R&I)

AA-a–1+To achieve global growth in the Social Innovation Business, improving theefficiency of management platform through digital technology is essential.
As ABB’s power grids business (now Hitachi Energy) and GlobalLogic, bothacquired during the Mid-term Management Plan 2021, already possess global
management platforms, we intend to deploy and utilize Hitachi Energy’s
advanced global operations platform for product-related businesses andGlobalLogic’s advanced global operations platform for IT-related businesses
within the Hitachi Group. We will work to build a common ERP across theentire Hitachi Group, utilize DX and Global Business Services (GBS), andimplement a customer relationship management system (CRM). We will
invest 80 billion yen to build out and introduce these systems by fiscal 2024.

(billions of yen)
160
120
80400

FY2022

FY2023

FY2024

Priority Measures

ERP

Sharing Management Data in Real Time
Utilizing the ERP system deployed globally by Hitachi Energy throughout the Hitachi Group will accelerate management decisions andpromote reductions in costs associated with system usage, operations, maintenance and new developments. In fiscal 2021, we createda Groupwide common template based on Hitachi Energyʼs ERP system that commenced operations at Hitachi Channel Solutions basesin Thailand and Indonesia. In fiscal 2022, we will establish an office for the promotion of this common ERP system and accelerate theintroduction and development of ERP at group companies.

DX

Realizing Automated Operations and Predictive Management
Hitachi will realize predictive management and business process automation and sophistication based on ERP, CRM, data lakes and other information
to enhance performance and improve the efficiency of indirect operations. Further, we will improve digital literacy among all employees to accelerate DX
through the development of infrastructure and tools that expand the scope of in-house DX activities.
In addition to the promoted utilization of data and automation of operations across all business divisions by fiscal 2021, from fiscal 2022, we plan toestablish standard services and template platforms necessary for promoting DX in all operations and deploy them throughout the company with the ERP.

CRM

Global Utilization of Account Information
We will deepen insights into new markets and enhance the utilization of sales activity information through the group-wide collection of market andcustomer information. Additionally, we will strengthen our customer approach in all areas through the promotion of coordinated customer support
between business units and other measures. After the initial August 2022 launch of this platform in Japan, we plan to expand implementation to
three companies: Hitachi Vantara, GlobalLogic and Hitachi Energy. The platform will be rolled out company-wide starting in fiscal 2023.

GBS

SG&A Reduction by Operation Consolidation and Process Transformation
We will improve operational efficiency and productivity by building company-wide common management department operations (indirect
operations such as human resources, finance, procurement, IT, etc.) as centralized shared services that can be used globally. At overseas
bases and group companies, the shared service functions of Hitachi Energy and Hitachi Vantara will be applied. We have already introduced
this concept to our regional companies such as those in North America, India, Europe and Asia. In Japan as well, we will expand sharedservice functions to standardize and consolidate business processes and have started to engage in pilots for process transformation.

ERP: Enterprise Resources Planning
As of July 2022

Effects of Priority Measures

Hitachi Integrated Report 2022

CEO Message

Whatʼs Hitachi

Introduction

The Story of Collaborative Value Creation with Stakeholders

Business Strategies

Value Creation

Materiality

The Value Creation Process

Sustainability

Mid-term Management Plan 2024

Data48Financial Strategies

CFO Message

Corporate Governance
Human Resources Strategies

Financial Analysis of the Past Five Years
The following is a summarized financial analysis of the Hitachi Group for the past five years.
•The adjusted operating income ratio increased as a result of efforts to improve profitability. In fiscal 2020, despite the harsh business environment resulting from the COVID-19 pandemic, the profit ratio stayed above 5%.
•Despite fluctuations caused by business restructuring, efforts to improve profitability resulted in net income reaching a record high of approximately 600 billion yen in fiscal 2021.
•Efforts to strengthen cash management resulted in cash flows from operating activities rising to the level of approximately 800 billion yen.
•The payout ratio has remained between 20% and 30%, and the total of dividend payments has increased.

Adjusted operating income ratio

8.0

7.6

Trends in dividends

Cash flows
(%)

7.5

Cash flows from operating activities (billion yen)
Cash flows margin from operating activities（%）

7.8％

7.2
5.7

727.1

6.4％
610.0

6.4％

9.1％

793.1

560.9

7.1％

283.5

2017

2018

2019

2020

2021

2017(FY)

2018

72.4

2020

120.9

39.1

290.0

20.0

135.4

2019

Total amount (billion yen)

91.7
104.8

86.9

729.9

419.8
136.0

Payout ratio (%)
Payout ratios excluding
unordinary items (%)

Core free cash flows (billion yen)

2017

2021 (FY-end)

17.0
2018

101.5

19.8

20.2

2019

2020

20.7
2021

(FY)

Total Shareholder Return (TSR)
The following illustrates Hitachi’s TSR, with fluctuations in dividends and stock price reflected.
While continuing to improve profitability and distribute a stable dividend, Hitachi is making concerted efforts to increase shareholder value through management that is aware of its share price, basedon business and financial strategies designed to improve TSR in excess of the cost of shareholders’ equity.
450400350300

Past 1Year

Hitachi share price
TOPIX including dividends
TOPIX Electrical Equipment
including dividends

Past 3 Years

TSR

TSR

AnnualTSR

Past 5 Years

Past 10 Years

TSR

AnnualTSR

TSR

Annual
TSR+25.7%+81.0%+21.9%+120.9%+17.2%+161.5%+10.1%

200TOPIX+2.0%+31.2%+9.5%+44.3%+7.6%+183.3%+11.0%

150

TOPIX Electrical
Equipment+3.6%+72.4%+19.9%+91.2%+13.8%+261.5%+13.7%

250

Hitachi share price

100
50
320
22/003
2021/

320/0
2003
20
19/

320
18/00320
17/316/020

20
15/0
320
14/0
3

3
20
13/0

20
12/

03

0Note: The graph and table above show return on investment for investments made from the fiscal year ended March
31, 2012, taking into account dividends and stock prices as of the fiscal year ended March 31, 2022.
Hitachi, Ltd. investment performance, including stock prices and dividends, is indexed using 100 as theinvestment amount as of March 31, 2012. The TSE Stock Price Index (TOPIX), which is a comparativeindicator, is similarly indexed using data including dividends for electrical equipment.