GS Yuasa Corporation (6674) Earnings Call Transcript & Summary

Let me start by offering a word of appreciation to institutional investors, analysts and the press. Today's briefing will cover Vision 2035, consisting of the GS Yuasa Corporation's long-term vision and the sixth midterm management plan. First, I will be discussing the business environment over the medium to long term. Shown here are a number of megatrends towards the year 2050. Of these economic and social transformation due to resource and environmental constraints is a trend that is intrinsically connected to our company. Against this backdrop, I would like to discuss the environment surrounding GS Yuasa. Within mobility, the world will continue seeing an acceleration of electrification towards zero emissions, advancing levels of self-driving cars and an acceleration of the shift from ownership to use. Regarding public infrastructure as the introduction of renewable energy expands, the importance of storage batteries to control fluctuations and adjust supply and demand also expands. Demand for energy management is also expanding. Additionally, we also forecast the increasing importance of backup for electric power, information and communication infrastructure, et cetera. In the domain of specialized batteries, we expect expanding space utilization and marine resource exploration. We also expect a rapid expansion in global demand for storage batteries, too, from 230 gigawatt hour in 2019, to over 10,000 gigawatt hour in 2050, as the world works to achieve carbon neutrality. We formulated Vision 2035, taking into account to the market trends I just discussed. I would now like to discuss Vision 2035, which is the company's long-term vision. To start off our discussion of Vision 2035, I would like to go over the history of GS Yuasa's business. In 1895, Genzo Shimadzu pioneered the manufacture of lead acid batteries in Japan, later founding Japan Storage Battery Company Limited in 1917. The following year, in 1918, Shichizaemon Yuasa founded Yuasa Storage Battery Co. Limited. After this, both companies developed a number of innovative products for various uses, eventually carrying out a corporate merger in 2004 towards the further development of storage batteries. Following the merger, in addition to enhancing profitability in the lead acid battery business, the company has also focused on its new lithium-ion battery business. In 2007, the company founded Lithium Energy Japan as a joint venture with Mitsubishi Corporation and Mitsubishi Motors Corporation for the manufacture and sale of batteries for use in EVs and plug-in hybrid vehicles. Additionally, in 2009, we established Blue Energy as a joint venture with Honda Motor Co. Ltd. for the manufacture and sale of batteries for use in hybrid vehicles. As such, through our energy devices, such as lead acid batteries and lithium-ion batteries, we have been delivering comfort and security to customers around the globe. Vision 2035, therefore, represents GS Yuasa's commitment to transforming and expanding its business foundations with an eye towards the next 100 years. We have reviewed and revised our pre-existing management philosophy and policy, newly formulating a policy on sustainability management. The world is seeing efforts towards making a reality, a more global and sustainable society, characterized by, for example, carbon neutrality. Against this backdrop, we believe that by leveraging GS Yuasa's energy technology, which we have honed over the years, we can both help achieve a sustainable society and realize the sustainable growth for our company. As such, we have incorporated this into our management policy, which reads as follows: we are committed to utilizing advanced technologies developed in the field of stored energy solutions to deliver security and comfort to our customers around the globe to make a real contribution to the global efforts towards sustainability and to grow corporate value. I would now like to discuss Vision 2035, which is the company's long-term vision, based on the Four Re's formula. We strive for innovation in energy technology, endeavor to address the challenges facing society through the development of mobility and other public infrastructures and seek to create comfortable living environments and play our part in the global efforts towards sustainability. The first Re stands for Reborn. Even a century after its founding, we are still inspired anew every day by the GS Yuasa's founding spirit. Second is Renewable, which stands for making a genuine contribution to carbon neutrality Third is Reliable, representing a commitment to technical innovation and delivering solid, reliable energy. Last is Respect, representing our efforts to earn the respect of the world through solid action towards achieving the SDGs. Achieving Vision 2035 requires two elements, some innovating and some eternal. In terms of elements that should not be changed are our philosophy of innovation and growth, inherited from the company's founders, as well as a commitment to technical innovation, namely the sustainable development of energy storage technology that has been polished up for more than 100 years. Conversely, we seek to innovate in business areas and in the value we provide. In the past, we have offered Mono, that is products to customers in the form of lead acid batteries, lithium-ion batteries, power supply systems, et cetera. Going forward, in addition to products, we also want to offer solutions and services in the domains of mobility and public infrastructure and aim to become a comprehensive device company. Here is a diagram showing the innovation and growth of our business towards achieving Vision 2035. In light of the shift toward electrification on a global scale, the Automotive Batteries segment, shown here in orange and currently centered around lead-acid starter batteries, is expected to undergo a gradual decline over time. However, we will be further improving profit margins, securing profits, which we intend to use as investment capital for the growth domains of mobility and public infrastructure. Regarding the Automotive Lithium-ion Batteries segment, shown in blue, sales of lithium-ion batteries for use in hybrid vehicles are expected to increase through to around 2035, after which they will see a gradual decline. We believe there is and will continue to be strong demand in the Industrial Battery and Power Supply segment, centered around backup batteries and power supplies, as these play a role in the maintenance of public infrastructure. Toward 2035 into 2050, high-capacity, high-output lithium-ion batteries are expected to deliver significant growth. We will be utilizing our joint venture with Honda, which we announced on January 23, to significantly grow batteries for BEVs and the regular field, centered around batteries for ESS. By providing automotive lithium-ion batteries for hybrid vehicles and plug-in hybrid vehicles and batteries for BEVs, we seek to realize high growth by delivering innovative storage battery technology to a wide range of society. Through our efforts in the field of industrial batteries and power supplies and the regular field, we will ensure high profitability by contributing to the realization of sustainable public infrastructure. In terms of new initiatives, shown in the top portion of the graph, starting around 2035, we would like to nurture a new business contributing to society and utilizing GS Yuasa's technology and expertise acquired over the years. As shown on the previous page, allow me to go over the strategy in order to promote mobility and public infrastructure to the status of business pillars. We will be leveraging the knowledge cultivated through the development of lithium-ion batteries for hybrid vehicle, plug-in hybrid vehicles and EVs at Blue Energy and Lithium Energy Japan as well as the technology cultivated in the Industrial Battery and Power Supply segment and our network and footwork delivering safety and peace of mind through maintenance and service. Additionally, another strength is the research and development of high-capacity, high-output lithium-ion batteries, carried out within our joint venture with Honda Motor. We will leverage this expertise and technological capabilities and R&D results to contribute to solving social issues through the offering of mobility and public infrastructure. We will be utilizing the results of R&D and supplying lithium-ion batteries mainly for BEVs, making a contribution in the field of mobility. In terms of public infrastructure, by utilizing our supply capabilities, which we have honed with batteries for BEVs, we will seek to expand our presence in the growing regular field market. Against this backdrop, we will be supplying optimal batteries for a wide range of public infrastructures such as electric power and telecommunication. Through this, we want to support and maintain public infrastructure, offering safety and peace of mind. Shown here is the R&D roadmap envisioned by the company. Liquid electrolyte lithium-ion batteries, as they currently exist, will evolve into batteries free from the use of rare metals, possessing longer lives and capable of being recycled. As such, we will continue to develop more sustainable batteries with more consideration for resources and environmental issues. Regarding all solid-state batteries, we are aiming to achieve higher energy density and we'll be developing batteries with distinctive features, based on our unique solid electrolyte technology. We will be carrying out the development of silicon-based anodes as opposed to carbon-based anodes as they currently exist. And furthermore, through the development of metal anode batteries, we will aim to achieve higher energy densities. In terms of cathode technology, sulfur presents several advantages such as allowing for high-performance batteries. Reserves of this resource are also plentiful, and it's also a low-cost material. We, therefore, seek to contribute to the realization of carbon neutrality by commercializing the fruits of our research and development. This graph illustrates the planned growth in terms of the scale of our business. By fiscal year 2025, which is the final year of the sixth midterm management plan, we will be aiming for JPY 610 billion in net sales and JPY 41 billion in operating income. The target within the scope of Vision 2035 is to expand sales to JPY 800 billion by fiscal year 2035. GS Yuasa has announced its commitment to achieving carbon neutrality by fiscal year 2050 in terms of Scope 1 and Scope 2 emissions. Adding to the GS Yuasa 2030 long-term greenhouse gas target, which was announced in fiscal year 2021, we will be enacting further energy savings and the use of renewable energy as well as initiatives within the procurement of renewable energy. Through these, we will be achieving carbon neutrality. Additionally, the products we supply make a contribution to the reduction of CO2 emissions. In fiscal year 2021, through the sale of environmentally considered products like the ones shown here, we made a contribution to reducing CO2 emissions by at least 8 million tons. Going forward, we believe GS Yuasa products will play a rather important role in achieving carbon neutrality. By achieving carbon neutrality for GS Yuasa's operations and through the expansion of the sale of environmentally considered products, we will seek to realize a reduction of CO2 emissions, in turn, contributing to the well-being of our planet and of society. I would now like to discuss the sixth midterm management plan, covering the period between fiscal year 2023 and 2025, which corresponded to the first 3 years towards achieving Vision 2035. First is a review of the fifth mid-term management plan, which had fiscal year 2022 as its final year. During the fifth midterm management plan, based on the Mono-Koto Zukuri product and service creation concept, GS Yuasa engaged in activities that lead to sustainable growth of both the lead acid battery and lithium-ion battery businesses through creation of new value. The achievements and issues of efforts can be summarized into 3 categories: the first being the Automotive Battery business. Here, in terms of achievements, we created a synergistic effect with GS Yuasa Energy, has converted the site in Turkey into a consolidated subsidiary. In terms of issues, we have intensifying competition in China as well as the need to revise sales prices due to soaring raw material prices. Next is the Industrial Battery and Power Supply business. Here, in terms of achievements, we have the delivery of lithium-ion batteries for wind power generation in Hokkaido. The acquisition of the social infrastructure systems business from Sanken Electric Company Limited; and lastly, the start of Koto Zukuri, that is service creation businesses, such as our STARELINK service. In terms of issues, we have delivery delays of our products due to a shortage of electronic components and materials and difficulty in securing profits in the regular field business. Third, we have the Automotive Lithium-ion Battery business. In terms of achievements, we have the start of operations of Blue Energy's #2 plant. We had a production capacity of 20 million cells in fiscal year 2019, but this number had increased to 50 million cells per year in fiscal year 2022. Second, we started the supply of lithium-ion batteries for hybrid electric vehicles for Toyota Motor. Third, we established the BEV battery development departments. And lastly, we signed a basic agreement toward collaboration with Honda Motor. I would now like to review the management results. We believe we will be able to achieve the initial midterm management targets of JPY 460 billion in net sales and JPY 28 billion in operating income. In terms of segment results as well, generally speaking, we have also achieved the targets. During the period corresponding to the fifth midterm management plan, we carried out capital expenditures, mainly centered around Blue Energy. Sales of batteries for hybrid vehicles are expected to continue expanding until around 2035, centered primarily around Japanese automakers. We seek to reap the results of the investments carried out during the fifth midterm management plan and carry out investment in the business of batteries for BEVs, which we position as our next business pillar. Additionally, we will work to unlock synergies from the social infrastructure systems business from Sanken Electric Company Limited and our consolidated subsidiary in Turkey, which we acquired through M&A. We will simultaneously work to expand the scale of these businesses. In broad strokes, we have 3 implementation measures toward laying the foundation for achieving our Vision 2035. The first is making preparations to realize the significant growth in mobility and public infrastructure within Vision 2035. In terms of measures, we will be developing high-capacity, high-output lithium-ion batteries by utilizing a joint venture company with Honda Motor. Additionally, we will be establishing production and supply systems of batteries for BEVs to expand mobility and the public infrastructure business. The second implementation measure is the reinforcement of earnings capacity in existing business. Within this, we will carry out thorough value-added creation and improvement in profitability. Next, we will maximize profits due to unparalleled superiority in our Industrial Batteries and Power Supplies business in Japan. Last is the transformation of regional strategy, including a review of business in China and the maximization of profits by concentrating resources at main sites. The third implementation measure is enhancing DX into new businesses. We will be carrying out DX promotion to enable business structure transformation as well as creates new businesses that contribute to solving social issues. GS Yuasa, therefore, wants to make this a 3-year period, one in which we execute to these measures to lay out a strong foundation towards achieving Vision 2035. The management's targets for the sixth midterm management plan are as follows: by fiscal year 2025, the final year, we seek to achieve net sales of at least JPY 610 billion and at least JPY 41 billion in operating income. Additionally, the ROE target is 8% or more and 30% or more for the total return ratio. Furthermore, starting with the sixth midterm management plan, we have newly established a target for ROIC, which is an indicator of interest to shareholders. On a corporate basis, we are aiming for a ROIC of 10% or more. Next is a comparison with the operating income forecast for fiscal year 2022. Shown here is the fiscal year 2022 forecast of JPY 29 billion and the sixth midterm management plan of JPY 41 billion for fiscal year 2025, with the breakdown of increases or decreases for each segments. We expect growth across all segments, with this growth being most pronounced in the Automotive Lithium-ion Batteries segment. In total, we expect sales to have grown by JPY 90 billion compared to the fiscal year 2022 forecast and operating income by JPY 12 billion. I will now be discussing each segment individually. I would now like to discuss the strategy for each segment, starting with the Automotive Battery segment to Japan. The business policy within the sixth midterm management plan is to build an optimal supply system in response to changes in the business environment and improve the profit rate. The main strategies and important tasks toward achieving JPY 100 billion in net sales and JPY 7 billion in operating income are as follows: In terms of sales of batteries for new automobiles, we will be improving the profit ratio due to optimal price revisions, reflecting soaring raw material prices. During the course of the sixth midterm management plan, we expect a recovery in demand for new automobiles and our ability to carry out cost pass-throughs to reflect soaring raw material prices. As such, we expect an expansion in sales and operating income of batteries for new vehicles and results unchanged from current levels for batteries for replacement. The business policy within the sixth midterm management plan for the overseas Automotive Batteries segment is to reform management structure for the future by selection and concentration and strengthen profitability. The main strategies and important tasks toward achieving JPY 240 billion in net sales and JPY 17 billion in operating income are as follows: In Southeast Asia, where we have a strong presence and competitive advantage, we will seek to maximize profit by strengthening our bases. In China, where we continue to struggle, we will be promoting a fundamental review of business. Regarding Europe, we will be utilizing the site in Turkey, which entered the scope of consolidation in fiscal year 2022, to carry out steady supply to Europe and expand sales to the Middle and Near East and North Africa, which are regions we are still in the process of making inroads into. During the course of the sixth midterm management plan, we will be concentrating resources in Southeast Asia, Europe and Australia, regions which we expect will see growth. Next are the strategies by region in the Automotive Batteries segment. In Japan, we will be improving the profit ratio due to optimal price revision reflecting soaring raw material prices. In Southeast Asia, we will be enhancing our manufacturing and sales systems with Thailand as our core base. Additionally, as I mentioned earlier, we plan to utilize our site in Turkey as an export base toward Europe, the Middle and to the Near East and North Africa. To this end, we will be further expanding this business. Regarding Europe, we will be addressing a recovery in demand following the end of COVID-19, responding to growing business demand for automotive replacement batteries and storage batteries for UPS. The business policy within the sixth midterm management plan for the Industrial Batteries and Power Supplies segment is building a business foundation to capture the growth of the next generation. The main strategies and important tasks toward achieving JPY 140 billion in net sales and JPY 11 billion in operating income are as follows: In the emergency field, we will expand our remote monitoring services and maximize profit by utilizing our unparalleled superiority. In the regular field, we would like to set the stage for a second pillar of business. As shown in the SWOT analysis on Page 26, one of our strengths is our high presence in Japan, and we will be leveraging this strength to maximize profit margins. We will be setting the stage for business growth in the regular field, allowing us to address the growing market for renewable energy. During the course of the sixth midterm management plan, in addition to the expansion of the market for renewable energy, we also expect to be regular field in Japan to grow significantly. Compared to existing batteries for the emergency field, profit margins are lower, so towards 2025, we expect a slight decrease in profit margins. However, thanks to the expansion of the replacement and maintenance business, we intended to raise profit margins over the medium to long term. In terms of batteries for forklifts and for emergency use as well, we expect sales for these to expand primarily in the overseas market. Here is the strategy for the regular field, which we seek to make a pillar for our business within the scope of Vision 2035. Within the Japanese government's Green Growth Strategy towards achieving carbon neutrality by 2050, it predicts and promotes drastic changes to the breakdown of power supply, with renewable energies growing to account for between 50% to 60%. Against this backdrop, the demand for storage systems using lithium-ion batteries to [ fluctuations ] and adjust supply and demand is expected to increase. Within storage batteries and storage systems, GS Yuasa will be offering power conditioners and replacement and maintenance, leveraging remote monitoring systems as all-in-one solutions, increasing our presence in the market for renewable energy. We are currently developing next-generation batteries. And by bringing these to market, we will be further enhancing our competitiveness and growing our presence in the regular field. The business policy within the sixth midterm management plan for the Automotive Lithium-ion Battery segment is achieving sustainable growth in the Lithium-ion Battery business by taking carbon neutrality and government targets as opportunities. The main strategies and important tasks toward achieving JPY 110 billion in net sales and JPY 6 billion in operating income are as follows: Regarding hybrid vehicles and plug-in hybrid vehicles, we will be improving the yield rate and plant utilization rates, allowing us to enhance profitability. At Blue Energy's #2 plant, we will be increasing production capacity to 70 million cells per year. For batteries for plug-in hybrid vehicles as well, we will be strengthening production systems. Regarding battery EVs, during the sixth midterm management plan and toward achieving Vision 2035, we will be strengthening development systems and setting the stage for growth, going forward. As shown in the SWOT analysis, one of our strengths is our strong connection with automakers in Japan, which we will maintain, going forward. At the same time, we will be addressing an expansion in the demand for batteries for hybrid vehicles and BEVs which represents an opportunity for us. During the sixth midterm management plan, we will greatly expand sales of batteries for hybrid vehicles. The sixth midterm management plan will be a period for us to set the stage towards achieving Vision 2035, so we expect batteries for BEVs to make a contribution in utmost, starting in the seventh midterm management plan. Next is the strategy for batteries for hybrid electric vehicles, sales of which we expect to expand considerably in the sixth midterm management plan. We believe demand for batteries for hybrid vehicles will remain through to around 2035, primarily from Japanese automakers. As recently reported, Europe will allow internal combustion engine vehicles to use synthetic fuel. In light of this, we believe there is the possibility of changes going forward in the trend toward electrification on a per-region basis as well as in terms of the timeline. Against this backdrop, in fiscal year 2011, we started the supply to Honda Motor of lithium-ion batteries for hybrid vehicles and also to Toyota Motor, starting in fiscal year 2020. Starting in the second half of fiscal year 2022, we started the expansion of the production capacity at Blue Energy's #2 plant, which currently has a production output of 50 million cells per year. We are aiming for a production capacity of 70 million cells per year by fiscal year 2025. Next is the strategy of batteries for BEVs which play an important role in achieving Vision 2035. We plan to establish a joint venture company with Honda Motor as an equity method affiliate for the research and development of high-capacity, high-output lithium-ion batteries. We will be utilizing the R&D results derived from this joint venture and leverage our expertise pertaining to lithium-ion batteries we acquired through our operations at Blue Energy and Lithium Energy Japan in the manufacture of batteries for BEVs and ESS in GS Yuasa Group. By supplying these batteries to a variety of clients in both the domains of mobility and public infrastructure, we will make a contribution to achieving a carbon-neutral society. The production capacity target for fiscal year 2035 is over 20 gigawatt hour per year. Going forward, we will be reporting trends related to this business during the company's financial results briefing, et cetera. The business policy within the sixth midterm management plan for the segment of Specialized Batteries and Others is to contribute to the building of new public infrastructure through batteries with the highest level of performance and quality. The many strategies and important tasks toward achieving JPY 20 billion in net sales are as follows: In the Specialized Batteries business, we expect improved profitability due to efforts to strengthen the foundation of the defense industry. Second, we will be developing next-generation lithium-ion batteries for submarines. And additionally, we will expand sales of lithium-ion batteries for aircraft. During the sixth mid-term management plan, we forecast a sales increase primarily for lithium-ion batteries for aircraft. Next is a discussion of the financial policy and capital policy within the scope of the sixth midterm management plan. In terms of the financial policy, we will seek to maintain our shareholders' equity ratio of 40% or more while investing in growth in mobility and public infrastructure and aim for a total return ratio of 30% or more. We will be prioritizing upfront investment into 3 years that comprise the sixth midterm management plan. As such, while we usually aim for 2 years in terms of the interest-bearing debt to operating cash flow ratio, this time, it will be approximately 3 years. In terms of 3-year cumulative cash flows, we expect JPY 140 billion in cash inflows from operating activities and JPY 190 billion in outflows from investing activities. As such, we expect negative JPY 50 billion in free cash flow. However, we will work toward maximizing income before the amortization of goodwill and ensuring the efficiency of invested capital, while at the same time, balancing this with growth investment and shareholder returns through a flexible approach toward the external procurement of funds. Page 33 discusses capital allocation. There will be a significant increase in capital expenditures as we will be carrying out additional investment for production capacity at Blue Energy's #2 plant and investments toward a reentry into the BEV battery business. We will be dedicating significant investments to the mobility field, which is expected to grow considerably, going forward, centered primarily around BEVs, and to the public infrastructure field, centered around renewable energy. In light of this, there is a possibility that operating cash flow might not be enough to carry out these investments. So we will be considering a variety of options in procuring funds, both direct and indirect, allowing us to deliver growth. Against this backdrop, we will be returning value to shareholders, while at the same time, aiming to deliver business growth. Next is capital investment, depreciation and R&D costs during the sixth midterm management plan. As I mentioned earlier, capital expenditures will increase considerably in the Automotive Lithium-ion Batteries segment. Against this backdrop, we will be carrying out capital expenditures necessary for growth, while also making use of subsidies. Expenses associated with research and development, too, will increase in order to accelerate R&D at our joint venture with Honda Motor. We will be utilizing subsidies within the scope of the Green Innovation Fund and continue carrying out R&D in order for our competitive advantage as a technological company to bring forth results. Next are the environmental targets within the sixth midterm management plan. We are aiming for a reduction in CO2 emissions of 15% or more compared with fiscal year 2018 levels. To this end, we will be implementing energy conservation measures through energy visualization, carrying out to the in-house consumption of renewable energies through the introduction of solar power generation equipment and replacing old equipment with energy-saving equipment. We are aiming to reduce water use by 15% or more compared with fiscal year 2018 levels and have environmentally considered products which contributes towards achieving carbon neutrality, accounts for 45% or more of total sales. Lastly, we will be increasing usage rates of recycled lead to 70% or more. We believe GS Yuasa products play an important role in achieving carbon neutrality. Through contribution from our products, the reduction of CO2 emissions associated with our activities and the reduction of the use of water resources, we aim to further reduce our environmental footprint and contribute to a sustainable society. Next are the initiatives for sustainability within the sixth midterm management plan. We have formulated materialities in the respective categories of environment, social and governance as well as major activities and targets for each. Against the backdrop of greater importance being placed on human capital, we are committed to the promotion of diversity and inclusion of work-life balance and of health management. This concludes my overview of Vision 2035. I would now like to begin the Q&A session. Mr. Endo with SBI Securities will be posing the first question.

I have two questions for you. You mentioned how the company will be carrying out a total of JPY 190 billion in capital expenditures over the 3-year period, corresponding to the sixth midterm management plan. I believe this to be a very high level of capital expenditures, especially in the Automotive Lithium-ion Batteries segment, namely JPY 105 billion. Capital expenditures at [ bank ], too, are also expected to grow to 70 million cells production capacity per year, and then there is the new joint venture. Do these figures include capital expenditures other than R&D for the new joint venture, such as, for example, plant construction expenses and the preparation of production, et cetera? I would also like to inquire as to when this plant will become operational and to the scale of sales it will generate. Will this plant make a significant contribution during the sixth midterm management plan? As such, I would like to inquire about the new plant together with Honda Motor and the content of the capital expenditures totaling JPY 105 billion in the Automotive Lithium-ion Batteries segment and lastly, about plant manufacturing and the sales scale, going forward.

Thank you. Allow me to answer your question pertaining to capital expenditures totaling JPY 105 billion in the Automotive Lithium-ion Batteries segment throughout the duration of the sixth midterm management plan. As i mentioned during my presentation, we view this period as one in which to further strengthen our foundation. This figure of JPY 105 billion contains the acquisition of land and costs associated with construction. An approximate amount stands at between JPY 60 billion and JPY 70 billion. Additionally, there is also investments that will be carried out at Blue Energy and also at Lithium Energy Japan and for 12-volt lithium-ion batteries. These bring the investments total to JPY 105 billion, with the approximate breakdown being, as I just mentioned. In terms of sales, I cannot reveal any details at the present moment, but we expect a significant contribution to sales and profits to take place during the seventh midterm management plan, starting in fiscal year 2026. As such, the sixth midterm management plan running through to 2025 will be a time for us to first acquire land, then carry out construction of our plant and then put in place a production line following capital expenditures.

Thank you. Allow me to ask my second question. The joint venture with Honda Motor will take place as an equity method affiliate. Would it be safe to assume that since GS Yuasa is investing JPY 100 billion in this joint venture for batteries for EVs, Honda Motor, too, is also investing in similar or greater amount? In terms of the total scale, is it reasonable to assume a size of JPY 200 billion or greater?

Indeed, I am not at liberty to discuss the details at the present stage, which we are currently planning for a production capacity of over 20 gigawatt hour per year by fiscal year 2035. Given an investment requirement of approximately JPY 10 billion per gigawatt hour per year, a rough estimate would be JPY 200 billion. Additionally, we will also be utilizing subsidies.

Allow me to ask one last question. Earlier, you mentioned that the free cash flow for the 3-year period corresponding to the sixth midterm management plan will be negative JPY 50 billion. Naturally, this takes into account very high levels of capital expenditure. Looking at the company's balance sheet, debt borrowings exceed JPY 100 billion. And while I am not certain, I do not believe this to be equity financing. So I would like to inquire about the financing path the company will be pursuing. You mentioned the company will be looking at both internal and external sources of funds. In light of an increase in bank debt, would it be reasonable to expect the debt ratio to increase for the foreseeable future?

CFO, Matsushima will be answering your question.

This is CFO, Matsushima speaking. Allow me to answer your question. As you mentioned, this negative of JPY 50 billion in free cash flow carries a heavy weight. As President Murao mentioned earlier, we have started considering a variety of funding methods, be they direct or indirect. It has not yet been decided whether the total amount will come from bank loans. Even if this turns out to be the case, we do not expect any significant changes to our financial structure and position. At the present moment, we are not at liberty to disclose the specifics regarding financing, so we request your understanding on this front.

Thank you. Mr. Yasuda with Toyo Securities will be posing the next question.

My name is Yasuda, and I am with Toyo Securities. I have one question for you, pertaining to investments. This is my personal opinion, but I believe past investments carried out by the company didn't see much success. I would like to ask President Murao, what went wrong in past investment in the Automotive Lithium-ion Batteries segment? And what elements are different with the investments the company will now be carrying out?

Thank you for your question. While we did struggle at times looking at GS Yuasa's current level of technical capabilities, et cetera, I do not view past investments as having failed. In other words, GS Yuasa boasts its current level of technical capabilities, thanks to the execution of past investments, which formed a base and foundation for this. With that being said, an objective analysis reveals that Lithium Energy Japan struggled significantly in terms of batteries for EVs and plug-in hybrid vehicles. However, even within this struggle, I believe we nevertheless were able to learn and obtain a variety of technical knowledge and expertise.

Thank you for your answer. Allow me to ask a follow-up question. You said these past investments were a learning opportunity that's translated into an increase in the company's technical capabilities. The company has carried out investment in a variety of forms in terms of capital, such as in the form of partnerships, et cetera. Would it have been preferable if the company had carried out this investment on its own?

As I have mentioned on previous occasions, it would be very challenging for GS Yuasa to carry out this type of investment using exclusively its own resources. As such, I believe GS Yuasa's strategy is to work together with Japanese OEM automakers. As such, looking back, I believe doing things on our own was never an option.

Thank you for your answer. The company will be carrying out over JPY 100 billion in investments within the scope of the sixth midterm management plan. Are there any differences between this and past investments carried out by the company?

Up until now, we have carried out investment at Lithium Energy Japan and Blue Energy. And I believe there isn't much difference between past investment and the investment we will be carrying out within the scope of the new midterm management plan. In terms of batteries for BEVs, we are currently applying for subsidies. We also received subsidies to some extent in the past, with support on the part of the Japanese government represents a tailwind for us this time as it pertains to public-private consortiums, et cetera.

Mr. Naruse with Okasan Securities will be posing the next question.

Allow me to ask two or three questions, the first of which pertaining to the Automotive Lithium-ion Batteries segment. To summarize your previous comments and explanations, naturally, the company will be carrying out R&D through a joint venture as an equity method affiliate. Is the company also considering the use of an equity method affiliate for the new manufacturing company? Additionally, in terms of profits, in addition to profits accounted for using the equity method, will the company be receiving royalties as you mentioned on previous occasions? My second question pertains to capital expenditures within the sixth midterm management plan. The company is aiming for a production capacity of 20 gigawatt hour per year by 2035. These figures are for one plant. So I believe this is quite achievable, even by 2030. Naturally, things have not been finalized yet, but I would like to hear your thoughts on this. Additionally, the company will also be strengthening the area of batteries for plug-in hybrid vehicles, as shown in the slide, dealing with lithium Energy Japan. There was another talk about GS Yuasa within the briefing of midterm management plan of Mitsubishi Motors. This didn't come to fruition, but does the company consider there to be room for new developments and growth on this front?

Allow me to answer your first question. Naturally, as shown here, we will transfer the technical expertise derived from our joint R&D efforts with Honda Motor to the manufacturing company in the form of intellectual property. As shown in the diagram, we want to carry out manufacturing within the GS Yuasa group. As you can imagine, we won't be doing this 100% on our own, but we will be carrying out production through a manufacturing company within the GS Yuasa group. In terms of returns, as you mentioned, we are considering a royalty system, paying a royalty fee to the development company. Such is the business model. Regarding your second question, you mentioned how a production capacity of 20 gigawatt hour per year by fiscal year 2035 might be a somewhat low number. As I mentioned during my presentation, we are planning for a production capacity exceeding 20 gigawatt hour per year. These numbers reflect things as they stand today in terms of talks we have had with OEMs, but there is a possibility this might change between 2030 and 2035. Third, on the topic of plug-in hybrid electric vehicles, we currently supply batteries to the Eclipse Cross by Mitsubishi Motors. Naturally, we intend to increase production capacity, taking this and other elements into account. Additionally, this production capacity of over 20 gigawatt hour per year will center primarily on BEVs, but some of this capacity will also be dedicated to plug-in hybrid vehicles.

My second question pertains to the Industrial Battery and Power Supply segment, namely the supply of lithium-ion batteries for our renewable energy uses. As you discussed, the company expects an increase in sales, but profits to remain somewhat stagnant. Indeed, the business model is not to make money from new batteries, but from replacement and maintenance services. Is my understanding accurate that it is difficult to change this basic premise, when it comes to the business model, against the backdrop of increasing adoption of renewable energies in Japan?

During the fifth midterm management plan, we supplied batteries for the interconnected system of large wind power generation in Hokkaido for reducing output fluctuations. Supplied batteries are equivalent to about 45,000 EVs. I believe this model will become the template, going forward, which generates very little upfront operating income at the time of installation. Profit is, therefore, generated over time over a period of 20 years or so in the form of replacement and maintenance. We currently receive inquiries for implementation at the plant level and for interconnected power generation systems and supply batteries in the domain of supply and demand adjustments of electricity. As such, we believe we can recoup costs and generate profits over long periods of time. And we already established this business model during the fifth midterm management plan. Going forward, we want to further expand this business model.

Thank you for your answer. In terms of my second question, I wanted to convey that it would be beneficial if the company were able to generate more profits during the initial installation stage.

That would indeed be desirable.

My third question pertains to shareholder returns. The company is aiming for a total return ratio of 30% or more, I would like to know about the breakdown and more details in terms of dividends, share buybacks, et cetera, Will the company only carry out these buybacks, should there be stock sales by large shareholders? You mentioned the company is considering both direct and indirect funding methods. But it would strike me as inconsistent if the company were to pursue direct funding, while at the same time, carrying out share buybacks. Could you, therefore, expand upon your thoughts on this breakdown?

Allow me to discuss our general approach to this, after which I will yield the floor to CFO, Matsushima. Generally speaking, as it stands, we are not currently actively considering share buybacks.

As President Murao mentioned just now, we expect this to be the case over the short term. However, our basic approach to shareholder returns involves both the distribution of dividends and the execution of share buybacks. There is no set percentage in terms of the breakdown for these two. The dividend amount is based on consolidated net income. And in addition to that, in the presence of surplus capital, we would like to consider share buybacks. This concludes my answer.

So the company will be focusing primarily on dividends. Thank you for your answer.

Ms. Takayama with Citigroup Global Markets Japan will be posing the next question.

My name is Takayama, and I am with Citigroup Global Markets Japan. I have one question for you, pertaining to the company's BEVs strategy. Could you give us a little more detail on this front? As in the case of hybrid vehicles, will the target market for BEVs be Japan? I believe GS Yuasa currently boasts the high market share in Japan through its supply of batteries for hybrid vehicles manufactured by Honda Motor. In terms of batteries for BEVs as well, do you believe you will be able to secure supply orders from Honda Motor as the first supplier? Additionally, could you discuss the possibility of partnerships with additional companies other than Honda Motor? The company positions the sixth midterm management plan as a preparatory phase in terms of the business of supplying batteries for BEVs. Lastly, could you share with us the profitability timeline and profitability estimates after mass production has stabilized?

Thank you for your question. First, these figures refer to the domestic market in Japan. As such, as it stands, we are currently planning on a production capacity exceeding 20 gigawatt hour per year in fiscal year 2035. And this refers to the domestic market in Japan as figures for overseas are not included in this. Naturally, we are considering other partnerships in addition to Honda Motor. In terms of the profitability timeline and profitability estimates, we are currently in the planning stage, so we are not at liberty to discuss specific figures.

Mr. Ishimoto with Nomura Securities will be posing the next question.