GS Yuasa Corporation (6674) Earnings Call Transcript & Summary

Let me start by offering a word of appreciation to institutional investors and analysts. Without further ado, I would now like to report on fiscal year 2023 2nd Quarter financial results. Here are the topical points of fiscal year 2023, second quarter financial results. Net sales and operating income increased on a year-on-year basis. Thanks to the revision of selling prices across the company's business units and primarily due to an increase in sales volume of lithium-ion batteries for hybrid vehicles. Ordinary income and profit attributable to owners of parent also increased year-on-year, thanks to improvements in equity in earnings of affiliates and foreign exchange gains and losses. We registered JPY 256.8 billion in consolidated net sales in the Second Quarter of fiscal year 2023, a year-on-year increase of JPY 21.6 billion. We registered JPY 12.7 billion in operating income, a year-on-year increase of JPY 4.5 billion, while operating income before amortization of goodwill stood at JPY 12.9 billion. a year-on-year increase of JPY 4.1 billion. We registered JPY 12 billion in ordinary income, a year-on-year increase of JPY 6 billion. This increase was on account of improvements in equity and earnings of affiliates and foreign exchange gains and losses. We registered JPY 6 billion in profit attributable to owners of parent, a year-on-year increase of JPY 4.3 billion. Lastly, we registered JPY 6.2 billion in profit before amortization of goodwill, a year-on-year increase of JPY 4 billion. Net sales, operating income, ordinary income and profit all achieved new record highs. Shown here are the change factors for operating income before the amortization of goodwill. The left side shows a year-on-year comparison, while the right side shows a comparison with the initial forecast. On a year-on-year basis, while surging raw material prices resulting from exchange rates had a negative impact, we made good progress in revising prices and consequently, raw material price and sales price made a positive contribution to operating income of JPY 9.6 billion. On the other hand, expenses, et cetera, made a negative contribution of JPY 4.1 billion, resulting primarily from an increase in costs proportional to a sales increase of lithium-ion batteries for hybrid electric vehicles. Additionally, realized results exceeded the initial forecast by JPY 4.4 billion. While quantity primarily overseas had a negative impact, we made progress in revising sales prices and rationalized expenses, and this allowed us to secure growth in operating income. I will be delving into the details starting on Page 8, but the bird's eye view is that GS Yuasa was able to grow sales and profits across all segments. While the price of lead, 1 of the key raw materials in our products was stable on the LME, a weaker yen meant domestic prices remained high. I will now be going over the details for each segment, starting with the Automotive Battery segment in Japan. Sales and profits increased in this segment. Sales volume of batteries for new automobiles increased as the mitigation of the semiconductor shortage made possible a recovery in production levels on the part of automakers and also thanks to progress in the revision of selling prices, while sales volume of batteries for replacement declined slightly progress in the revision of selling prices allowed us to maintain sales at the same level as in the previous year. In terms of operating income, sales quantity and composition change led to a worsening of the product mix and an increase in expenses, but this was offset by a profit increase, thanks to progress in the revision of selling prices. Next is GS Yuasa's Ratio of shipped batteries in Japan for new automobiles and for replacement and its market share. We registered a significant year-on-year recovery in the ratio of shipped batteries for new automobiles compared to the period between fiscal years 2020 and 2022. And which was marked by the negative impact of COVID-19 and due to the semiconductor shortage. In the market of replacement batteries, the share of batteries for start and stop vehicles, which are high value-added batteries continues a steady climb. And at the same time, we are also gradually seeing an increase in replacement demand for European standard-compliant, abbreviated as [ EN ] batteries. Our market share in batteries remains unchanged from fiscal year 2019 levels, pre-COVID-19 at 72% for new automobiles and 57% for replacement. Next is the overseas automotive battery segment, which registered an increase in sales and profits. In Southeast Asia, especially in Indonesia, we have seen rough demand preceding price hikes in the previous period. While this extra demand was absent in the first quarter, leading to a decrease in sales quantity, we started seeing a recovery in the second quarter with the rate of decrease being less and less pronounced over time. In China, sales volume for new automobiles decreased significantly, especially on account of a poor performance by Japanese automakers in this market. We also faced headwinds here in terms of profits as well. As announced in July, Loech Battery was set to acquire controlling stakes in GS Yuasa's 2 consolidated subsidiaries in China, and this transaction was completed on October 31. The net sales is on a rising trend in European and Australian markets on account of the revision of selling prices. While we registered a decrease in sales quantity in China and Southeast Asia, some success in price revisions in markets such as Europe and Australia allowed us to post an increase in segment profits. Despite a weaker yen depreciation of the Turkish lira negatively affected the foreign exchange rate, which weighed down on operating income. Page 11 discusses sales and market share by region globally in the overseas automotive battery segment as well as the ratio of shipped batteries in ASEAN where GS Yuasa has a significant presence. As you can see, globally, the sales share for the ASEAN region continues on an upward trend, growing with each passing year. GS Yuasa aims to maintain a high market share in ASEAN, while at the same time working towards further profitability improvements through the introduction of new products and optimal production systems. We based Vision 2035 on a worst-case scenario premised on the gradual phasing out of lead-acid batteries for automobiles. With that being said, global vehicle ownership numbers are on the rise, especially in ASEAN. So we believe there will continue to be robust demand for lead-acid batteries over the foreseeable future. The Industrial Battery and Power Supply segment too registered an increase in sales and profits. Sales increased in the regular field, which is a field that is expected to see growth going forward. Sales of backup batteries and power supplies remained steady, thanks to the execution of selling price revisions, et cetera. In terms of batteries for forklifts as well, while sales volume decreased slightly in Japan, net sales increased, thanks to the execution of selling price revisions, et cetera. In fiscal year 2022, GS Yuasa announced price revisions to offset soaring raw material prices. These efforts have borne fruit, allowing us to grow operating income. I would now like to discuss our strategy in the regular field which we intend to grow to become a core pillar in this segment. The Japanese government screen growth strategy calls for a drastic shift in the power supply composition in order to achieve carbon neutrality by 2050. With renewable energy accounting for 50% to 60%. Additionally, an expansion in subsidies related to renewable energies is expected going forward within the scope of efforts toward carbon neutrality. Against this backdrop, there has been an increase in the importance of storage battery systems utilizing lithium-ion batteries deployed to prevent output fluctuations and match supply and demand. Within storage batteries and systems, GS Yuasa will be strengthening its presence in the renewable energy market by offering all-in-one solutions for maintenance, leveraging PCS and remote monitoring services. We are currently developing a new battery. And once this process is complete and this new battery makes it to market, this will allow us to improve our competitiveness and further enhance our presence in the market for batteries in the regular field. Shown here are some examples of major ESS projects secured and delivered by GS Yuasa. Between fiscal years 2020 and 2021, we carried out to delivery of an interconnected system of large wind power generation in Hokkaido. This is the largest lithium-ion storage battery facility in the world. with a capacity of 720-megawatt hour. This has been followed by further demand for interconnected storage battery systems as GS Yuasa continues delivering similar projects such as Honda's Kumamoto factory and the ENEOS Muroran plant. Going forward, GS Yuasa will continue contributing to the further use of renewable energies by promoting stability in the electrical grid. Next are the results in the automotive lithium-ion battery segment. This segment registered a significant increase in net sales, accompanied by an increase in profits. Sales volume of lithium-ion batteries for hybrid vehicles increased significantly, thanks to a recovery in production by new car manufacturers. We are making progress in enhancing its production structure in order to meet demand from new car manufacturers for lithium-ion batteries for HEVs. Among these initiatives, Blue Energy's #2 plant started operations in fiscal year 2022. Additionally, sales of 12-volt lithium-ion batteries increased due to higher sales of car models equipped with our batteries. On the other hand, while an increase in sales quantity and price revisions had a positive effect on operating income, the start of operations at Blue Energy's #2 plant higher costs resulting from an increase in sales volume and soaring raw material prices offset this to a significant extent, meaning the increase in operating income was somewhat limited. Next, our initiatives by Blue Energy and Lithium Energy Japan. We expect growing demand for batteries for HEVs, especially from Japanese automakers until the mid-2030s. Against this backdrop, in fiscal year 2011, we started supplying Honda Motor with lithium-ion batteries for HEVs and also Toyota Motor starting in fiscal year 2020. In fiscal year 2023, we have plans to expand sales to other automakers as well. Blue Energy's #2 plant started operations in the second half of fiscal year 2022, with an annual production capacity of 50 million cells. We have plans to expand this production capacity and are aiming for an annual capacity of 70 million cells by fiscal year 2025. Lithium Energy Japan is starting mass production of new lithium-ion batteries for Mitsubishi Motors Minicab-MiEV and we'll expand the number of PHEV models equipped with our lithium-ion batteries. I would now like to discuss our strategies for lithium-ion batteries for BEVs, which is an area we seek to deliver a significant leap in. First, we have Honda GS Yuasa EV battery R&D, which is a joint venture between Honda Motor and GS Yuasa. Within this scope, the idea is to go beyond a mirror supplier automaker relationship with engineers from both Honda Motor and GS Yuasa searching for optimal solutions for batteries and vehicles to promote development. We positioned GS Yuasa's battery cell technology Honda Motors in-vehicle pack technology and both companies' production technology as key technologies for creating new added value in batteries for BEVs. As such, we aim to accelerate innovation by integrating these technologies. The right-hand side of the page shows the timetable for the business of the batteries. We will be utilizing JPY 158.7 billion in subsidies from the Ministry of Economy, Trade and Industry and achieved a production capacity for the 3 companies of GS Yuasa, Honda Motor and Blue Energy, exceeding 20 gigawatt hour per year by 2030. Additionally, we will work to build up the GS Yuasa Group's production capacity to exceed 20 gigawatt hour per year by 2035. The segment of specialized batteries and others too registered an increase in sales and profit. In terms of lithium-ion batteries for aircraft, sales volume of batteries for airlines for replacement increased. In addition, we also reduced expenses in administrative divisions, and we're able to deliver an increase in profits. I would now like to discuss the balance sheet statement as of September 30, 2023. Total assets stood at JPY 559.2 billion, an increase of JPY 18.4 billion from March 31, 2023 figures. Despite an increase in inventories of JPY 15 billion, improvements in other areas allowed us to limit the increase in working capital to JPY 2 billion. Noncurrent assets increased by JPY 19.5 billion on account of the rebuilding of the plant, the purchase of shares of subsidiaries and associates and an increase in unrealized gains on securities. Net assets were up by JPY 15.8 billion, thanks to an increase in profits and unrealized gains resulting from rising stock prices and a weaker yen. We capped cash and deposits, reducing total borrowings by JPY 6.2 billion. While total borrowings have now fallen below the JPY 100 billion mark, we believe current levels to be rather elevated. Ultimately, the equity ratio improved slightly to 43.6%. Next is the cash flow statement for the Second Quarter of fiscal year 2023. As of September 30, 2023, cash and cash equivalents stood at JPY 27.7 billion, a year-on-year decrease of JPY 8.3 billion. Operating cash flow increased significantly on a year-on-year basis from JPY 1.9 billion last fiscal year to JPY 19.3 billion as GS Yuasa was able to secure JPY 11.7 billion in profit before income taxes and carry out improvements in working capital. Investing cash flow came to negative JPY 17.5 billion, due to capital investment for Blue Energy's #2 plant, et cetera. These factors resulted in free cash flows of JPY 1.8 billion, which, together with cash and cash equivalents, the company used to repay long-term debt, maintaining financial discipline. We carried out JPY 15.2 billion in capital investment for a year-on-year increase of JPY 1.3 billion. The main capital investment item was in Blue Energy's #2 plant in the automotive lithium-ion battery segment. We are also carrying out the renovation of the Kyoto plant and to the acquisition and development of land for BEV battery production. As a result, capital investment is also up in the segment of specialized batteries and others. Depreciation increased as a result of the start of operations at Blue Energy's #2 plant. We have also enhanced R&D related to lithium-ion batteries pertaining to research into batteries for BEVs and all solid-state batteries. I would now like to discuss the revision to the full year results forecast for fiscal year 2023. The main revision item pertains to the overseas automotive battery segment where we transferred our stake in GS Yuasa's 2 consolidated subsidiaries in China. As a result of this transfer, we have lowered the fiscal year 2023 net sales forecast by JPY 5 billion, while raising the operating income forecast by JPY 1 billion. Additionally, we have lowered the net sales forecast for the automotive lithium-ion battery segment by JPY 15 billion, primarily on account of the postponement into next fiscal year of deliveries to a new automaker client. We have reflected the impact of the revision of selling prices in the automotive battery and industrial battery and power supply segments as we raised the operating income forecast for these segments. Additionally, we raised the operating income forecast for specialized batteries and others on account of a strong performance of lithium-ion batteries for aircraft and cost reductions in administrative divisions. Taking all of these factors into account, GS Yuasa ultimately expects to realize JPY 560 billion in net sales, which represents a decrease of JPY 20 billion compared to the initial forecast. Conversely, we expect JPY 37.5 billion in operating income, which represents an increase of JPY 3.5 billion compared to the initial forecast. Together with this revision to the results forecast, we have also revised the forecast conditions, namely the price of lead and due to the exchange rate forecast. We expect to break new record highs in fiscal year 2023 for net sales as well as all other income line items. This concludes the results briefing covering the results for the 6 months ended September 30, 2023. We would now like to begin the Q&A session.

Mr. Hashimoto with Nomura Securities will be posing the first question.

My name is Hashimoto, and I am with Nomura Securities. Allow me to pose my first question. I believe the company has issued a revision to the results forecast for the automotive lithium-ion battery segment. Could you give us some more details on this front? It's a rather large downward revision in net sales. So could you discuss the background in terms of this postponement of deliveries into next year? And also the operating income forecast, which remains unchanged.

Thank you for your question. As you mentioned, the revision to net sales was primarily on account of the postponement of deliveries to new automaker clients. We had originally intended to carry out these deliveries in fiscal year 2023 and but we now expect these to take place next fiscal year. I'm not at liberty to go over the details here. The production of models equipped with our batteries is running slightly behind schedule as a result of some issues faced by the relevant OEMs. This accounts for this downward revision of approximately JPY 15 billion to the net sales forecast. With that being said, the operating income forecast remains unchanged. This is on account of an overall increase in sales quantity as well as the revision of selling prices to reflect an increase in energy costs associated with the cost of electrolytes or electricity bill and component costs, among other things, as well as soaring raw material prices. Another factor is yield improvements of production process, offering stable quality with levels now significantly exceeding the initial forecast. Furthermore, the joint venture company, Honda GS Yuasa EV battery R&D no longer features within the scope of consolidation, and this has a positive impact on operating income. Taking all of these factors into account and despite an expected decrease in net sales, we don't expect operating income to fall below the initial forecast.

Thank you for your answer. Allow me to ask a follow-up question. In light of what you just said, I believe that means that the automotive lithium-ion battery segment is expected to deliver a significant improvement in operating income in the second half of the year. compared to first half results. Would it, therefore, be reasonable to say the company expects to make significant progress in the revision of selling prices? This naturally together with the other factors you mentioned, such as improved yield, et cetera.

Indeed, and also there is another factor. Allow me to direct your attention to first and second quarter operating income results. We posted a somewhat lackluster operating income performance in the second quarter. As you are aware, raw materials are currently on a downward trend. So this lackluster performance in the Second Quarter had to do with the price of raw materials prior to the execution of revisions to selling prices. We are carrying out adequate measures in this area and will aim to secure results in line with the initial forecast.

Thank you for your answer. Allow me to pose my second question pertaining to the company's numerical performance results in the automotive lithium-ion battery segment. Could you give us a breakdown of the results for BEC and LEJ in terms of net sales and operating income?

Thank you for your question. The utilization rate for LEJ increased significantly in terms of cumulative first half results. As it stands, the utilization rate at LEJ currently exceeds 80%, and these continue to be very strong results. While we increased production capacity at Blue Energy, the utilization rate remains more or less in line with last year's results at around 70%. However, the effects of the semiconductor shortage continued through to the First Quarter. So the quantity of batteries delivered for Blue Energy fell slightly short of the initial forecast. With that being said, Blue Energy nevertheless registered a significant year-on-year increase in the quantity of batteries delivered. Lithium Energy Japan also delivered a significant year-on-year increase in quantities. As such, both Lithium Energy Japan and Blue Energy delivered an increase in sales quantity and a very strong utilization rate performance. In terms of the outlook going forward, naturally, we will be enhancing production capacity of batteries for HEVs and blue energy. Additionally, while the number of cells produced varies by capacity of batteries, Lithium Energy Japan currently has a production capacity of approximately 6 million cells per year. We have plans to increase this capacity, and we'll be carrying out construction to this end.

Thank you for your answer. You mentioned how Lithium Energy Japan currently has a production capacity of 6 million cells per year, with a utilization rate in excess of 80%. Similarly, you mentioned that the company intends to further expand production capacity going forward. So would it be reasonable to assume an increase in PHEV models equipped with batteries of lithium energy Japan. Mitsubishi Motors is Lithium Energy Japan's main client, but do you have other clients lined up?

I'm not at liberty to go over the details here, but what I can say is that we do expect an increase in the number of PHEV models equipped with our batteries. There is also ESS with Lithium Energy Japan manufacturing storage batteries, and we have received a large number of inquiries regarding these. As such, there is a need for us to increase capacity to address this as well.

Does that mean the company expects this expansion in PHEV models equipped with batteries to take place in the near future, say, next fiscal year or so? Or is the expected time line a little bit further down the road?

I can't go into the details, but we expect this increase in models to take place in the near future.

My final question pertains to overseas results and forecasts. The company posted a very strong profit performance in the Second Quarter. And while I initially expected this to be a result of a weaker yen, this wasn't the case. Instead, it was also the result of an increase in sales quantity. Against this bankrupt, how does GS Yuasa view its product mix? Has there been an improvement from pre-COVID levels? Or have things changed for the worse? I believe that compared to the second half of last fiscal year, there has been a slight decrease in batteries for replacement and an increase in batteries for new automobiles. Against this backdrop, could you expand a little on what allowed the GS Yuasa to post such robust profit results? Lastly, could you share your thoughts on the product mix in the second half?

Your observations are correct. The semiconductor shortage has subsided with an increase in production numbers for new automobiles. In light of this, the share of batteries for new automobiles within the product mix has increased significantly compared to during the pandemic period. The replacement market has better profit margins, so this change in the product mix has translated into a slight negative impact on profits. With that being said, price revisions and efforts to rationalize expenses have borne fruit, allowing us to deliver a robust profit performance. As I mentioned briefly, in the second half as well, Southeast Asia and especially Indonesia are very important regional markets for us. In this region, inventories sold well in the first quarter, and we have high hopes for this market going forward. GS Yuasa's products are manufactured and sold in the same region, so fluctuations in the exchange rate don't tend to have much impact on the company's profit performance.

It would therefore appear that the company expects a strong performance in the second half as well. The operating income forecast for the second half stands at JPY 8.4 billion. Given how Second Quarter nonconsolidated operating income came to JPY 4.8 billion, I believe there is a strong probability the company will be able to achieve its forecast. Would it be correct to assume the company does not expect downside risks from things like a worsening in the product mix and a decrease in sales quantity?

That is indeed the case as we don't expect such risks. There is a level of country risk overseas, so we take a somewhat cautious approach on this front.

Mr. [ Naroseya ] with Okasan Securities will be posing the next question.