GS Yuasa Corporation (6674) Earnings Call Transcript & Summary

Good afternoon, everyone. My name is Hiroaki Matsushima, Director and CFO at GS Yuasa Corporation. Allow me to use this opportunity to thank analysts and fund managers for their coverage and interest in our company's operations. Today's briefing covers the results for the 6 months ended September 30, 2025. Key points from the second quarter results for fiscal year 2025. Revenue reached JPY 272.2 billion, representing an increase of JPY 7.7 billion compared to the previous year. Operating profit was JPY 18.7 billion, an increase of JPY 3.0 billion, while ordinary profit was JPY 17.3 billion, an increase of JPY 2.8 billion, and interim net profit was JPY 10.5 billion, an increase of JPY 1.1 billion, resulting in both increased revenue and profit. Performance trends are as follows: the increase in both revenue and profit was driven by higher sales volumes, alongside price revisions for automotive batteries domestic, industrial battery power sources and automotive lithium-ion batteries. Interim net profit increased due to extraordinary gains, specifically the recognition of gains on the sale of fixed assets from the disposal of idle land. Both sales revenue and profits at each stage have reached record highs. Factors contributing to the year-on-year change in operating profit before amortization of goodwill and similar items. Although personnel costs rose year-on-year and various expenses increased due to inflation, this was offset by volume growth and higher selling prices, resulting in a JPY 3.0 billion increase in profit. Despite the underperformance of the Turkish base, strong results from other bases, particularly in the ASEAN region combined with cost reductions and selling price adjustments in the lithium-ion battery business, especially for hybrid vehicle batteries, contributed to a total of JPY 19.1 billion. Breakdown of non-operating income and expenses, and extraordinary gains and losses. Nonoperating income has decreased. Research and development expenses at Honda GS Yuasa EV battery R&D, HGYB, our joint venture with Honda, have increased, and there are negative contributions from some equity-method affiliates. Foreign exchange gains and losses improved year-on-year. Interest expense increased, but this resulted in an increase in ordinary profit. Extraordinary gains include JPY 1.6 billion in gains on the sale of fixed assets arising from the disposal of idle land. Income tax expense increased year-on-year. Interim net profit increased by JPY 1.1 billion year-on-year to JPY 10.5 billion. Revenue and operating profit by segment. All segments, except Automotive Batteries overseas recorded increased revenue and profit. Automotive batteries in Japan recorded increased revenue and profit with sales up JPY 3.5 billion and operating profit up JPY 0.3 billion. Automotive Batteries overseas saw a decrease in both sales revenue and operating profit, with sales revenue down JPY 4.4 billion and operating profit down JPY 0.3 billion. Industrial battery power sources saw increased revenue and profit with sales up JPY 4.7 billion and operating profit up JPY 0.6 billion. Lithium-ion batteries for vehicles recorded a significant increase in both sales revenue by JPY 4.1 billion and operating profit by JPY 2.6 billion. Specialized and others recorded a decrease in both sales and profit with sales down JPY 300 million and operating profit down JPY 300 million. Domestic automobile production is currently recovering from the previous year's shutdowns at new car manufacturers. Furthermore, domestic infrastructure demand remains robust, partly due to replacement cycles, while renewable energy demand continues to grow steadily. Whilst domestic lead base prices and LME prices have declined, there has been a surge in the cost of certain raw materials such as antimony. Compared to the previous year, the yen has strengthened. Automotive batteries in Japan recorded sales of JPY 47.1 billion, an increase of JPY 3.5 billion, with operating profit reaching JPY 3.7 billion, an increase of JPY 0.3 billion. Sales for new vehicles increased due to higher sales volumes following the recovery from the previous year's production stoppages at new vehicle manufacturers, the effect of selling price adjustments and the successful conclusion of price adjustments reflecting the sharp rise in antimony, a key raw material. For the replacement market, sales volume increased alongside an improvement in the product mix, leading to higher sales revenue. Operating profit remained largely unchanged from the previous year. However, despite increases in certain raw material costs, primarily antimony and higher expenses, mainly labor costs, profit increased due to higher sales volumes and sales price revisions. Automotive Batteries overseas recorded sales of JPY 123.1 billion, a decrease of JPY 4.4 billion year-on-year and operating profit of JPY 9.1 billion, a decrease of JPY 0.3 billion year-on-year, resulting in both reduced sales and profit. The decrease in sales was due to the impact of the Turkish base and exchange rate effects. Although sales in Turkey declined significantly, Southeast Asia, Europe and Australia remained robust. Operating profit was negative, partly due to exchange rate effects, but we recognized an increase on a local currency basis. Industrial battery power supplies recorded sales of JPY 50.9 billion, an increase of JPY 4.7 billion year-on-year and operating profit of JPY 4.5 billion, an increase of JPY 0.6 billion year-on-year. For regular field, including ESS, sales increased slightly due to a rise in projects and the carry-over effect from the previous period. Sales in the emergency use increased due to expanding demand for nuclear power and data centers as well as new orders from major convenience store chains. Sales of forklift batteries remained largely unchanged from the previous year. The surge in antimony prices has been partially reflected in selling prices. The primary factor driving the profit increase was the rise in demand for emergency field batteries. We recognize that the significant impact stems largely from improved profitability driven by strong performance in projects for nuclear power plants, data centers and government agencies. Sales of automotive lithium-ion batteries reached JPY 40.4 billion, an increase of JPY 4.1 billion year-on-year. Operating profit was JPY 0.8 billion, a significant improvement of JPY 2.6 billion year-on-year. Sales increased for hybrid vehicle batteries, driven by a significant expansion in volume supplied to Honda. Plug-in hybrid vehicle applications saw increased volume year-on-year with profits recovering substantially from the previous year's deficit to achieve profitability. For hybrid vehicle applications, profit increased substantially due to higher volumes, price adjustments and stabilizing raw material market conditions. Specialized batteries and other products recorded sales of JPY 10.6 billion, a decrease of JPY 0.3 billion year-on-year, and operating profit of JPY 0.9 billion, a decrease of JPY 0.3 billion year-on-year. Sales of lithium-ion batteries for submarines decreased due to a revision in contract unit prices. Sales of lithium-ion batteries for aircraft decreased for both new installations and airline applications. Additionally, a slight increase in head office administrative expenses and research and development costs contributed to the decline in profit. This is the balance sheet as of the end of September 2025. Total assets amounted to JPY 684.5 billion, representing a decrease of JPY 9.3 billion compared to the end of March. This decrease is primarily attributable to a JPY 23.4 billion reduction in current assets. Cash and deposits decreased due to investments in tangible fixed assets, specifically the BEV factory and increased production facilities for lithium-ion batteries for hybrid vehicles. Tangible fixed assets increased by JPY 11.7 billion, driven by growth in machinery and equipment and construction in progress. The equity ratio stands at 51.8%. Total borrowings amounted to JPY 105.1 billion. Operating cash flow was positive JPY 14.6 billion. Investing cash flow was negative JPY 26.9 billion. Financing cash flow was negative JPY 11.0 billion and free cash flow was negative JPY 12.3 billion. Although operating cash flow showed a significant improvement from the previous year, overall cash flow was negative due to capital expenditures for BEV production facilities and increased production capacity for hybrid vehicles. Please refer to this slide as supplementary material.

We shall now outline our assessment of the business environment for the second half of the fiscal year ending March 2026. Automotive batteries in Japan. Price increases for raw materials such as antimony have been passed on to new vehicle customers, and sales volumes for both new vehicles and replacement batteries are progressing as planned. Replacement battery sales are showing a slight upward trend. Automotive batteries overseas. While challenges persist in Turkey, the main market in ASEAN remains robust. This favorable situation for both new vehicle and replacement applications is expected to continue in the second half. Australia is also anticipated to maintain strong performance in the second half. Industrial Battery and power supplies. Emergency use supplies remain strong as infrastructure enters a renewal phase with new projects increasing for government agencies, nuclear power, data centers and telecommunications. Unlike emergency use, regular use applications have longer lead times from order to delivery. Although delivery dates may fluctuate due to customer factors such as subsidies and project applications, continued strong performance is anticipated. For automotive lithium-ion batteries, partial price adjustments have been implemented for hybrid vehicle applications. Against a backdrop of robust demand, volume growth is anticipated to continue in the second half. For plug-in hybrid vehicles, volume reductions beyond initial projections are expected to continue into the second half. However, production is anticipated to remain robust due to strong demand for batteries for energy storage systems, ESS, which are manufactured at the same facility. For hybrid vehicles, we anticipate a partial revision of selling prices and an increase in volume for Honda, but we also expect an increase in depreciation costs for the newly established line set up for new projects. For specialized batteries and other products, we recognize no change in the demand environment. This is the initial forecast announced in May. Although we anticipate steady progress in the second half, we have not revised our initial forecast due to the postponement of large-scale projects in the industrial battery power supply business's standard-use sector and the further negative impact of the Turkish operations. Towards the Seventh Mid-Term Management Plan currently under formulation, under the Sixth Mid-Term Management Plan, we significantly expanded earnings in the automotive lithium-ion battery business and the industrial battery power supply business alongside our existing lead-acid battery operations. We believe the sixth midterm management plan successfully strengthened the foundation of our earnings structure as intended. However, within the automotive lithium-ion battery business, significant shifts in market trends have necessitated addressing specific challenges for both hybrid and plug-in hybrid vehicles. Our commitment to contributing to society by solving social issues related to mobility and social infrastructure, as outlined in Vision 2035, remains unchanged. However, we will clarify the priorities for each business within the lead-acid battery and lithium-ion battery sectors, control capital allocation and advance measures to enhance our corporate value. Under the Seventh Mid-Term Management Plan, within the mobility sector, we will strive to increase cash generation, both domestically and internationally for lead-acid batteries, which are expected to continue expanding due to the global increase in the number of vehicles in operation. For lithium-ion batteries, we will meet new vehicle manufacturer demand with an annual production capacity of 70 million cells for hybrid vehicles. For BEVs, we will make investments commensurate with market demand and respond appropriately to our corporate scale. For 12-volt batteries, we will reliably serve Japanese new car manufacturers alongside lead-acid batteries, utilizing our expertise. In the social infrastructure sector, robust demand exists in the regular field. We are advancing discussions to expand production capacity through the addition of new production sites. Alongside the development and introduction of new lithium-ion battery models, we will maximize sales opportunities and strengthen competitiveness. In the emergency use, replacement demand is increasing due to aging infrastructure. We will respond to backup demand and domestic and international data center demand with high-quality products and meticulous aftersales service. Aerospace and Defense sector. We recognize the broad scope for application of our batteries installed on the International Space Station and artificial satellites. Amid heightened defense awareness within Japan, we will invest in production facilities to meet growing demand for large-scale lithium-ion batteries and thermal batteries for defense applications, leveraging our unique products and technologies. We will steadily expand profits in the aerospace and defense sectors through our unique technologies. This concludes an overview of our positioning towards the seventh midterm management plan. We will now begin today's Q&A session.

Regarding the Industrial Battery Power Supply business, second quarter performance was slightly down year-on-year. Is it correct to understand this was due to exceptionally strong performance in the prior year? Also, on the full year forecast front, you mentioned that revenue recognition for projects scheduled for completion this fiscal year will fall into fiscal year 2026. What level of impact is anticipated?

As a trend within the Industrial Battery Power Supply business, projects tend to concentrate around the end of the first and second half periods. We have not factored in the timing shift for deliveries. Our view remains that the business continues to perform well. The impact of the timing shift directly affects both sales and profit. The impact is estimated at just under JPY 6 billion on a sales basis and just under JPY 500 million on a profit basis. We are currently negotiating with customers to see if we can somehow bring these projects within the current fiscal year.

Regarding the outlook for automotive lithium-ion batteries, the second half will also include depreciation charges for the new production line. However, the full year pre-depreciation profit of JPY 2 billion seems likely to be slightly higher. Is the upward trend expected to continue in the second half?

The second half will follow the upward trend seen in the first half. As President Abe explained, this does not constitute a full earnings revision. While it will be difficult to achieve a steep upward trajectory in earnings going forward, as we plan to manufacture products, while pausing out the automotive lithium-ion battery lines from next fiscal year onwards, it is reasonable to view the current situation as showing some improvement.

Please explain the second quarter performance by segment relative to the initial plan.

Automotive Batteries domestic: in line with the plan, slightly above target; the surge in antimony prices has been balanced by sales price adjustments. Overseas Automotive Batteries: underperformance in Turkey is dragging results down; performance depends on how well other sites can compensate. Industrial power batteries: slightly above plan for the first half. Full year operating profit of JPY 19 billion remains uncertain, contingent on the outcome of timing adjustments. Lithium-ion batteries for automotive applications: as stated in Answer 2.

Regarding the timing shift mentioned in answer 3, would operating profit of JPY 19 billion be achievable without this timing shift?

Regarding the timing discrepancy, it depends on whether the application procedures can be completed in time. If this period's procedures cannot be completed in time, it will be carried over to the next period. If there is no timing discrepancy, the operating profit target of JPY 19 billion is expected to be met.

Is the profit from automotive lithium-ion batteries a one-off? Also, will LEJ separate the PHEV and regular use ESS lines?

Cost reductions, yield improvements and sales price negotiations with new car manufacturers are bearing fruit. While the upside potential for the second half is considered somewhat limited, we recognize an overall upward trend for the full year.

Production lines are being managed at the LEJ Ritto plant. But as manufacturing cannot keep pace, we are considering new expansions that is significant capacity increases. Details will be clarified in the Seventh Mid-Term Management Plan.