GS Yuasa Corporation (6674) Earnings Call Transcript & Summary

Here is a summary of the consolidated financial results for fiscal year 2025. Revenue totaled JPY 609 billion, an increase of JPY 28.7 billion compared to the previous year. Operating profit was JPY 60.2 billion, an increase of JPY 10.2 billion and ordinary profit was JPY 58.2 billion, an increase of JPY 11.9 billion. Net income was JPY 41.9 billion, an increase of JPY 11.5 billion, with all profit categories showing growth. Factors affecting the change in operating profit. This represents an increase of JPY 10.3 billion compared to the previous year. Although there were increases in expenses such as labor and logistics costs, profit increased significantly due to higher selling prices, price adjustments and increased sales volume across all segments as well as the impact of IRA subsidies in the U.S. Regarding the IRA subsidies in the U.S., we recognized not only the fiscal year 2025 portion but also the portions for fiscal year 2023 and 2024, resulting in a total positive impact of JPY 3.5 billion on earnings. Consequently, earnings increased significantly partly due to the lump sum recognition of the past 3 years' worth of subsidies in the current fiscal year. Breakdown of nonoperating income and expenses and extraordinary income and expenses. Nonoperating income increased due to the impact of inflation accounting. Foreign exchange gains and losses contributed JPY 2.2 billion, driven by a shift from foreign exchange losses in the previous year to foreign exchange gains. Interest expense increased due to higher interest payments at our Turkish operations, but ordinary profit still rose. Extraordinary gains include JPY 1.6 billion in proceeds from the sale of idle land. In addition, there was a gain of JPY 7.0 billion from the sale of Mitsubishi Logisnext shares as a gain on the sale of investment securities. We recorded a provision of JPY 3.3 billion related to the sale of our Turkish operations as a provision for losses on the liquidation of affiliated companies. Net income was JPY 41.9 billion, an increase of JPY 11.5 billion year-on-year. Here are the sales and operating income figures for each segment. With the exception of special batteries and others, both revenue and operating profit increased. Automotive Batteries Japan reported increased revenue and operating profit, with revenue up JPY 6.1 billion and operating profit up JPY 1.0 billion. Automotive batteries overseas reported increased revenue and operating profit, with revenue up JPY 4.4 billion and operating profit up JPY 5.8 billion. Industrial battery power sources reported an increase in both revenue and operating profit, with revenue up JPY 11.0 billion and operating profit up JPY 0.5 billion. Automotive lithium-ion batteries reported an increase in both sales and operating profit, with sales up JPY 7.1 billion and operating profit up JPY 3.5 billion. Specialty batteries and others reported a JPY 100 million increase in sales but a JPY 600 million decrease in operating profit. Automotive Batteries Japan remained largely flat year-on-year. Automotive batteries overseas saw a significant increase in profit. The main factors were the recognition of 3 years' worth of IRA subsidies for fiscal years 2023 through 2025, an increase in sales volume in the fourth quarter primarily in ASEAN countries such as Thailand and Vietnam, and improved profitability in Europe. In the lithium-ion battery segment, profit increased due to price adjustments for hybrid vehicles as well as higher sales volumes for both hybrid and plug-in hybrid vehicles. Furthermore, domestic infrastructure demand remains robust due to replacement cycles and demand for renewable energy continues to grow steadily. Although domestic lead prices and LME prices have fallen, prices for some raw materials such as antimony have risen sharply. The yen has appreciated compared to the previous year. In the Automotive Battery Japan segment, net sales were JPY 108.0 billion, an increase of JPY 6.1 billion and operating income was JPY 11.7 billion, an increase of JPY 1.0 billion. For new automobiles, although sales volume remained flat net sales increased due to a revision of selling prices and price adjustments implemented in the second half of the fiscal year in response to rising antimony prices. For replacement, sales increased due to higher sales volumes and an improved product mix, driven by growth in high value-added products, such as those for vehicles equipped with idling stop systems. Despite increased expenses and soaring antimony prices, operating profit and revenue both increased due to the revision of selling prices and price adjustments for antimony. The Automotive Batteries Overseas segment posted sales of JPY 264.5 billion, an increase of JPY 4.4 billion year-on-year and operating income of JPY 24.5 billion, an increase of JPY 5.8 billion year-on-year, resulting in both higher sales and higher profits. Sales increased at all locations except the Turkish facility. Operating profit was impacted by the challenging market conditions in Turkey, but this was offset by strong sales at other locations. In addition, operating profit increased significantly due to the impact of a JPY 3.5 billion subsidy under the U.S. Inflation Reduction Act, IRA. The Industrial Battery Power Supply segment reported net sales of JPY 124.1 billion, an increase of JPY 11.0 billion year-on-year and operating income of JPY 18.4 billion, an increase of JPY 0.5 billion year-on-year. For the regular field in Japan, sales increased due to a rise in projects compared to the previous year and the timing shift of projects from the previous fiscal year. For the emergency field in Japan, sales remained strong for nuclear power and data centers, continuing the trend from the previous year and sales also increased in the first half for telecommunications and major convenience store chains. Although sales volume of forklift batteries decreased, sales revenue remained largely flat due to ongoing price revisions. Operating profit saw a slight year-over-year increase, driven by an increase in projects despite rising expenses and soaring raw material prices. Sales of automotive lithium-ion batteries reached JPY 89.9 billion, an increase of JPY 7.1 billion year-on-year with operating profit of JPY 4.9 billion, a year-on-year increase of JPY 3.5 billion, marking a significant improvement. For HEVs, although sales volume to Toyota decreased due to a model change, sales revenue increased due to a significant expansion in sales volume to Honda. For PHEVs, sales volume to Mitsubishi Motors increased year-on-year, leading to higher sales revenue. Sales of 12-volt lithium-ion batteries declined due to customer circumstances resulting in a decrease in revenue. Operating profit continued the trend seen through the second quarter, largely driven by improved profitability in the hybrid vehicle segment. Although expenses increased, profit rose as the rising expenses was offset by price adjustments and increased sales volume. The Specialized Batteries & Others segment reported net sales of JPY 22.5 billion, an increase of JPY 0.1 billion year-on-year and operating income of JPY 1.5 billion, a decrease of JPY 0.6 billion year-on-year. Regarding lithium-ion batteries for submarines, sales decreased due to a revision of contract unit prices in response to changes in raw material market conditions. Sales of lithium-ion batteries for aircraft declined for both new installations and airline repair applications. In addition, increased expenses for the head office administrative division and research and development were factors contributing to the decrease in operating income. This is the balance sheet as of the end of March 2026. Total assets amounted to JPY 741.0 billion, an increase of JPY 47.2 billion compared to the end of March 2025. Tangible fixed assets increased by JPY 35.4 billion. This was primarily due to increases in machinery and equipment and construction in progress as well as investments in the manufacture of batteries for BEVs and in facilities to increase production of batteries for HEVs. In addition, cash and deposits decreased in line with the increase in tangible fixed assets. Inventories increased in the industrial battery power supply sector. The equity ratio was 53.3%. Total borrowings amounted to JPY 87.8 billion. Operating cash flow was positive JPY 49.5 billion. Investing cash flow was negative JPY 44.9 billion. Financing cash flow was negative JPY 31.8 billion, and free cash flow was positive JPY 4.6 billion. Here are the main investment plans for fiscal year 2025. We made investments to expand the Blue Energy's production capacity for automotive lithium-ion batteries from 50 million cells to 70 million cells as well as investments in specialized batteries and other areas to establish BEV battery manufacturing operations scheduled to begin in 2027.

We will promote social infrastructure, utility power, emergency power and aerospace and defense sectors as new growth drivers and accelerate growth in areas where we can leverage our strengths. Leveraging our competitive advantage is rooted in exceptional quality and reliability as well as our unique technologies, we will make concentrated investments in high-growth sectors to transform our business portfolio. We will strengthen the mobility sector as a source of cash generation. We aim to further expand earnings in the robust domestic and international lead-acid battery markets. Additionally, we will enhance our cash generation capabilities by improving profitability in batteries for hybrid vehicles, leveraging our expertise in high-rate lithium-ion battery technology. We will enhance profitability and capital efficiency and implement shareholder returns in line with progress towards sustainable growth. We will continue to increase dividends in line with growth through a progressive dividend policy targeting a DOE of 3%. We will redefine our business segments as Mobility and Social Infrastructure, clarify business responsibilities and roles establish management metrics such as ROIC, and clarify accountability for execution. Here is a review of the 6th Midterm Management Plan. Revenue was JPY 609 billion. Operating profit was JPY 61 billion, and the total payout ratio was 21.2%. While there were variations in revenue across business segments, we successfully captured demand in our existing segments and revenue generated progressed as planned. Operating profit exceeded the plan due to improved profitability, driven primarily by price adjustments. Operating profit before amortization of goodwill and other items, significantly exceeded the plan due to improved profitability, driven primarily by price adjustments and increased sales volume. Regarding the total return ratio, we struck a balance between profit growth and growth investments, implementing returns that prioritized the continuity and predictability of dividends. Here are the results by segment. While the automotive lithium-ion battery segment fell short of its targets due to fluctuations in material prices and changes in sales volume, other segments performed steadily, thanks to measures such as price adjustments, securing sales volume and initiatives in new businesses, enabling us to achieve the profit targets set in the 6th Midterm Management Plan. Here are the capital allocation. Cumulative operating cash flow expanded to approximately JPY 150 billion under the 6th Midterm Management Plan. This represents roughly a twofold increase compared to the 5th Midterm Management Plan, demonstrating a steady improvement in the business's earning power. Regarding capital expenditures, we utilized funds raised, including approximately JPY 40 billion from a new share issuance and operating cash flow to invest in expanding production capacity for BEV and hybrid batteries, as well as upgrading equipment for existing businesses. Here are the key initiatives. We established Honda and Honda GS Yuasa EV Battery R&D, HGYB and began joint development of high-capacity high-output lithium-ion batteries. To expand our mobility and social infrastructure businesses, we advanced the construction of a factory scheduled to begin operations in 2027 to establish a production and supply system for BEV batteries. To thoroughly create added value and improve profitability, we improved profitability by advocating for appropriate prices in the domestic automotive lead business. To shift our regional strategy, including a review of our China operations and to concentrate resources on key locations and maximize profits, we decided to withdraw from our operations in China and Turkey in light of the business environment. We improved profitability by strengthening sales expansion in the ASEAN region, and restructuring our production and sales systems. To maximize profits by leveraging our overwhelming competitive advantage in the domestic industrial battery power supply business, we established an energy solution model combining storage batteries and STARELINK. We secured orders for storage batteries for the power market and expanded our scale. To expand production of lithium-ion batteries for general use, we adjusted prices to reflect raw material costs and the impact of inflation. We strengthened our maintenance system by leveraging a service network of over 100 locations nationwide, thereby increasing revenue. Regarding our assessment of the current business environment. Expansion of the automotive lead-acid battery aftermarket due to longer vehicle ownership periods, changes in model change cycles and rising new car prices, demand in the aftermarket is on an upward trend. Consequently, demand for lead-acid batteries remains robust, even amid vehicle electrification and digitalization trends. With an expected increase in demand for hybrid vehicles, demand for higher rate batteries is also expanding. We anticipate opportunities for increased demand for higher capacity and longer-lasting batteries alongside improved profitability. Emergence of new markets driven by technological advancements, demand for data centers for AI and grid-connected storage batteries is on the rise. We view this as an opportunity for new market expansion and anticipate that AIDC will see increased demand for lead-acid and lithium-ion batteries, while ESS will see growing demand for industrial lithium-ion batteries. Growing awareness of security issues, such as economic and energy security. There is a growing demand for strengthening domestic production and supply systems and the defense-related market is expanding. We anticipate opportunities for expanding demand in industrial, aerospace and defense applications, driven by the strengthening of requirements for purely domestic products and procurement. GS Yuasa's strength and competitive advantages. In the mobility sector, we will maintain a solid foundation with a product portfolio that supports both lead-acid and lithium-ion batteries. In the social infrastructure sector, we will drive this sector as a new growth driver by leveraging our comprehensive capabilities in high reliability and field support based on domestic production. In the social infrastructure sector, we are recognized for our battery performance that achieves high output and long life. Our track record in developing high output batteries honed through HEV battery technology, our proven track record of long-life products utilizing degradation suppression technology and our strong TCO performance. Safety and reliability based on a long track record, including high safety and reliability that has earned high praise in the emergency power supply and defense sectors. We will develop value-added businesses through our maintenance and operation, O&M service capabilities that support stable operation. Here is an update on strategic policy. To respond swiftly to changes in the market environment and further enhance corporate value, we will strategically transform our business portfolio through focused investments that prioritize growth potential and capital efficiency. We will also take on the challenge of creating new value for the next generation by leveraging our assets. In the LED business, we will generate funds for growth investments by maximizing stable cash flow. In the automotive lithium-ion battery business, we will mitigate risk through selective investments and shift to a profitable business model. We will position social infrastructure as a pillar of growth and accelerated through concentrated investment in key areas. In particular, based on the certification of our plan to secure the supply of storage batteries, we will provide end-to-end support ranging from the manufacturer of domestic battery cells to O&M. Here is the growth outlook for each segment. In light of changes in the market environment for each segment, we have updated the growth outlook presented in Vision 2035. We anticipate that demand in the Automotive Battery segment will remain robust in both domestic and overseas markets. In the Automotive Lithium-Ion Battery segment, we anticipate expanding demand driven by electrification and digitalization as well as continued growth in demand for hybrid vehicles. In the Industrial Battery Power Supply segment, we anticipate steady growth in the regular power supply market driven by heightened economic and energy security concerns as well as in the emergency power supply markets, driven by technological advancements. In the Aerospace and Defense segment, we anticipate growing demand driven by heightened security awareness. This segment is expected to grow to a scale of JPY 40 billion in the latter half of the 8th Midterm Management Plan. We expect to achieve the 2035 sales target of JPY 800 billion, set forth in Vision 2035 announced in 2023 by the end of the 8th Midterm Management Plan, fiscal year 2031. This is a projected trend for operating profit. With mobility and social infrastructure as our 2 pillars, we aim for them to contribute equally to profits by 2035. Furthermore, regarding our lead-acid battery business in the automotive and industrial battery sectors, we will continue to focus on it as a foundation for generating cash. The 7th Midterm Management Plan will be a period during which we will actively invest in the social infrastructure sector and work to transform our business portfolio. While we will not see a full return on these investments until the 8th Midterm Management Plan or later, we will continue to drive sustainable growth while generating cash from our existing businesses. In the 8th Midterm Management Plan, we aim to achieve operating income of at least JPY 75 billion at an early stage through stable growth in the mobility sector and the major leap forward in the social infrastructure sector. Initiatives in the social infrastructure sector. We're establishing a business framework and advancing to the recovery phase under the 8th Midterm Management Plan. Driven by growing awareness of economic and energy security, we will meet new infrastructure demands with purely domestically produced products. In the 6th Midterm Management Plan, the market was in an expansion phase as power supply demand from the expansion of AIDC generation and ESS demand driven by the expansion of renewable energy arose simultaneously. Under the 7th Midterm Management Plan, as a company certified under the supply assurance plan, we will begin investing in factories and equipment for the manufacture of domestically produced batteries starting in fiscal year 2026, with operations commencing in the second half of fiscal year 2028. Our initiatives in the aerospace and defense sectors. We aim to capture market demand by leveraging our unique technological capabilities and achieve sustainable growth. Major investments in production expansion include those to meet demand for new submarines equipped with lithium-ion batteries and replacement batteries, as well as investments to increase production of thermal batteries for space and defense vehicles. As part of the business expansion and production increased investment phase of the 7th Midterm Management Plan, we will implement investments to increase production of lithium-ion batteries for submarines from fiscal years 2027 to 2029, and investments to increase production of thermal batteries from fiscal years 2026 to 2027. Starting with the 8th Midterm Management Plan, the company will enter a phase of investment recovery and rapid growth, beginning increased production of lithium-ion batteries for submarines in 2030. Production volume of thermal batteries will be increased to approximately 3x that of the 6th Midterm Plan by fiscal year 2028, when increased production begins. These are our initiatives in the mobility sector. In the mobility sector, we will generate funds for growth investments by maximizing cash flow. Global vehicle ownership is projected to grow, and since even electric vehicles such as EVs and HEVs require 1 lead-acid battery per vehicle, the role of lead-acid batteries will remain critical in the future. We will maximize cash flow by prioritizing profitability in the lead-acid battery business, and we will promote the development of storage batteries, lead-acid and 12-volt lithium-ion batteries that meet the demand for higher output and capacity. For drive and hybrid applications in electric vehicles, we will prioritize profitability and make maximum use of existing production capacity. Next-generation technology road map. We will drive the evolution of batteries with a focus on high safety, long life and recyclability. Going forward, we will focus on further advancing existing liquid lithium-ion batteries and promoting the development of next-generation lithium-ion batteries, including all solid-state batteries. We will focus on advancing the development of high-power, long-life large-scale batteries for industrial use, developing rare metal-free batteries, lead-free alternatives and technologies to extend battery life and promoting the development of technologies based on electrochemistry. Regarding changes to segment composition. This change was made to clarify our business strategy and revenue structure. The reported segments consist of mobility and social infrastructure with mobility serving as a stable cash-generating foundation and social infrastructure as a new growth driver, thereby clarifying their respective roles. We will enhance the level of information disclosure by establishing Aerospace and Defense, 1 of our key investment areas as an independent segment. Additionally, the overseas industrial business previously included in automotive batteries overseas will be reclassified to social infrastructure. This change will have an impact of approximately JPY 31 billion on revenue and approximately JPY 1.3 billion on operating profit for the fiscal year ending March 2025. Consolidated performance targets. We will focus on building a business foundation centered on 2 pillars: the mobility sector and the social infrastructure sector. In the mobility sector, we will promote business operations focused on stabilizing earnings and generating cash flow through lead-acid batteries and lithium-ion batteries for hybrid vehicles and 12-volt applications. In the social infrastructure sector, we will position this as an investment phase for building a foundation and will reliably execute and promote initiatives to secure a return on investment. In the 7th Midterm Management Plan, we set targets of JPY 720 billion in net sales and JPY 65 billion in operating profit. The starting point for growth is set at JPY 56.7 billion, excluding the U.S. IRA subsidy received in a lump sum for 3 years in fiscal year 2025. Although the return on investment for social infrastructure will not be realized until the 8th Midterm Management Plan or later, we aim to achieve an operating profit of JPY 75 billion at an early stage. These are the targets by segment. These are the key initiatives for achieving our goals. In the mobility sector, we will ensure investments commensurate with the scale of our operations to further strengthen our profitability. In the social infrastructure sector, we will steadily execute growth-oriented investments to build a solid business foundation. Key initiatives in the mobility sector include strengthening our product lineup through the development of new 12-volt products, lead-acid, LiB, addressing the need for higher capacity and greater durability in automotive lead-acid batteries, strengthening our global supply chain centered on our ASEAN basis, Thailand, Indonesia and Vietnam, and improving the utilization rate and efficiency of our lithium-ion battery plants for hybrid vehicles as well as enhancing battery performance. Key initiatives in the social infrastructure sector include expanding our presence in the ESS market as a purely domestic manufacturer certified under the plan for securing the supply of storage batteries, developing products optimized for AIDC and strengthening sales in Japan and the U.S. Emergency power. Strengthening the profitability of the emergency power business by promoting efficiency through DX and AI and expanding orders for high value-added specialty batteries through unique defense products such as lithium-ion batteries for submarines and thermal batteries for special applications. Details of key initiatives in the mobility sector. While steadily executing investments aimed at streamlining supply systems and strengthening business continuity planning, BCP, we will curb large-scale investments and prioritize investment efficiency. By enhancing productivity, we aim to steadily improve profitability. Below, we outlined the initiatives, the rationale behind them, their feasibility, while we are capable of executing them and our competitive advantages. Details of key initiatives in the social infrastructure sector. We will make proactive investments to expand our business as a new growth driver and lay the foundation for sustainable growth, starting with our 7th Midterm Management Plan. This slide summarizes the initiatives, the reasons for undertaking them, their feasibility, why our company is capable of executing them and our competitive advantages. Capital policy and financial strategy. We will generate steady operating cash flow primarily through our existing businesses, continue to invest in the social infrastructure and mobility sectors and ensure shareholder returns to drive a cycle of growth and return. In our 7th Midterm Management Plan, we aim to implement a progressive dividend policy with a target dividend payout ratio, DOE, of 3%. Capital allocation. We anticipate cash inflows of JPY 255 billion from operating cash flow and fundraising. We plan to allocate JPY 135 billion for growth investments. The breakdown includes JPY 850 billion for the construction of a domestic battery plant for ESS, increased production of submarine batteries and thermal batteries and JPY 50 billion for new product development of automotive lithium-ion batteries and small-scale M&A to strengthen the supply chain. We anticipate shareholder returns of approximately JPY 30 billion and will implement a progressive dividend policy targeting a DOE of 3.0%, providing shareholder returns commensurate with our growth. We plan to invest JPY 90 billion in our business infrastructure. This infrastructure investment includes R&D expenses for next-generation batteries and investments in the refurbishment of the Gunma plant, our main production facility for automotive lead-acid batteries. This section discusses the relationship between our newly formulated materiality criteria and corporate value assessments. With the formulation of our 7th Midterm Management Plan, we have shifted from the traditional materiality framework based on our CSR policy to a new framework based on our sustainability management policy, focusing on materiality that contributes to creating value for society. We have established business materiality, which serves as a growth driver and foundational materiality, which contributes to reducing the cost of capital. This slide summarizes the initiatives related to our newly established business materiality. We have summarized our initiatives regarding foundational materiality in this slide. Earnings forecast. For the 2026 earnings forecast, net sales are projected to reach JPY 660 billion, representing an increase of JPY 51 billion. Operating profit is projected to be JPY 60 billion, representing a decrease of JPY 200 million. Since the previous fiscal year included a onetime payment of JPY 3.5 billion in U.S. IRA subsidies covering a 3-year period, we are using JPY 56.7 billion as the baseline. Net income is projected to be JPY 36 billion, representing a decrease of JPY 5.9 billion. In the previous fiscal year, a gain of JPY 7.0 billion from the sale of investment securities boosted net income, but we do not currently anticipate a similar gain this fiscal year. We forecast an annual dividend of JPY 98 per share, which is in line with the 3% DOE target, representing an JPY 8 increase. The actual and forecast comparisons of factors affecting operating income are as follows. Here are the earnings forecasts by segment. Automotive Batteries Overseas is expected to see a revenue decrease of JPY 40.5 billion due to the impact of segment transfers and to the closure of our Turkish facility. For Industrial Battery Power Supplies, in addition to the segment transfer, we expect a significant revenue increase of JPY 65.9 billion due to higher volumes in ESS and AIDC. In the Industrial Battery Power Supply business, while order intake for both regular and emergency power systems remains strong, revenue will be impacted by increased expenses related to investments in the new ESS factory and higher development costs for new battery models. In addition, profitability will temporarily deteriorate due to large orders for overseas AIDC batteries. Across all divisions, expenses will rise due to the impact of the situation in the Middle East. This will particularly affect logistics costs, raw material costs and component procurement costs. However, due to the rapid rise in expenses, we believe it will be difficult to pass on all of these costs to sales prices. In addition, some automakers have announced production cuts, and we anticipate a decline in profits due to reduced volume and lower operating rates. Regarding capital expenditures, depreciation and R&D expenses. In the Industrial Battery Power segment, based on the approval of our supply assurance plan, we will execute investments aimed at the development and mass production of domestically manufactured stationary lithium-ion batteries.

To what extent will the situation in the Middle East this fiscal year have an impact? Will recovery be possible in the next fiscal year or later?

We expect company-wide expenses to increase by nearly JPY 15 billion. Logistics costs and raw material costs, particularly for hard to obtain materials, are surging sharply. As supply and demand conditions are changing rapidly, we are carefully timing when to pass on these costs to customers. In the medium to long term, these costs are expected to level off.

Regarding the partnership with Honda, we understand that Honda's business in North America is winding down. How will this impact the current fiscal year?

Regarding the impact of BEVs, we are currently engaged in various discussions with Honda, but no conclusion has been reached yet. We will provide a further explanation once a conclusion is reached. Please understand that there is no immediate impact at this time.

I understand that the 7th Midterm Management Plan is designed to improve overall performance. But I would like to hear details regarding changes in top line revenue and profitability for the Industrial Battery Power segment.

This change was driven by the transfer of the low-margin industrial battery business, previously part of the Automotive Batteries Overseas segment to the Industrial Battery Power Supply segment. We are working to improve profitability and develop high-margin products for this business in order to offset the negative impact.

will the negative impact from batteries for data centers in North America significantly affect the midterm business plan?

This is our first time securing a large-scale order for data centers, and we are facing challenges as product improvements to the batteries themselves are necessary. While the project is not unprofitable, we are incurring costs related to product improvements. To some extent, this is unavoidable because we must secure a certain volume of large-scale orders to secure future projects, but this does not mean that low-margin projects will continue indefinitely. Since initial deliveries are incurring somewhat higher expenses, we will work to improve this going forward.

The guidance for this fiscal year projects an increase of approximately JPY 66 billion in industrial battery power supplies. How much of this is attributable to the North American data center project and by how much will ESS sales increase? Also, while profitability for the North American data center project is expected to deteriorate, does this mean it will be in the red?

The North American data center projects are not operating at a loss. We expect order intake of approximately JPY 4 billion to JPY 5 billion.

Do you expect the market for regular use batteries to grow more than that for emergency use batteries going forward?

Total sales for ESS are expected to grow by approximately JPY 20 billion to JPY 30 billion year-over-year plus additional growth.

You have implemented a 10% price increase for industrial battery power supplies, but it appears this has had little impact on the profit plan for this segment. Is it correct to assume that this has been offset by rising raw material costs due to the situation in the Middle East?

That is correct. In addition to the situation in the Middle East, there are various other factors driving up costs, such as rising labor expenses. We are in a situation where even after adjusting selling prices, profits are being eroded.

The medium-term plan gives a conservative impression. While I understand this is an investment phase, many forecasts project flat sales and profits. You mentioned that lead-acid batteries are expected to grow gradually, but this does not appear to be the case. Please explain the opportunities within each segment.

Although we have decided to withdraw from the automotive battery overseas business in Turkey, we have signed a supply agreement with the company and expect to continue receiving supplies. For automotive batteries overseas, we will expand our operations while containing rising costs through rationalization. The challenge going forward is how to maintain and expand our market share. In the 6th Midterm Plan, we achieved certain targets through base price increases. However, base price increases cannot be implemented at any stage. We also need to control future costs. In the 7th Midterm Plan, our approach to increasing revenue and passing on price increases will differ from the 6th Midterm Plan. We will expand while offsetting costs. Regarding investment in industrial battery plants, while we would like to bring forward the start of production, SOP, to fiscal year 2028, there are unavoidable challenges such as the time and cost required for construction. Since the plant is scheduled to be completed and begin accepting orders in fiscal year 2028, the final year of the 7th Midterm Plan, the key point will be how much of an order backlog we can accumulate. While the defense sector does not generate its own business opportunities, there is a sharp increase in demand. However, expanding our production capacity is necessary to meet this demand. This may appear conservative, but we ask that you understand the 7th Midterm Management Plan as an investment phase intended to be fully recouped in the 8th Midterm Management Plan.

There was mention of defense production volumes tripling. Is it correct to understand that the goal is to triple the JPY 19.8 billion figure from the 6th Midterm Plan?

This refers to tripling the production volume of thermal batteries.

I believe performance exceeded expectations across all business segments, but are there any onetime factors affecting each segment?

Since the February earnings revision, nearly all business segments have shown further improvement. For the Automotive Japan segment, this is due to solid sales in the aftermarket and the impact of price adjustments. Overseas, factors include strong performance in the IRA and ASEAN markets, as well as lower procurement costs. The Industrial Battery Power Supply segment performed as expected. The lithium-ion battery business exceeded expectations due to changes in HEV and PHEV volume and successful negotiations for significant price increases.

Regarding the U.S. IRA subsidies, what is the gap between the portion factored into the third quarter and the guidance announced this time?