GS Yuasa Corp

TSE:6674

Earnings Call Transcript 2020-Q2

[Osamu Murao, executive]

My name is Murao, President of GS Yuasa Corporation. Let me start by offering a word of appreciation to institutional investors and analysts.

Without further ado, I would like to report on GS Yuasa Corporation's financial results for the second quarter of the fiscal year ending in March 2020.

First, I would like to start with the metric of net sales for the second quarter of fiscal year 2019. We registered JPY 190.4 billion in net sales. This represents a Y-o-Y reduction of JPY 5 billion. This was caused by a fall in the price of lead, which translated into lower selling prices for our products. We use a price indexing system, so lower raw material prices almost always translate into lower selling prices for finished products.

The company's results were also negatively influenced by a stronger yen.

With a stronger Yen, overseas sales carry less weight. These are the 2 main reasons behind the JPY 5 billion reduction in net sales Y-o-Y. On the other hand, we registered JPY 7.5 billion in operating income. This represents a Y-o-Y increase of JPY 500 million.

The factors affecting operating income were as follows: First, power supply systems, which include lead acid batteries in the Industrial Battery and Power Supply segment posted a very strong sales performance. Another factor is a reduction in the price of lead. The company also registered JPY 8.4 billion in ordinary income, which represents a Y-o-Y increase of JPY 900 million. As a result of this, GS Yuasa delivered JPY 4.8 billion in profit attributable to owners of parent. This represents a Y-o-Y increase of JPY 1.3 billion.

Next, I would like to discuss the various factors affecting operating income before the amortization of goodwill. The green vertical bar at the center represents the company's realized results for the second quarter of fiscal year 2019. The left side represents the company's performance last fiscal year, and the right side shows our initial forecast. As I mentioned earlier, we registered a Y-o-Y increase of JPY 500 million for the metric of operating income compared to fiscal year 2018. This was due to a fall in the price of lead as well as to a quantity increase primarily centered around the Industrial Battery and Power Supply segment.

I shall be delving into the specifics at a later part of this presentation, but lead acid batteries, for use in data centers and power supply systems for the generation of electricity, performed very well. The company was able to exceed its operating income forecast by JPY 2.7 billion.

We were unable to meet our quantity forecast, primarily in the Overseas segment. However, lower-than-expected lead prices and a reduction in expenses, et cetera, allowed us to exceed our operating income forecast.

I would now like to discuss each segment. We registered a Y-o-Y net sales reduction in the Automotive Battery segment. Like I mentioned earlier, this was due to falling lead prices, which in turn, translated into lower selling prices for our products. We registered a Y-o-Y net sales reduction in the Overseas Automotive Battery segment. This was due to a stronger Yen appreciating against the local currencies. This foreign currency effect was felt most acutely in the U.K. and Australian markets. We registered an increase in net sales and operating income for the Industrial Battery and Power Supply segment. As I mentioned earlier, this segment delivered a very strong quantity performance.

I would now like to discuss each segment individually, starting with the domestic Automotive Battery segment. We registered a Y-o-Y net sales and operating income reduction in this segment. Business conditions during the second quarter of fiscal year 2019 were characterized by an increase in sales quantity, both for batteries for new automobiles as well as for replacement batteries. I will be discussing this topic in the later part of this presentation, but European standard compliant, often abbreviated as EN in batteries, are starting to gain momentum in the replacement battery market, as we are seeing more of these. Another factor was lower lead prices, resulting in lower selling prices for our products.

These 2 graphs show the shipment ratio for new automobile batteries and the shipment ratio for replacement batteries. The graph on the left shows the former. We saw the maintenance of a high shipment ratio of storage batteries for start & stop vehicles with JIS and EN compliance batteries accounting for approximately 45% of shipments for start & stop batteries.

We are currently seeing a shift from JIS type batteries to EN type batteries, with the Toyota Motor Corporation leading the charge. GS Yuasa started developing EN type batteries ahead of our competitors. So our market share for EN type batteries for new automobiles is on the rise.

I would now like to discuss the replacement battery market. Lead-acid storage batteries for start & stop vehicles are high value-added products. And as you can see from the graph, this type of battery continues a steady growth trajectory in terms of market share.

During the first half of the current fiscal year, start & stop batteries finally accounted for over 20% of JIS-type battery sales. This has translated into a significant profitability improvement contribution for this segment.

Next, I would like to discuss the Overseas Automotive Battery segment. We registered a Y-o-Y reduction in net sales, coupled with an increase in operating income. The red vertical bars represent net sales, and the blue bars represent the metric of operating income. The red line represents operating income margins.

The business climate during the second quarter of fiscal year 2019 was as follows: a worsening of market conditions in China has led to a slowdown in automobile sales, which have fallen Y-o-Y for 16 months in a row and consequently, to a reduction in the sales quantity of lead-acid storage batteries for automobiles. On the other hand, we saw a significant sales quantity increase in Southeast Asia, especially in the countries of Thailand and Vietnam.

In terms of motorcycle lead-acid batteries, we registered a sales quantity reduction trend in the Chinese and European markets. The company's results in the Overseas Automotive Battery segment were also negatively affected by foreign currency translation adjustments caused by a stronger Yen.

I would now like to discuss net sales in the Overseas Automotive Battery segment by region and product category. First, the graph on the left shows net sales by region, while the graph on the right shows net sales by product category. We have divided the graph on the left into the following sections: China, Asia except China, Europe, North America and other. China is currently experiencing a temporary slowdown due to the effects of the ongoing U.S.-China trade issues. However, we are hopeful about the region's mid- to long-term prospects. GS Yuasa views China as a market we cannot ignore.

During the current fiscal year, we saw a net sales increase in the ASEAN region, where our company has a large market share. This net sales increase centered especially around Thailand and Vietnam. We also believe our new plant in Myanmar, which started operations during the current fiscal year, will make a positive contribution going forward.

In terms of net sales by product category, net sales associated with motorcycle batteries have been on a slight downward trend as a result of a policy decision by the Chinese government to ban motorcycles in coastal cities and in urban centers.

Next, I would like to discuss the Industrial Battery and Power Supply segment. As I mentioned earlier, we registered Y-o-Y net sales and operating income growth in this segment, which delivered a strong performance. Business conditions, during the second quarter of fiscal year 2019, were characterized by strong sales associated with mainstay lead-acid industrial batteries, which is the main product category in this segment as well as with power supply systems.

In concrete terms, when it comes to batteries, we have seen a very significant increase in demand from data centers and from power companies when it comes to power supply systems. Operating income and operating income margins for this segment are usually very low during the first half of the year. However, we saw a significant increase in operating income during the second quarter, marking a departure from the pattern we have observed over the past 2 or 3 years.

I would now like to discuss the metric of net sales by product category in this segment. We saw a very significant increase in net sales associated with mainstay lead-acid industrial batteries and power supply systems, which are product categories we consider to be one of our foremost fields of expertise. We also posted strong results in terms of lead-acid storage batteries for battery-operated forklifts.

In terms of the demand source breakdown, we observed very strong demand from the private sector, from public agencies and from electric power companies. We believe the Japanese government's fundamental plan for national resilience contributed, in part, to this strong performance through things, such as power supplies used to power things like CCTV cameras.

Next, I would like to discuss the Automotive Lithium-ion Battery segment.

We registered a slight Y-o-Y net sales and operating income reduction in this segment. Business conditions, during the second quarter of fiscal year 2019, were as follows: Lithium Energy Japan, which manufactures lithium-ion batteries for electric vehicles and plug-in hybrid electric vehicles, saw a reduction in the sale of lithium-ion batteries for electric vehicles, such as the i-MiEV. On the other hand, Blue Energy, which manufactures lithium-ion batteries for hybrid vehicles, delivered a strong sales performance. This lower-than-expected operating income performance is due to expenses incurred for the start-up of the Hungary plant. These expenses translated into a Y-o-Y reduction in terms of operating income.

I would now like to discuss the status of the GS Yuasa Hungary plant.

Our plant in Hungary became operational in October 2019. This plant has an initial production capacity of 500,000 units per year to be fitted in 500,000 automobiles.

Regarding the cells used in these batteries, they are manufactured by Lithium Energy Japan at our plant in Ritto City in Shiga Prefecture. These are then shipped to Hungary, where they are assembled into batteries through the use of an automated production line. We will start shipping 12-volt lithium-ion starter batteries to European automakers.

We have received interest and inquiries from multiple automakers, including Japanese automakers, and are currently in the process of discussing these. Going forward, we would like to use the Hungary plant as a lithium-ion battery production base in Europe within the context of the shift towards electric vehicles.

We have built a manufacturing plant and office using approximately 1/4 of the total site area. So we still have over 4x the space available for us to expand. We want to increase our production capacity in stages. In the future, we would also like to start the manufacturing of lithium-ion battery cells in the Hungary plant as well.

Currently, we manufacture 12-volt lithium-ion starter batteries. However, going forward, we want to expand sales by offering auxiliary batteries and 12-volt backup lithium-ion batteries for self-driving vehicles.

I would now like to discuss the segment of Others. This segment has primarily to do with special application lithium-ion batteries. We experienced a partial temporary production dip for some special application batteries, which translated into a Y-o-Y net sales reduction. Operating income is also slightly down Y-o-Y, and increase in R&D costs also affected this segment.

I would now like to discuss a topic related to our company's special application lithium-ion batteries. GS Yuasa will be taking part, starting with the current fiscal year, in the advanced Aircraft System Commercialization Project organized by the New Energy and Industrial Technology Development Organization. Within this project, GS Yuasa will be doing R&D work on lightweight storage batteries for aircraft. As you can see from the slide, we will be carrying out this type of R&D work towards achieving energy density levels of 1000 watt-hour per kilogram per cell by 2030.

Sulfur cathode material is considered a promising candidate for the development of high-density lithium-ion batteries. GS Yuasa has been researching and developing a silicon-sulfur battery since 2011. We hope to leverage this know-how to achieve energy density levels of 1000 watt-hour per kilogram by 2030, which is 10 years from now.

I would now like to discuss the company's financial situation, starting with the balance sheet. First, we registered a reduction in current assets after the collection of trade accounts receivable. We saw an increase in property, plant and equipment due to changes in the accounting treatment of leases following the application of IFRS 16 at our overseas subsidiaries. We registered a JPY 3.1 billion reduction in current assets and a JPY 3.6 billion increase in property, plant and equipment. So these 2 items cancel each other out. Total assets stood at JPY 383.9 billion, virtually unchanged Y-o-Y, with only a JPY 300 million reduction.

In terms of liabilities, we registered a reduction in trade accounts payable and others. However, as I mentioned earlier, we carried out the application of IFRS 16 at our overseas subsidiaries, leading to changes in the accounting treatment of leases. As a result, we registered an increase in liabilities.

In terms of net assets, we registered an increase derived from the item of profit attributable to owners of parent. However, the payment of dividends and a stronger Yen 'and low stock prices translated into a reduction in net assets. The application of IFRS 16 and the adoption of changes to the accounting treatment of leases translated into an equity ratio of 45.2%. Under the old accounting treatment, the equity ratio would have stood at 45.9%.

I would now like to discuss capital investment, depreciation and R&D costs. The current slide shows capital investment, depreciation and R&D cost levels for the second quarter of fiscal year 2019 and the company's full year forecast for fiscal year 2019. We forecast a total of JPY 27 billion in capital investment for the current fiscal year. This represents a significant increase compared to last fiscal year. The main capital investment items are as follows: We will be carrying out investments towards increasing the production of lithium-ion batteries for hybrid vehicles at Blue Energy.

Additionally, as I mentioned earlier, we carried out investment towards building our 12-volt lithium-ion battery plant in Hungary. We will also be carrying out restructuring investment in our Kyoto office located in the Nishioji area. As a result of these, we forecast an increase in capital investment during fiscal year 2019. As you can see, we are forecasting a big increase in capital investment in the Overseas Automotive Battery and Automotive Lithium-ion Battery segments as well as an increase in capital investment in the form of restructuring, as I mentioned just now.

Additionally, we forecast an increase in depreciation from JPY 16.1 billion last fiscal year to JPY 18 billion for the current fiscal year. We expect an increase of just over JPY 1 billion in R&D expenses, the bulk of which will go towards R&D related to lithium-ion batteries.

Next, I would like to go over the company's cash flow statements. We delivered JPY 18.3 billion in profit before the amortization of goodwill, which translated into JPY 15.1 billion in operating cash flow. Free cash flow stood at JPY 6.5 billion, which was used as a source of shareholder returns and in order to increase cash on hand for the company. As a result, GS Yuasa's cash and cash equivalents balance at the end of the second quarter stood at JPY 24.7 billion.

I would now like to discuss the company's full year consolidated financial results forecast for the fiscal year ending in March 2020. The following is our revised forecast for fiscal year 2019: We forecast JPY 415 billion in net sales; JPY 20 billion in operating income; JPY 22 billion in ordinary income; and JPY 12 billion in profit attributable to owners of parent. Lastly, we forecast JPY 14.5 billion in profit attributable to owners of parent before the amortization of goodwill.

We forecast a reduction in sales overseas, especially in China. However, we believe the company will deliver a Y-o-Y net sales increase.

In terms of income, we saw an improvement in income margins derived from lower raw material prices for lead. This allowed us to exceed our forecast for the first half of the year. On the other hand, for the second half of the year, we forecast a reduction in overseas sales and a trend towards higher lead prices, coupled with an uncertain environment going forward. As a result of these factors, we have left our income forecast unchanged from the figures shown in the current slide. Our forecast, therefore, remains completely unchanged.

I would now like to give you a breakdown by segment, pertaining to the initial and revised forecasts for fiscal year 2019. We lowered operating income guidance for the Automotive Battery segment in Japan and Overseas by JPY 1 billion. We expect to make up for this reduction in the Automotive Battery segment with a JPY 1 billion increase in the Industrial Battery and Power Supply segment. As such, we expect to deliver operating income in line with the initial forecast. Incidentally, regarding the price of lead, we forecast a price of JPY 300,000 per ton for the second half of the year.

I would now like to discuss market conditions for Overseas business segments and their responses. I would like to start with an overview of the current conditions in ASEAN Countries and response. The data presented here excludes China. As shown in this slide, we expect automobile sales in ASEAN to continue growing until fiscal year 2030. In terms of opportunities, we expect continued motorization in the region to translate into an increase in new automobile sales and automobile ownership.

We also forecast a steady increase in new motorcycle sales in the region.

In terms of risks, we view increased competition with local manufacturers as a risk factor, especially in terms of selling prices, as there is an element of uncertainty when it comes to selling prices.

Regarding GS Yuasa's responses in the region, going forward, we will be taking a proactive approach towards developing products tailored to specific markets. Additionally, we intend to increase sales in the replacement battery market by reducing lead times and through the use of sales rebates. Lastly, we built a new plant in Yangon, Myanmar during the current fiscal year. Going forward, we want to expand sales to the Mekong subregion with this new plant as a base.

I mentioned the topic of developing products tailored to specific markets. GS Yuasa has a lead-acid storage battery R&D technical center in Bangkok, Thailand. Going forward, we want to take a proactive approach towards developing products tailored to specific markets centered around our R&D technical center in Bangkok.

Next, I would like to give you an overview of current conditions in China and response going forward. In terms of opportunities, while we forecast a temporary reduction in new automobile sales, China is a very large market. So we believe it will continue growing in the medium to long term, alongside with an increase in vehicle ownership rates in the country.

In terms of risks, we see a risk related to the ongoing U.S.-China trade issues and to the extent of the popularization of electric vehicles in China. This depends, in part, on subsidies, but there is some uncertainty regarding the extent of the popularization of electric vehicles, plug-in hybrids and hybrid vehicles in the country. GS Yuasa's response in the Chinese market will also vary depending on the scope of this popularization.

In terms of our response in the short term, we want to promote the sale of lead-acid batteries for start & stop vehicles, which are high value-added products, in both the market for new automobile batteries and in the replacement battery market. We will be carrying out this initiative from the area of Tianjin to the North and Guangdong to the South.

Additionally, electric vehicles currently available in the market come with lead-acid batteries for use in starting the vehicles and as backup for electrical components. As a result of this, even assuming the continued shift towards electric vehicles, we believe there is a certain level of demand for lead-acid batteries.

Next, I would like to give you an overview of the current conditions in countries neighboring Turkey and our response. In 2015, we acquired 50% of shares outstanding in Inci, Turkey's second-largest storage battery manufacturer, which became an equity method affiliate of GS Yuasa.

The current conditions in countries neighboring Turkey are as follows: we expect to neighboring countries in the Middle East and North Africa to continue delivering economic growth, leading to an increase in new automobile sales and automobile ownership. In terms of risks, we see risk in foreign currency fluctuations and rising interest rates. We also believe there is an element of geopolitical risk in the region.

In terms of GS Yuasa's response in the region, we want to expand our export business targeting countries neighboring Turkey. Our new plant, employing the latest in GS Yuasa's technology, started operation in January 2019. This allows us to target areas we hadn't targeted previously, such as the Middle East, Africa and the Commonwealth of Independent States that formed after the collapse of the Soviet Union. We have also started sales expansion efforts in Europe. Additionally, we have carried out investment in our new plant. So going forward, we want to reduce interest-bearing debt.

Lastly, I would like to give you an overview of the current conditions in the EU and response. As you can see from the automobile sales graph, there is stable demand for lead-acid batteries for automobile and industrial use. However, we don't forecast significant growth in the EU.

We believe a number of European luxury automakers, although not all, are starting to adopt 12-volt lithium-ion starter batteries. In terms of risks, Brexit poses a risk.

Regarding GS Yuasa's response in the region, we expect an increase in costs derived from the introduction of customs duties and customs clearance procedures as a result of Brexit. We also believe there will be lead time delays. Here too far, we would ship our automobile batteries from ASEAN to a town in Southwest England called Swinden. We would then distribute these batteries into the Continental European market from there. Although in some other cases, like Spain, we would ship the batteries directly.

We would also do direct shipments to France and Germany, in some cases. However, primarily, here too far, we would ship these batteries to the U.K. and export our products to Continental Europe from there. Going forward, we want to change this to a direct shipment route from the GS Yuasa Group in ASEAN to Continental Europe, without going through the U.K.

We have started production of 12-volt lithium-ion batteries in Hungary. There are some doubts regarding demand for lead-acid storage batteries for new automobiles. However, we do not believe demand for 12-volt lead-acid batteries will disappear all at once. For the time being, we will be focusing exclusively on luxury automakers in the EU. However, we have not, up until now, delivered lead-acid batteries under an original equipment agreement to automakers in the EU. So the future of lead-acid batteries doesn't have much impact on our company's operations.

Lastly, I would like to discuss the history of lithium-ion batteries within GS Yuasa. Professor Yoshino won the Nobel Prize in chemistry this year. So I would like to use this opportunity to review the history of lithium-ion batteries within GS Yuasa.

First, in 1985, Professor Yoshino and his team invented the basic configuration for lithium-ion batteries. Lithium-ion batteries were then first commercialized by Sony in 1991. Just a few years after that, in 1995, GS Yuasa began mass production of prismatic lithium-ion batteries. We then formed GS-Melcotec in 1997 as a joint venture with the Mitsubishi Electric Corporation towards the development, manufacturing and sale of compact lithium-ion batteries. These batteries were used in Motorola and Mitsubishi Electric Corporation mobile phones.

Starting in 1995, we have manufactured lithium-ion batteries for use in consumer applications. After that, we began manufacturing special application lithium-ion batteries used in the fields of space and ocean exploration. In 2003, we provided lithium-ion batteries for use in the SERVIS-1 satellite.

Additionally, in terms of lithium-ion batteries for industrial use, we began selling the industry's first uninterruptible power supply, powered by lithium-ion batteries in 2004. After that, after providing lithium-ion batteries for special application and industrial uses, GS Yuasa entered the automotive battery market.

In 2007, we founded Lithium Energy Japan as a joint venture with the Mitsubishi Corporation and Mitsubishi Motors towards the development, manufacturing and sale of lithium-ion batteries for electric vehicles and plug-in hybrid vehicles. The following year, in 2008, we founded Blue Energy as a joint venture with the Honda Motor Company towards the development, manufacturing and sale of lithium-ion batteries for hybrid vehicles. The Automotive Battery segment came later, and we started manufacturing lithium-ion batteries for use in extremely adverse conditions.

For example, in the case of the Shinkai 6500, water at a depth of 6,500 meters exerts a pressure of around 670 kilograms per square centimeter, which our batteries have to be able to withstand.

In space, we are faced with the opposite dynamic since space is a perfect vacuum and 1 atmospheric pressure is felt from within the spacecraft. The batteries used on the International Space Station or on the geostationary metrological satellite, also known as Himawari, have to be able to withstand the perfect vacuum environment of outer space. We have, therefore, accumulated significant know-how in the field of wind engineering. We started by manufacturing these, and later, entered the market for lithium-ion batteries for industrial and automotive use.

As you can see, GS Yuasa has a very long history when it comes to lithium-ion batteries. Currently, we, of course, manufacture automotive lithium-ion batteries as well as lithium-ion batteries for uses in a wide array of fields such as space and ocean exploration. Going forward, we want to continue the type of product development and mass production that only GS Yuasa as can carry out and increase the company's presence. I believe stakeholders have good reason to expect positive developments in this field.

This concludes my presentation covering GS Yuasa's financial results for the second quarter. Thank you for listening.

[Osamu Murao, executive]

I would now like to proceed to the Q&A. [Operator Instructions]

[Koichi Sugimoto, analyst]

My name is Sugimoto, and I am with Mitsubishi UFJ Morgan Stanley Securities.

I have 3 questions I would like to ask you. My first question is as follows: I believe you outlined the primary foreseeable risks and opportunities for the second half of the current fiscal year and gave us an overview of which segments could exceed or fall short of the company's forecast. As you showed on Page 21, the Industrial Battery and Power Supply segment posted a very strong performance during the first half of the year, but I got the impression that the company is not expecting a repeat of this situation in the second half of the year. Net sales performance in the Overseas segment wasn't very good during the first half of the year, but I got the impression the company expects this trend to extend into the second half of the year or perhaps even worsen. Could I hear your thoughts on these two items?

[Osamu Murao, executive]

Thank you for your question. First, regarding the company's full fiscal year forecast, which includes the second half of the year in the Overseas Automotive Battery segment, we are not seeing the kind of results we had anticipated in China, which is a very large market. We consider this to be a significant risk. On the other hand, as I mentioned earlier, we are registering a strong performance in Thailand and Vietnam. So we believe we will be able to cover the lower-than-expected results in China. In the overall Automotive Battery segment, we expect lead to trade at a very high price during the second half of the year. In the beginning of the second half of the year, in the beginning of October, lead was trading at JPY 300,000 per ton at a price above our forecast assumptions. As of today, it is currently trading at JPY 289,000 per ton. As a result, should this situation continue, we believe the situation will progress in our favor.

Next, we forecast an operating income performance JPY 1 billion in excess of our forecast for the Industrial Battery and Power Supply segment. Currently, we continue seeing very strong results in this segment with our plants operating almost at full capacity. However, there is a level of uncertainty regarding whether this dynamic will continue throughout the second half of the year. For example, we have heard of supply difficulties related to battery-operated forklifts as a result of recent natural disasters. This isn't directly related to GS Yuasa, but we have received this information. So we haven't raised our operating income guidance further beyond this JPY 1 billion increase compared to the initial forecast.

Should lead continue trading around the current price of JPY 289,000 per ton, we believe that the situation in the Industrial Battery and Power Supply segment will progress in our favor. Lead was trading above JPY 300,000 per ton, just as we were entering the second half of the year. So we wanted to delineate a plan we were sure we would be able to achieve.

[Koichi Sugimoto, analyst]

I would now like to ask my second question. I had the opportunity of going over the company's statements of income. In the item of extraordinary income, the company booked a gain on sales of fixed assets and a loss on the liquidation of subsidiaries and affiliates. I would, therefore, like to hear your thoughts on these 2 items.

Additionally, the consolidated earnings report mentions in a footnote that Siam GS Battery Myanmar Limited was consolidated due to an increase in materiality during the second quarter. Could you, therefore, discuss the effects of this consolidation, if any?

[Osamu Murao, executive]

I would now like to yield the microphone to CFO Nakagawa, who will be answering your second question.

[Toshiyuki Nakagawa, executive]

My name is Nakagawa. Please allow me to answer your question. First, I would like to discuss the 2 extraordinary income and extraordinary loss items. As you are aware, we recorded a gain of JPY 2.2 billion on the sale of fixed assets during the first half of the year. We were able to sell either land owned by GS Yuasa in the Kanto area for what we consider to have been an attractive price. This gain on the sale of fixed assets, therefore, derived from the sale of this property. On the other hand, we recorded an extraordinary loss of JPY 1.4 billion on the liquidation of subsidiaries and affiliates. We also recorded a loss on the liquidation of subsidiaries and affiliates of JPY 1.8 billion last fiscal year. In total, we registered a provision against liquidation losses of JPY 3.2 billion. Plainly speaking, due to a number of environmental regulations in China related to our Industrial Battery and Power Supply segment plant, we decided it would make more sense to abandon the project rather than invest a significant sum in order to proceed. This plant is still currently in operation, but we already booked a provision.

Regarding Siam GS Battery Myanmar, we did include such a disclosure as a footnote in our latest consolidated earnings report. However, it has just recently started operations. In broad strokes, we will be taking uncharged batteries manufactured in Thailand, which can then be charged and sold in Myanmar. For this reason, as it stands, Siam GS Battery Myanmar does not have a particularly significant profit and loss impact. This concludes my answer.

[Koichi Sugimoto, analyst]

I would now like to ask you my last question. Perhaps I am wrong about this, but recently, I am sensing a trend among overseas battery manufacturers towards shifting their business in the direction of niche areas such as batteries for hybrid vehicles or perhaps areas which used to be considered niche in the past. I believe you mentioned GS Yuasa's strategy of pursuing the market for batteries for hybrid vehicles as opposed to the larger market of high-capacity batteries for electric vehicles. As a result, I would like to hear your thoughts on this trend by overseas battery manufacturers. Is this something the company anticipated? Or is this something the company has a level of apprehension about?

[Osamu Murao, executive]

Originally, GS Yuasa used to carry out the development and manufacturing of lithium-ion batteries for electric vehicles and plug-in hybrids, which places importance on energy density and lithium-ion batteries for hybrid vehicles, which are high input/output batteries, capable of providing power several dozen times the capacity of the battery. However, we believe GS Yuasa's field of expertise is in high input/output, lithium-ion batteries for hybrid vehicles. Going forward, as I mentioned in previous occasions, we believe we will see an increase in hybrid vehicles by 2030, centered around the Japanese automakers and also overseas automakers. So this is an area we want to focus on. As you mentioned, we are seeing a trend of battery manufacturers making a shift towards batteries for hybrid vehicles.

However, we had anticipated this move. So we were not taken aback by the entrants of new players into the market for batteries for hybrid vehicles. Lithium-ion batteries for hybrid vehicles is an area we want to focus on and this shift from battery manufacturers is something we had anticipated.

[Hisahiro Yamaoka, analyst]

My name is Yamaoka, and I'm with Nomura Securities. I would first like to ask you a question about the Industrial Battery and Power Supply segment. The Industrial Battery and Power Supply segment showed a very strong performance during the first half of the year. Does GS Yuasa consider this to have been a temporary overperformance? Excluding batteries for forklifts for a moment, the demand baseline for the Industrial Battery and Power Supply segment has been rising over time. Do you believe we will continue seeing an increase in demand going forward looking ahead into the second half of the year or into next fiscal year? This is my first question.

[Osamu Murao, executive]

Thank you for your question. In this segment, we saw very strong results, primarily around lead-acid storage batteries for use in data centers and power supply systems for power plants. We are seeing a trend towards infrastructure investment within the scope of the Japanese government's fundamental plan for national resilience. We cannot say whether this trend will extend into the future, although we still have the Tokyo Olympic Games ahead of us. This segment has posted a very strong performance during the current fiscal year, although we had started seeing interest, starting with the second half of last fiscal year. We cannot express certainty as to whether this trend will continue into the future or not. However, we continued seeing very strong results even after the beginning of the second half of the year.

[Hisahiro Yamaoka, analyst]

My second question deals with the topic of capital investment. You showed us a slide on the topic of capital investment, which I interpreted as showing a not so large increase in capital investment during the first half of the year. Would it be reasonable to expect to see an increase in capital investment during the second half of the year in segments such as the Automotive Lithium-ion Battery segment? Additionally, the company has announced its new midterm management plan. I would like to hear your thoughts on the level of capital investment going forward.

[Osamu Murao, executive]

Capital investment figures at the end of the second quarter are as shown on the slide. During the second half of the year, we expect capital investment in the Overseas segment, which also includes the Tianjin plant and in the Automotive Lithium-ion Battery segment to proceed according to plan. Additionally, we are forecasting approximately JPY 100 billion in capital investment over the next 3 years, of which half, between around JPY 48 billion and JPY 50 billion, will go towards the Automotive Lithium-ion Battery segment. There have, therefore, been no changes regarding the topic of capital investment. We believe we will be seeing an increase in capital investment, primarily related to lithium-ion batteries for hybrid vehicles.

[Hisahiro Yamaoka, analyst]

My third and last question pertains to the Automotive Lithium-ion Battery segment. You showed a picture of the Hungary plant, but are the orders and inquiries related to the Hungary plant for 12-volt lithium-ion starter batteries? I believe this to be the case, but I wanted to make sure.

The company had announced its intention of focusing on batteries for hybrid vehicles; however, I believe we will be seeing an increase in electric vehicles in Europe and 48-volt mild hybrid vehicles. I would like to ask you what kind of inquiries the company has been receiving in Hungary, in which areas, including the manufacturer of cells in Hungary, the company will be focusing on going forward?

[Osamu Murao, executive]

Since there are issues related to contract agreements, please allow me to answer your question within the limits of the information I can disclose to the public at this point in time. Currently, we have started supplying 12-volt lithium-ion starter batteries for use in gasoline engine vehicles. We have received inquiries from several automakers regarding these 12-volt lithium-ion starter batteries, auxiliary batteries and 12-volt backup lithium-ion batteries for self-driving vehicles. Currently, we supply 12-volt lithium-ion starter batteries.

[Hisahiro Yamaoka, analyst]

Looking ahead, GS Yuasa will begin manufacturing cells in Hungary. Am I correct in thinking the company does not have any current plans in the direction of providing lithium-ion batteries for electric vehicles?

[Osamu Murao, executive]

That is correct. First, we manufacture these cells at Lithium Energy Japan at our plant in Ritto. Once we reach full capacity at Ritto, we will start manufacturing cells in Hungary. First, we want to reach full capacity at Ritto, after which we will be manufacturing cells and assembling these 12-volt lithium-ion starter batteries in Hungary. In the future, we have a significant amount of site space in Hungary, so should more and more hybrid and plug-in hybrid vehicles enter the market in Europe, we will entertain that option.

Any further questions? This concludes today's earnings briefing covering the second quarter. Thank you for attending today.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]