GS Yuasa Corp

TSE:6674

Earnings Call Analysis

Earnings Call Transcript 2021-Q2

[Osamu Murao, executive]

Let me start by offering a word of appreciation to institutional investors and analysts. Without further ado, I would now like to report on the financial results for the second quarter of the fiscal year ending March 2021.

Please turn to Page 4. First, I would like to start with net sales and profit. We registered JPY 172.3 billion in net sales, a year-on-year decrease of 9.5%. This was primarily due to a decrease in sales of lead acid batteries for new automobiles and of lithium-ion batteries for plug-in hybrid electric vehicles, both in Japan and overseas.

We registered JPY 5.3 billion in operating income, a year-on-year decrease of 29.9%. This resulted from a decrease in net sales.

We registered JPY 100 million in profit attributable to owners of parent, as one of our consolidated subsidiaries in the automotive lithium-ion battery segment, Lithium Energy Japan, recorded impairment losses as extraordinary losses. Other contributing factors were an increase in income taxes, et cetera.

Please turn to Page 5, which discusses the factors for operating income change. Sales quantity was negatively impacted by COVID-19 both in Japan and overseas, resulting in lower sales for lead acid batteries for new automobiles, lead acid batteries for forklifts and lithium-ion batteries for plug-in hybrid electric vehicles. Additionally, we also registered lower sales of power supplies in the industrial battery and power supply segment. The price of raw materials and the sales price were a positive contributing factor due to a decrease in the price of lead, the main raw material used in our products.

Please turn to Page 6, which contains the segment results. I shall be discussing the details next.

Please turn to Page 7. I would like to start with our results in the domestic automotive batteries segment. In this segment, we registered a decrease in net sales accompanied by an increase in operating income. Due to the impact of COVID-19, the sales quantity of batteries for new automobiles decreased because car production decreased drastically, particularly in the first quarter. On the other hand, the sales quantity of replacement batteries increased due to an increase in the use of private cars as people avoided using public transportation and due to an increase in the use of delivery systems.

Please turn to Page 8, which discusses the ratio of shipped batteries for new automobiles and replacement batteries. The market share for batteries for new automobiles grew by 3 percentage points compared to fiscal year 2017. This is the result of an increase in adoption of European standard-compliant, abbreviated as EN batteries, a type of battery GS Yuasa has a competitive advantage in. The market share for replacement batteries has grown by 4 percentage points from fiscal year 2017. We supplied a significant volume of lead acid batteries for start and stop vehicles for new automobiles, and now we are registering an increase in replacement demand for these. Additionally, an increase in sales of batteries for start and stop vehicles, which are a high value-added product, also allowed us to improve our product mix. Battery replacements and auto dealerships are becoming more common in the replacement market in Japan. In light of this, we are carrying out initiatives in order to capture this demand.

Please turn to Page 9, which discusses our results in the overseas automotive battery segment. In this segment, we registered a decrease in net sales, accompanied by an increase in operating income. The sales quantity of batteries for automobiles and motorcycles decreased due to the large impact of COVID-19 in Southeast Asia, such as Indonesia and Thailand, especially in the first quarter. We registered an increase in sales quantity centered primarily around sales of replacement batteries in China, Europe and Australia, a fall in the price of lead translated into lower product prices. This constituted a change factor.

Please turn to Page 10, which discusses sales and market share by region in the overseas automotive battery segment. Asia, for which automotive and motorcycle sales are projected to continue growing, accounts for over 50% of net sales in the overseas automotive battery segment. Within Asia, GS Yuasa has a high market share in the ASEAN region, 35% for automotive and 54% for motorcycle, both represent the world's #1 market share. In ASEAN, we will aim to maintain a high market share, while at the same time improving profitability through the introduction of new products and optimal production systems.

Please turn to Page 11, which discusses our results in the industrial battery and power supply segment. In this segment, we registered a decrease in both net sales and operating income. In Japan, we registered an increase in sales derived from the supply to the large wind power generation project in Hokkaido having started. However, we registered a slowdown in the sale of power supplies for the communication business. Additionally, the sales quantity of lead acid batteries for forklifts decreased due to the impact of COVID-19. In Thailand, the sales quantity of lead acid batteries for forklifts decreased and sales of lead acid batteries for backup decreased in North America.

Please turn to Page 12, which discusses our results in the automotive lithium-ion battery segment. In this segment, we registered a decrease in both net sales and operating income. In terms of Lithium Energy Japan, due to the impact of COVID-19, automotive production volume for our main customers drastically decreased. Consequently, sales of lithium-ion batteries for plug-in hybrid electric vehicles also decreased.

In terms of Blue Energy, sales of batteries to Honda Motor increased as we started supplying the company with batteries to be fitted in their new vehicle model starting at the end of last fiscal year. Additionally, we also started supplying batteries to Toyota Motor in the current fiscal year.

In terms of capacity utilization at GS Yuasa Hungary, the launch of the new plant was delayed due to the impact of COVID-19. However, from November 2020, mass production has already started.

Please turn to Page 13. I would like to discuss the individual companies that make up the automotive lithium-ion battery segment starting with the results for Blue Energy, which manufactures lithium-ion batteries for hybrid vehicles. As I mentioned earlier, during the current fiscal year we started supplying batteries for Toyota Motor's Harrier model. We anticipate a future increase in demand and are therefore in the process of building a second plant. We will aim to increase our production capacity by a factor of 2.5x our current capacity or 50 million cells by fiscal year 2023.

Please turn to Page 14, where I would like to discuss our future plans for Lithium Energy Japan. Lithium Energy Japan declared an impairment of JPY 2.7 billion on a consolidated basis. Following this impairment, GS Yuasa is scheduled to purchase Lithium Energy Japan's #2 plant in Ritto City. We will be using one of the 2 production lines currently installed to manufacture ESS batteries and 12-volt lithium-ion batteries. We would also like to continue using the other production line for 12-volt lithium-ion battery production for Europe. Additionally, we have also started considering utilizing the remaining unused space at the plant for operations related to lithium-ion batteries.

Please turn to Page 15, which discusses our results in the segment of other, a segment centered around the GS Yuasa technology. In this segment, we registered a decrease in net sales and an increase in operating income. Production of lithium-ion batteries for submarines progressed smoothly. Sales of lithium-ion batteries for aircrafts decreased due to the impact of COVID-19.

Please turn to Page 16, which contains the balance sheet statement. Total assets stood at JPY 378.2 billion, down JPY 7.2 billion from March 31, 2020. Current assets decreased by JPY 10 billion primarily on account of the collection of trade accounts receivable. In terms of noncurrent assets, property, plant and equipment decreased on account of depreciation. However, we registered an increase in investment securities derived from the mark-to-market valuation of our stock holdings. We also registered an increase in net defined benefit assets. In light of these factors, noncurrent assets increased by JPY 2.7 billion year-on-year.

GS Yuasa borrowed a total of JPY 5 billion as part of funding measures against the backdrop of COVID-19. This translated into an increase in long-term debt. However, last fiscal year we carried out advanced payments associated with the large-scale storage battery project. These payments decreased this year, and so did trade accounts payable. Consequently, we registered a decrease in liabilities.

The mark-to-market valuation of our stock holdings had a positive effect on net assets. However, the payment of dividends and the purchase of treasury stock, et cetera, ultimately translated into an overall decrease in net assets of JPY 2.5 billion. The equity ratio increased by 0.5 percentage points from March 31, 2020 to 46.3%.

I would now like to discuss the cash flow statement. Please turn to Page 17. Operating cash flow totaled JPY 12.6 billion due to profit before income taxes and due to a decrease in depreciation. Cash flow derived from an improvement in working capital allowed us to cover payments related to taxes, et cetera. In spite of payment for the acquisition of property, plant and equipment, free cash flow came to JPY 3.6 billion, which was allocated to fund shareholder returns.

Please turn to Page 18, which discusses capital investment, depreciation and R&D costs. As it currently stands, these have been mostly in line with last fiscal year's results.

Please turn to Page 19, which discusses the revision to the consolidated results forecast. The reason for revision is as follows: We have revised net sales upward by JPY 10 billion in light of steady sales of automotive replacement batteries in the domestic and overseas markets. Additionally, we are also seeing signs of recovery following the COVID-19 crisis, for example, in the form of a recovery in terms of sales of new automobiles. Furthermore, we have revised operating income upward by JPY 2 billion as a result of a sales recovery overseas and of steady sales of automotive replacement batteries in Japan.

Please turn to Page 20, which discusses the revision to the consolidated results forecast on a per segment basis. We have revised upward the operating income forecast for the domestic automotive battery segment by JPY 500 million. This primarily reflects an overperformance in the first half of the fiscal year.

We have revised upward the net sales forecast for the overseas automotive battery segment by JPY 5 billion. Our performance in Indonesia, the United States, Australia and Thailand has exceeded our initial forecast. We have also revised operating income upward by JPY 1.5 billion. This primarily reflects an overperformance in the first half of the fiscal year.

Next is the industrial battery and power supply segment. We have revised upward the net sales forecast by JPY 2 billion as we are expecting a recovery in terms of the sale of lead acid batteries for forklifts.

Next is the automotive lithium-ion battery segment. We have revised upward the net sales forecast by JPY 3 billion as we expect a sales quantity increase for Lithium Energy Japan. We expect the profit contribution to be limited, so we left the operating income forecast unchanged.

Please turn to Page 21. I would now like to discuss our ESG initiatives starting on this page. GS Yuasa announced its support for TCFD recommendations and participation in the TCFD consortium in December 2019. Within this context, we are paying particularly close importance to trends in the automotive market in terms of both the risks and opportunities, given that these affect the automotive battery business, which constitutes our main product category. Additionally, we also view the spread of renewable energies on a global scale as a significant opportunity for the sales expansion of storage battery systems. Going forward, we will be promoting the use of TCFD to assess risks and opportunities and its introduction in our business strategy. At the same time, we would also like to carry out the adequate disclosure of information pertaining to climate change.

Please turn to Page 22. Environmentally considered products as a percentage of total sales stood at 34% for fiscal year 2019. As such, we were able to greatly exceed our fiscal year goal.

Please turn to Page 23, which outlines GS Yuasa's initiatives for diversity. The company has been carrying out initiatives for diversity, with the promotion of women's roles and work style reform as priority issues. As a result of these efforts, GS Yuasa received the Platinum Kurumin certification in fiscal year 2020. The employment rate of people with disabilities also exceeded the legally mandated employment rate.

Please turn to Page 24, which discusses the topic of CSR procurement. Cobalt is one of several minerals extracted in conflict regions and used in lithium-ion batteries. GS Yuasa is aware of the risks associated with this, and therefore collaborates with suppliers to guarantee CSR procurement of raw materials across the entire supply chain.

Please turn to Page 25. I would now like to discuss our steps to strengthen corporate governance.

Please turn to Page 26, which details our progress towards strengthening corporate governance. In terms of our policy on the appointment of directors, we select, in a well-balanced manner, persons with knowledge, experience, skills and so on relating to the business of our group as a whole and persons who can make statements and act from an objective standpoint and a long-term wide-ranging perspective.

Please turn to Page 27. Starting with this, I will be discussing GS Yuasa's initiatives in the industrial battery and power supply segment.

Please turn to Page 28, which contains an overview of the industrial battery and power supply segment at GS Yuasa. Under the industrial batteries and power supplies division, we have GS Yuasa Fieldings Ltd. and Sanken Densetsu Co., Ltd, which I will be discussing later on in this presentation. Overseas, we have GS Battery Co., Ltd. in China, GS Yuasa Siam Industry Ltd. in Thailand, and GS Yuasa Energy Solutions Inc. in America. These constitute our organizational structure.

Please turn to Page 29, which contains the net sales and operating income trends in the industrial batteries and power supplies division starting in fiscal year 2016, the first year of the fourth midterm management plan.

Please turn to Page 30, which discusses the opportunities of development for this business segment. Traditionally, we have focused on industrial batteries and power supplies for emergency use that is for backup use. Going forward, we will continue leveraging our strengths in this field so that we are well prepared to address demand. Furthermore, we believe there is a great growth opportunity going forward in the market for industrial batteries and power supplies for nonemergency use associated with renewable energy, peak shift and peak cut solutions.

Please turn to Page 31, which discusses the business environment associated with industrial batteries and power supplies for emergency use. The following factors have contributed to an increase in demand for batteries in power supplies for emergency use as backup devices for social infrastructure. The factors are a government program to build national resilience as a way to address the issue of natural disasters, developments in IoT, work style reform, data centers due to the diversification of contents, 5G, et cetera. Our strengths are our varied product lineup, our high market share and brand, and safe and secure service systems for customers. These are our strengths.

Our strategies here are the suggestion of a new business by Koto Zukuri and strengthening our business through the acquisition of the infrastructure business from Sanken Electric Co., Ltd.

Please turn to Page 32, where I would like to discuss the purpose behind the acquisition of the infrastructure business from Sanken Electric Co., Ltd. The first purpose is in reinforcing competitiveness through the integration of technological and developmental capabilities. The second purpose is in expanding sales channels, mainly in the communications business fields. The third purpose is in strengthening operational frameworks in preparation for the emergence of new markets. We believe this acquisition will allow for the generation of various short-term synergies and synergies over the medium to long term.

Please turn to Page 33, which discusses our strengths in the field of industrial batteries and power supplies for nonemergency use. This is a field we would like to focus on going forward. First, one of our strengths lies in our various sales and maintenance systems. Second, one of our strengths lies in the fact we were able to secure an order involving one of the world's largest wind power projects. This project involves the production and construction of 720 megawatt hour large capacity batteries for a facility located in Toyotomi-cho, Hokkaido. We are currently supplying this project.

Our strategy in the field of industrial batteries and power supplies for nonemergency use is to strengthen service by collaboration with energy companies and electric manufacturers. Additionally, as I mentioned earlier, our strategy is also to strengthen cost competition. We are now developing a new battery model based on the technologies used in the lithium-ion batteries supplied to one of the world's largest wind power projects in Hokkaido. We expect that this new model will cost less, have larger capacity, and be safer than existing models.

Please turn to Page 34, which discusses the business environment associated with industrial batteries and power supplies for nonemergency use. The adoption of renewable energy sources towards decarbonization continues to progress. Therefore, we are also currently seeing an increase in people and companies installing storage batteries for self-consumption for emergency business continuity plan purposes or purposes related to energy management such as peak shift and peak cut. Our strengths are as follows: Customers can feel safe in knowing they can choose from a varied lineup of in-house products manufactured domestically presented all as one package. This lineup is not limited to storage batteries, but also includes power conditioners. Additionally, we also offer a reliable support system with more than 100 service points in Japan.

Our strategies are as follows: Going forward, we would like to continue serving products that meet customers' needs. In addition to a broad scope support system, we also have plans for the proactive introduction of a remote monitoring service.

This concludes today's financial results briefing for the second quarter of the fiscal year ending March 2021. Thank you for listening.

[Unknown Executive]

The first question will be posed by Mr. Watanabe with SMBC Nikko Securities.

[Hiroharu Watanabe, analyst]

My name is Watanabe, and I am with SMBC Nikko Securities. I have 2 questions. First, I would like to hear your forecasts regarding how much GS Yuasa's market share will shrink in the overseas automotive battery segment over a long-term horizon. Market share has dropped slightly in Thailand, although it remains high. I would, therefore, like to know if investors should be concerned about this data point or not. This is my first question.

[Osamu Murao, executive]

Thank you for your question regarding GS Yuasa's market share in the overseas automotive battery segment. GS Yuasa currently boasts high market share in Asia, especially in the ASEAN region. We are currently expanding production capacity and carrying out the delivery of new products tailored to each region. Additionally, in Thailand, we are currently expanding GS Yuasa Asia Technical Center, which possesses design, testing and manufacturing technology capabilities. Going forward, we would like to continue dedicating our efforts towards maintaining and securing market share primarily centered around Thailand. We have registered a slight market share decrease in Thailand. A number of circumstances contributed to this. Currently, GS Yuasa's market share in Thailand stands at 34%. This was partially because we have been focusing on profits in this area, but we believe that we will be able to secure a strong market share performance going forward. In summary, this decrease in market share was the result of our focusing on profits in the Thai market.

[Hiroharu Watanabe, analyst]

Allow me to follow up on that question. I believe that in the past, GS Yuasa temporarily lost market share in some Asian regions following an influx of lower-quality products from competitors, which resulted in an increase in price competition. You mentioned how GS Yuasa's focus on profits in Thailand led to this decrease in market share. Was this the result of increased price competition? Or is this an adequate level, considering unprofitability in the overall market?

[Osamu Murao, executive]

As shown on the current slide, we are currently focusing on high value-added batteries in the Thai market as a result of a selection and concentration strategy. As such, while we have registered a slight decrease in market share in Thailand, we posted a very strong performance in terms of profitability.

[Hiroharu Watanabe, analyst]

So does that mean GS Yuasa has given up on low-end products in the Thai market?

[Osamu Murao, executive]

You could say that. In structural terms, we are focusing on models allowing us to generate high levels of profitability.

[Hiroharu Watanabe, analyst]

I see. My second question pertains to the situation involving renewable energies. I understand that the market for renewable energies will expand going forward over the long term. However, currently in Japan in a majority of cases, there is some form of government subsidy associated with the installation of storage batteries. So either the government or the energy producers have to bear the costs.

The legal framework regarding these is still very unclear. So from the outside looking in, it does not appear that this market has been able to stand on its own. I would therefore ask you to discuss inquiries GS Yuasa has received and the outlook going forward.

[Osamu Murao, executive]

Thank you for your question. In terms of the adoption of storage batteries resulting from the adoption of renewable energies and self-consumption, we have indeed received a significant number of inquiries. However, while GS Yuasa has been carrying out a number of market activities, adoption in terms of small-scale home installations following the end of the FIT program starting in fiscal year 2019 has been slower than we had anticipated. This is an area we need to address and improve upon going forward. However, we are currently in the process of manufacturing and supplying lithium-ion batteries to a 720 megawatt hour wind power project, one of the largest in the world in Toyotomi-cho in Hokkaido.

Regarding a medium-sized scale, it is also true that we have been receiving a large number of inquiries related to self-consumption from business facilities. However, as you mentioned in your question just now, I believe there is a need going forward for a support structure as part of a national strategy and for the government to decide whether to use products made in Japan to this end or not. Going forward, GS Yuasa would like to focus on the medium-sized scale in the form of business facilities and factories.

[Hiroharu Watanabe, analyst]

Allow me to clarify this point. Does that mean GS Yuasa will be focusing more on self-consumption on the part of players in the manufacturing industry, et cetera, as opposed to mega solar projects making use of these batteries?

[Osamu Murao, executive]

Indeed, we would like to focus on the medium-sized scale, and we have been seeing an increase in inquiries related to this.

[Unknown Executive]

The next question will be posed by Mr. Nishizu with Nomura Securities.

[西津 昂, analyst]

My name is Nishizu, and I am with Nomura Securities. My first question pertains to lead acid batteries. I believe sales of replacement batteries posted a robust performance, continuing the trend from the first quarter. I would like to ask you whether you think this is sustainable going forward. Do you think this demand has been pulled forward? Or do you foresee this strong performance to continue into the future?

[Osamu Murao, executive]

Thank you for your question. Allow me to address the market for replacement batteries for automobiles going forward. Indeed, we registered very strong demand exceeding our forecasts both in the first quarter in the months of April, May and June, and in the second quarter in July, August and September. We believe this was caused by COVID-19, which resulted in an increase in the use of cars. This includes people using private cars more often during this period and also primarily due to increased car use by delivery operators, et cetera.

Going forward, we believe it will depend on how COVID-19 develops. We also believe performance numbers rivaling our results for the first and second quarters will be very difficult to achieve. However, we expect to see some demand in the market for replacement batteries.

[西津 昂, analyst]

I see. My second question pertains to Lithium Energy Japan. I believe you mentioned earlier that GS Yuasa was considering repurposing unused space at Lithium Energy Japan's second plant for use related to lithium-ion batteries. For example, what are some of the options currently available to GS Yuasa on this front? Would these be used for example at Blue Energy?

[Osamu Murao, executive]

Thank you for your question. First, regarding Blue Energy, we are currently in the process of building a plant allowing us to raise annual cell production at our location in Osadano, Fukuchiyama City from 20 million cells to 50 million cells. We therefore plan on increasing production capacity at Blue Energy using all the resources associated with Blue Energy.

Lithium Energy Japan's plant manufactures batteries with a larger capacity than those produced at Blue Energy for plug-in hybrid electric vehicles, electric vehicles and energy storage systems. We would therefore like to focus on energy storage systems. That is the aforementioned lithium-ion batteries for industrial use and on 12-volt lithium-ion batteries and increase production.

Additionally, as I mentioned briefly earlier, GS Yuasa currently has several test locations in the Kyoto region. There, we carry out R&D towards the development of future lithium-ion battery models.

We would, therefore like to aggregate these locations by utilizing unused space and improve efficiency when it comes to R&D. As such, we are not thinking of using this space for initiatives associated with Blue Energy.

[西津 昂, analyst]

I see. Lastly, Blue Energy started supplying batteries for the Toyota Motors Harrier model. But I believe that currently, the bulk of the sales volume is to Honda Motor. Going forward against the backdrop of an alliance between Honda Motor and GM, Honda Motor will also be making available car platforms for ICE vehicles and others to GM, who will be focusing on electric vehicles. Will this alliance have an impact on GS Yuasa?

[Osamu Murao, executive]

We are not currently foreseeing an impact resulting from the Honda Motor and GM alliance. We are receiving a large number of inquiries for use of our batteries for use in hybrid electric vehicles from other companies in addition to Honda Motor and Toyota Motor. As such, we are considering expanding the sale of Blue Energy batteries for use in hybrid electric vehicles. We therefore do not believe the alliance between GM and Honda Motor will impact the GS Yuasa's business.

[Unknown Executive]

The next question will be posed by Mr. Sakae with Daiwa Securities.

[Satoshi Sakae, analyst]

My name is Sakae, and I am with Daiwa Securities. I have 3 questions.

My first question pertains to Blue Energy, specifically to Page 13 of the presentation materials. My understanding is that the company is anticipating a pronounced net sales increase in the current fiscal year, primarily thanks to the supply of batteries to Toyota Motor. Is Blue Energy on track to meet the initial forecast?

Additionally, this represents a contribution to profit growth from the get-go. In the first year, the company is supplying batteries to Toyota Motor. Normally, one would expect problems and setbacks associated with the initial launch. I would therefore like to ask you about the reason we should expect this profit increase contribution to materialize straightaway.

[Osamu Murao, executive]

Thank you for your question. First, in terms of net sales for Blue Energy in fiscal year 2020, we have also registered an increase in sales associated with the supply of batteries to Honda Motor. Sales to Toyota Motor too have also exceeded our initial forecast. Furthermore, in terms of the yield associated with the launch of this operation, things have been going extremely well, and we continue maintaining a very high yield rate.

[Satoshi Sakae, analyst]

My second question deals with Lithium Energy Japan. I got the impression company projections indicate a challenging net sales situation in the second half of the fiscal year, as was the case during the first half. Is this assessment correct? I believe the use of Lithium Energy Japan's batteries in new models, such as the Mitsubishi Motor's Eclipse Cross model, could lead to a slowdown in WACC faster than expected.

[Osamu Murao, executive]

First, compared to the initial full fiscal year forecast for Lithium Energy Japan, net sales have indeed fallen in the first and second quarters. However, it is also true that we are seeing a gradual recovery trend starting in the middle point of the second quarter.

Despite this, we have registered a significant decrease compared to the initial forecast. As such, it is true that Lithium Energy Japan faces a more challenging net sales situation compared to Blue Energy.

Regarding the Eclipse Cross, the situation is dire in the European market, with Mitsubishi Motors announcing it would not be releasing new models in Europe. However, we continue supplying batteries for use in other markets, not in Europe.

[Satoshi Sakae, analyst]

Lastly, allow me to ask a third question. Statements made by Minister of Economy, Trade and Industry, Hiroshi Kajiyama, lead me to believe players in the storage battery market like GS Yuasa will gain prominence going forward. In light of this, a possible strategy is to aim for a profit contribution starting with the very first year in operation for large-scale projects, like the wind power project in Hokkaido. This strategy would involve a profit contribution from the get-go as opposed to generating profits over time through aftersales support and maintenance.

On the other hand, GS Yuasa is focusing on peak shift and peak cut solutions associated with small- and medium-sized projects. Would it be safe to assume the company reached the conclusion these were more profitable than large-scale projects? Additionally, I would like to inquire about the current size of the peak shift and peak cut business for GS Yuasa as well as the market scale of competitors.

[Osamu Murao, executive]

Thank you for your question. First, Minister of Economy, Trade and Industry, Hiroshi Kajiyama, stated that he wants to give renewable energy a higher share of electricity generated in Japan. We view the statement as being highly beneficial for us. However, we are currently supplying storage battery system to the large-scale wind power project in Toyotomi-cho in Hokkaido. We don't just supply them with products as we also have an after-service maintenance agreement with a duration of 20 years in the case of the wind power project in Toyotomi-cho. Our strategy is therefore to generate profits gradually over time during this period through maintenance services, et cetera. We use the Japanese term Koto Zukuri to refer to this business model. As such, I believe these profits are generated through after-service maintenance, et cetera.

However, Japan will be executing a national policy offering support to nonautomotive industrial batteries. Despite this, a concrete list of items receiving government support is yet to be announced. This will have an effect on whether we will be generating profits from the get-go or over time through maintenance, et cetera, although we believe we will be generating profit over time.

Next, going forward, GS Yuasa also will of course be taking on large-scale projects, but we would like to focus on medium-sized projects for business facilities and factories. We have received a large number of inquiries from these, and we have been carrying out tests within GS Yuasa.

Additionally, one of our strengths, as I mentioned earlier, is the fact we can supply not just storage batteries but also power conditioners, all in one package. We have these types of products. So we believe these medium-scale projects are a good place to leverage our strengths. For this reason, we would like to focus on this area going forward.

Regarding information on our competitors' business, we do not have detailed information on hand here. So please allow me to refrain from answering your question. I ask you for your understanding.

[Unknown Executive]

The next question will be posed by Mr. [ Aiba ] with Nomura Asset Management.

[Unknown Analyst]

First, I would like to inquire about the storage battery business. Earlier, you mentioned the collaboration with electric manufacturers. In concrete terms, what does this refer to?

[Osamu Murao, executive]

As it stands, we cannot divulge specific company names. However, these refer to large-scale prominent electric manufacturers.

[Unknown Analyst]

I understand you cannot divulge specific company names, but could you expand upon the substance of this collaboration within the limits of what you can discuss here?

[Osamu Murao, executive]

Within the system, the range of products GS Yuasa can supply revolves around batteries and power conditioners. In concrete terms, within the scope of this collaboration, electric manufacturers would be taking care of the management aspect.

[Unknown Analyst]

I see. Allow me to ask a second question. I believe that going forward, GS Yuasa will be focusing on providing peak shift and peak cut solutions to factories and business facilities. I believe this involves providing power conditioner solutions. However, statements made by Minister Kajiyama were mentioned in the previous question. And I believe that if batteries made in Japan are used in these large-scale projects, rather than LG or CATL, GS Yuasa will only find competition in the form of Toshiba's SCiB. This type of project appears to be more profitable, or is that not the case?

[Osamu Murao, executive]

Thank you for your question. As you just said in your question, the outlook changes depending on the form of preferential treatment afforded to Japanese battery manufacturers. Indeed, only a limited number of manufacturers currently operates in the field of nonautomotive industrial batteries. As such, if batteries made in Japan are given preferential treatment, this will be tremendously beneficial for GS Yuasa.

Currently, and this includes the topic of subsidies, the government is yet to decide upon a concrete support structure. So while we do indeed have high hopes, we cannot make any concrete pronouncements regarding this topic.

[Unknown Analyst]

I see. Lastly, I would like to inquire about the impairment of JPY 2.7 billion associated with the retail plant. What impact do you think this will have in terms of the profit and loss statement for next fiscal year and beyond?

[Osamu Murao, executive]

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

[Toshiyuki Nakagawa, executive]

My name is Nakagawa. Lithium Energy Japan recorded an impairment loss of JPY 2.76 billion. However, this impairment is primarily related to equipment.

At GS Yuasa, we amortize lithium-related equipment over a 7-year period. However, this does not mean that 7 years remain in terms of amortization. There is, therefore, a need to apply a discount to this.

However, we believe this impairment of JPY 2.76 billion will translate into changes in terms of the annual amortization amount covering a number of years. We request your understanding in that we currently cannot disclose detailed changes in annual amortization and in terms of the profit and loss statement. However, the basic idea is how I just outlined. This concludes my answer.

[Unknown Executive]

Mr. Sugimoto with Mitsubishi UFJ Morgan Stanley Securities will now pose the next question.

[Koichi Sugimoto, analyst]

My name is Sugimoto. First, Mitsubishi Motors' plan to downsize its operations in Europe somewhat was discussed in GS Yuasa's financial results briefing held 3 months ago. At the time, I believe you mentioned how you were unsure as to what impact this would have on GS Yuasa. Could you tell us if you currently have any impact forecast?

[Osamu Murao, executive]

Thank you for your question. I cannot disclose the specifics here, but the downsizing of Mitsubishi Motors' European operations has translated into a decrease in production of batteries for plug-in hybrid electric vehicles at Lithium Energy Japan during the current fiscal year. COVID-19 also had a negative impact, and these factors led to a significant decrease compared to the initial forecast.

As I mentioned earlier, we want to structure our plans and our company so that we can generate profits even under a lean structure. As such, we recorded an impairment towards creating a lean structure so that we can get a new clean start.

[Koichi Sugimoto, analyst]

I see. This, therefore, means the company is forecasting a difficult situation next fiscal year and beyond.

[Osamu Murao, executive]

Indeed. However, by creating a lean and healthy structure, we would like to become capable of addressing a number of things, including customer inquiries next fiscal year and beyond.

[Koichi Sugimoto, analyst]

I see. My second question is as follows. On Page 8, you mentioned a growth trend in market share in the domestic automotive battery segment. Going forward, will the company be maintaining this market share level or further increase its market share?

[Osamu Murao, executive]

Thank you for your question. The numbers referred to the GS Yuasa Group overall. So these also included GS Yuasa Energy.

Our market share for batteries for new automobiles stood at a very high level of 71%. As such, we believe it's difficult to grow this number any further. However, our market share in terms of replacement batteries currently stands at 57%, so we believe there is still some room for growth here. This concludes my answer.

[Toshiyuki Nakagawa, executive]

This is Nakagawa speaking. Allow me to briefly expand upon President Murao's answer.

I would like to direct your attention to the vertical bar graph on Page 8. The vertical bar on the left refers to OEM for new automobiles, while the bar on the right refers to replacement batteries. This graph shows the change trend over the past 3 years between fiscal years 2017 and 2020.

In terms of OEM for new automobiles as shown by the section colored yellow, the ratio of shipped batteries for EN batteries has grown from 10% to 25% plus 5%, or 30%. Additionally, regarding replacement batteries on the right-hand side, EN batteries have not yet made it into the replacement battery market.

What I would like to direct your attention to is the fact that the ratio of shipped batteries for JIS batteries for start and stop vehicles has grown from 15% 3 years ago to 25%. As we have mentioned previously, both EN batteries and batteries for start and stop vehicles are one of GS Yuasa's fields of expertise. An increase in the ratio for these types of batteries both in terms of OEM for new automobiles and replacement batteries is a positive for GS Yuasa's overall position. This concludes my answer.

[Koichi Sugimoto, analyst]

Allow me to ask one last question. You gave a detailed overview of the industrial battery and power supply segment. But would it be possible for you to give us your take on the following topic?

First, you mentioned the GS Yuasa's strategy of focusing on supplying batteries to medium-sized projects like factories, et cetera. Would it be correct to assume this refers exclusively to lithium-ion batteries? Or will it involve a wider range of batteries, including lead acid batteries?

[Osamu Murao, executive]

Thank you for your question. We primarily supply lithium-ion batteries. However, some projects are indeed for lead acid batteries, so it is not 100% lithium-ion batteries. Lead acid batteries have certain benefits too, so we have seen a number of projects involving lead acid batteries, including in the overseas market. However, our main focus is on lithium-ion batteries.

[Koichi Sugimoto, analyst]

I see. Among the competition, some manufacturers produce lead acid batteries with distinctive properties. Would it be correct to assume GS Yuasa will not take a similar approach?

[Osamu Murao, executive]

Indeed. However, we have a division within GS Yuasa, carrying out R&D targeted at lead acid batteries towards the development of storage batteries with a long operating life through the use of load leveling, which is a technology that has existed for a while. As such, we would like to continue these initiatives.

[Koichi Sugimoto, analyst]

I see. Additionally, you mentioned that the company is in the process of developing a new lithium-ion battery model. I do not know the best way to word this question, but could you give us a bird's eye view of what kind of battery this will be?

Perhaps I am missing something, but I believe GS Yuasa has never discussed in detail technological trends in current lithium-ion batteries. For this reason, I am having trouble grasping what this new lithium-ion battery model would involve. So could you expand upon this topic a little bit further?

[Osamu Murao, executive]

As I mentioned earlier, we currently supply a battery we have termed [ PS1 ] for use in the aforementioned 720 megawatt hour wind power project in Toyotomi-cho in the Wakkanai region of Hokkaido. Our new battery is based on the [ PS1 ] model and leverages the mass production know-how we acquired through the Hokkaido project.

Originally, the [ PS1 ] was developed by modifying the recipe underlying Lithium Energy Japan's plug-in hybrid electric vehicle batteries. For the new model, we would like to make changes to our [ PS1 ] batteries to further improve their price competitiveness. Unfortunately, I cannot disclose any further details.

[Unknown Executive]

We would now like to conclude today's financial results briefing. The video version of today's briefing is scheduled to be made available online, starting at 11:00 a.m. on November 20, on the GS Yuasa website.

This concludes today's financial results briefing. Thank you for your time.

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