TESS Holdings Co.,Ltd. Q2 FY2025 earnings call

• Corporate Vision: Tess Group aims to become a leading decarbonization company delivering Total Energy Saving & Solution to customers.
• Consolidated Interim Results: Reported revenue of 18.013 billion yen (+19.5% YoY), gross profit of 4.73 billion yen (+25.5% YoY), operating profit of 2.409 billion yen (+36.5% YoY). Reported net income was impacted by a 1.816 billion yen derivative valuation loss from foreign exchange forward contracts for the Imari biomass project; excluding this impact, ordinary profit was 2.056 billion yen (93.5% of full-year target) and interim net income attributable to the parent was 1.79 billion yen (99.5% of full-year target).
• Engineering Business Order Trends: Q2 order value was 4.13 billion yen (37.6% of YoY level), as the company reallocated significant resources to the new storage battery business. Order backlog remained stable at 13.548 billion yen (93.9% of YoY level). The company secured a preliminary indication for a 5.579 billion yen EPC order for a battery energy storage system co-located with a solar power plant, its first non-customer-side storage battery order.
• Renewable Energy Operations: 7.7 MW of new on-site PPA renewable energy supply was launched in the first half, with an additional 7.5 MW launched after Q2 and 12.5 MW of future projects pending launch. Total consolidated renewable energy generation capacity reached 327.7 MW as of Q2 end.
• Biomass Power Progress: The Saga Imari Biomass Power Plant is progressing on schedule for commercial operation in May 2025, and has begun grid interconnection trial power sales. The project already secured FIT certification, so it is unaffected by new policy proposals to exclude imported biomass from support. Most fuel costs are hedged via foreign exchange contracts, and feedstock is sourced directly by the company's Indonesian subsidiary.
• Strategic Partnerships:
  • Entered into a capital and business alliance with Tokyo Century, which acquired a 5% stake in Tess, to expand existing business lines and accelerate growth in the priority storage battery and biomass fuel businesses.
  • Signed a memorandum of understanding with Daiwa Energy & Infrastructure to co-develop 2 GWh of grid-scale storage battery projects. This collaboration alone would deliver ~70% of the mid-term plan's target of 700 MW (2.8 GWh) of grid-scale storage battery development, and Tess currently has over 3 GWh of active projects in its development pipeline.
• Sustainability & Organizational Updates: Published the group's first integrated report covering corporate history, value creation, strategy and sustainability. Revised human resource systems to attract and train new talent to support mid-term plan growth targets.

1. Engineering Business: Total revenue of 7.607 billion yen (+35% YoY), contributing 42.2% of total consolidated revenue; total gross profit of 1.083 billion yen (+55% YoY). Sub-segment performance:

• Energy Saving EPC (Contracted): Revenue of 3.744 billion yen (+64% YoY), gross profit of 0.403 billion yen (+167% YoY). Growth driven by increased cogeneration system projects and strong project progress.
• Renewable Energy EPC (Contracted): Revenue of 3.14 billion yen (-5% YoY), gross profit of 0.497 billion yen (-10% YoY). Slight decline due to a small reduction in the number of active projects despite larger average project size.
• Renewable Energy EPC (Development): Revenue of 0.722 billion yen (from 0.043 billion yen YoY), gross profit of 0.181 billion yen (from -0.003 billion yen YoY). Sharp increase driven by progress on a solar project in Kagoshima Prefecture, which had no new development projects in the prior year period.

1. Energy Supply Business: Total revenue of 10.406 billion yen (+10% YoY), contributing 57.8% of total consolidated revenue; total gross profit of 3.647 billion yen (+18% YoY). Sub-segment performance:

• Renewable Energy Power Generation: Revenue of 5.782 billion yen (+25% YoY), gross profit of 2.344 billion yen (+14% YoY). Growth driven by consolidation of the Fukuoka Miyako Mega Solar Power Plant, startup of the Kumamoto Nishiki Green Power biomass plant, and increased power supply from on-site PPA, partially offset by reduced power sales from cable theft at solar plants in the Kanto region.
• O&M (Operations & Maintenance): Revenue of 2.655 billion yen (-13% YoY), gross profit of 0.795 billion yen (-8% YoY). Decline caused by lower ad-hoc project revenue compared to the prior year, with steady recurring contract revenue.
• Electricity Retail Supply: Revenue of 0.678 billion yen (-13% YoY), gross profit of 0.051 billion yen (from 0.016 billion yen YoY). Revenue fell due to termination of a large customer contract, but gross profit grew sharply driven by low market prices under the new market-linked pricing menu.
• Biomass Fuel: Revenue of 1.289 billion yen (+27% YoY), gross profit of 0.455 billion yen (from 0.136 billion yen YoY). Growth driven by increased shipment volume, higher selling prices from yen depreciation, and access to low-cost feedstock.

• Management maintains the full-year 2025 June fiscal year consolidated earnings guidance originally announced on November 5, 2024, with no upward or downward revision.
• The large Kyoto Prefecture development project is progressing steadily but its schedule remains unconfirmed, so it is still excluded from both the 2025 full-year guidance and the mid-term management plan, consistent with prior reporting.
• Seasonality expectations: Renewable energy generation is typically stronger in the first half due to solar irradiance patterns, with second half generation expected to reach approximately 70% of first half levels. Lower-margin engineering projects are also more likely to occur in the second half.
• Unused selling, general and administrative expenses remain in the first half, and personnel costs are expected to increase in the second half as the company expands headcount to support growth. It remains uncertain whether new storage battery orders will be recognized in the 2025 fiscal year due to construction scheduling.

• Cable theft at solar power plants, concentrated in the Kanto region, has caused partial reductions in power sales volume for the company.
• Resource reallocation to the new storage battery business has created staffing constraints for contracted energy saving and renewable energy EPC sales activities, contributing to lower year-over-year order intake in the core engineering business.
• The large Kyoto Prefecture development project involves multiple local governments, leading to extended permitting timelines and uncertain revenue recognition timing.
• As a new business line, storage battery project development is facing unforeseen execution delays in finalizing contract terms for incoming inquiries, even though demand has grown sharply.
• Derivative valuation losses from foreign exchange forward contracts for the Imari biomass project caused significant volatility in reported net income for the first half.

Q: How does management assess Q2 progress, given gross profit reached ~60% of full-year target (in-line with seasonal trends) and non-derivative adjusted ordinary profit and interim net income are already at very high full-year completion rates? Is progress on plan or better than expected? / A: Management confirms the full-year guidance remains unchanged. Renewable energy generation has a natural seasonal skew to the first half, with second half generation expected to be ~70% of first half levels. Lower-margin engineering projects and weather-related delays are more likely in the second half, and first half SG&A is partially unspent with higher personnel costs expected in H2 from ongoing headcount expansion. It is uncertain if new storage battery orders can be recognized in the current fiscal year, so management assesses progress as in-line with the original guidance.

Q: Engineering order intake remains below last year's level even with the large preliminary storage battery order. How does this compare to internal plan, and what are the key drivers of the slowdown? / A: The company does not set fixed internal annual order targets. The main driver of lower order intake is that significant existing resources have been reallocated to build out the new storage battery business, and new hires are not yet fully productive, leading to reduced capacity for traditional contracted EPC sales. While there are over 200 active storage battery inquiries with many large promising projects, final contract negotiations are progressing slowly due to the newness of the business. Tess expects order growth to accelerate once these bottlenecks are resolved, and individual storage battery projects are much larger than traditional projects, so they will have a major impact on future order intake.

Q: What is the expected gross margin for the 5.6 billion yen storage battery EPC order, compared to the company's existing contracted and development EPC businesses? / A: Batteries themselves account for 70-80% of total project cost for storage battery EPC, which leaves limited margin for the contractor. Management expects gross margins will be lower than traditional contracted renewable energy EPC, with a target high-single-digit percentage margin. While margins per project are lower, individual projects have very large nominal revenue, so total gross profit dollars are still meaningful, and on-site construction work is less intensive than for traditional EPC projects, making the business efficient to scale. For this reason, the company continues to prioritize storage battery as a key growth area.

Q: Is the large 18 billion yen derivative valuation loss recognized in the first half fully aligned with the full-year guidance, and will no additional valuation gains or losses be recognized in the second half? / A: The November 2024 full-year guidance was already updated to reflect this level of derivative valuation loss, after hedge accounting was adopted starting in the first half of 2025. No further derivative valuation gains or losses will be recognized in the P&L from Q3 onwards, so the full-year outcome aligns with the existing guidance.