TESS Holdings Co.,Ltd. Q3 FY2025 earnings call

• Core Financial Performance

  • Consolidated 3Q results: Revenue 26.788 billion yen (+17.2% YoY), gross profit 6.203 billion yen (+22.8% YoY), operating profit 2.669 billion yen (+28.8% YoY). Excluding derivative valuation losses, ordinary profit reached 2.041 billion yen (92.8% of full-year target) and net profit attributable to parent shareholders reached 1.81 billion yen (100.6% of full-year target).
  • A 1.816 billion yen derivative valuation loss was recorded from foreign exchange forward contracts for Saga Imari Biomass Power Plant PKS procurement; hedge accounting is now applied, so no further derivative valuation gains/losses will be recognized going forward. A 513 million yen special gain was recorded from sale of one unlisted equity security.

• Storage Battery Business Progress

  • Multiple large-scale storage battery EPC orders were secured: 5 billion yen for the 30MW Shizuoka Kikugawa storage plant (completion March 2027), 4 billion yen for the 25MW DEI Battery Fund Alpha contracted project (completion December 2027), and 5.7 billion yen for 5 FIT-to-FIP conversion + storage battery addition projects for existing solar plants (completion January 2026, to be recognized in next fiscal year).
  • As of end-March 2025, there are over 120 inquiries for storage battery additions and over 150 inquiries for grid-scale storage plants, with a development pipeline of over 20GWh for large-scale extra-high voltage development EPC. The mid-term management plan targets 700MW cumulative installed capacity for grid-scale storage and 150MW for FIT-to-FIP + addition projects by 2030.

• Renewable Energy & Operations Updates

  • The Saga Imari Biomass Power Plant started commercial operation in April 2025, one month ahead of the original May 2025 schedule; annual sales are projected at 7.4 billion yen.
  • Total group renewable power generation capacity reached ~349.5MW (excluding Saga Imari Biomass) as of 3Q, with 19.6MW added from on-site PPA and 1.9MW added from FIP solar in the quarter. 18 on-site PPA projects totaling 19.6MW have started supply as of 3Q end, with an additional 8 projects (31.8MW) scheduled to start supply after April 2025.
  • Groundbreaking was held for a small-scale EFB pellet plant in North Sumatra, Indonesia, with operations scheduled to start in June 2026 and annual production of 10,000 tons. After validating production and costs, capacity will be scaled up to 100,000 tons per year by 2030.

• Sustainability & Governance

  • Achieved a B score in CDP 2024 for climate change, recognized for starting Scope 3 emission disclosure and offsetting Scope 1/2 emissions via J-Credits from customer energy-saving projects.
  • Added an in-house industrial health nurse for employee physical and mental health support, updated workplace guidelines, and expanded Osaka headquarter office space to accommodate new hires.

• Shareholder Return

  • Introduced a new shareholder benefit program to improve investment attractiveness and encourage long-term shareholding, awarding points convertible to cash based on shareholding size.

1. Engineering Segment: Total revenue was 11.811 billion yen, up 26% year-over-year (YoY); total gross profit was 2.069 billion yen, up 78% YoY. Sub-segments: - Energy-saving EPC (contracted): Revenue 5.146 billion yen, up 41% YoY; gross profit 692 million yen, up 266% YoY. - Renewable energy EPC (contracted): Revenue 4.828 billion yen, down 14% YoY; gross profit 814 million yen, down 18% YoY. - Renewable energy EPC (development): Revenue 1.837 billion yen, up from 53 million yen YoY; gross profit 563 million yen, up from -19 million yen YoY. Revenue contribution % for 3Q cumulative Engineering segment orders: Storage battery accounts for 65.7% of total new orders, solar power 18.8%, cogeneration/self-generation 6%, combined ~90% of total new orders. Storage battery accounts for 50.2% of total order backlog. 2. Energy Supply Segment: Total revenue was 14.976 billion yen, up 11% YoY; total gross profit was 4.133 billion yen, up 6% YoY. Sub-segments: - Renewable energy power generation: Revenue 7.997 billion yen, up 24% YoY; gross profit 2.574 billion yen, up 9% YoY. - O&M: Revenue 3.986 billion yen, down 10% YoY; gross profit 976 million yen, down 18% YoY. - Electricity retail supply: Revenue 1.191 billion yen, up 10% YoY; gross profit 74 million yen, up 51% YoY. - Biomass fuel: Revenue 1.8 billion yen, up 16% YoY; gross profit 508 million yen, up 76% YoY. Total company consolidated revenue was 26.788 billion yen, with Engineering contributing ~44.1% and Energy Supply contributing ~55.9% of total consolidated revenue.

• Full-year 2025 June fiscal year guidance is maintained unchanged from the November 2024 release, despite 3Q cumulative operating profit reaching 98.9% of the full-year target and overall performance progressing ahead of plan. The guidance is kept unchanged due to seasonal performance patterns, unspent SG&A, and increased development costs for storage battery businesses.
• The Kyoto development project is progressing steadily, but its revenue recognition timing remains undetermined, so it is still excluded from the 2025 June fiscal year full-year guidance, consistent with prior reporting.

• Cable theft at existing renewable power plants has caused a reduction in power sales volume, creating a drag on renewable energy generation revenue growth.
• Large O&M project contract expirations reduced ad-hoc O&M revenue, and inventory valuation losses for related parts further reduced O&M segment profit.
• While the storage battery project pipeline has strong potential, the company notes there are unstated operational and execution challenges to converting all inquiries into firm orders and meeting the 2030 mid-term capacity target.
• Foreign exchange volatility previously created large derivative valuation losses for PKS fuel procurement at the Saga Imari plant, though hedge accounting has now been implemented to mitigate this volatility going forward.

Q: With Engineering segment order backlog expected to stay above 20 billion yen at 2025 June fiscal year end, what share will contribute to revenue in the 2026 June fiscal year, and what is the typical revenue recognition timeline and profitability by order type? / A: The full question text was cut off in the provided transcript. Management notes that most of the large storage battery orders received this quarter will be recognized in 2026 and beyond, as these multi-year large-scale projects have construction timelines stretching 1-2 years from order to completion. Profitability varies by project type and size, with large-scale storage battery projects expected to deliver margin consistent with the segment's improved gross profit trend seen this quarter.

Q: What is management's view on the impact of inflation and rising labor costs on business performance? / A: The full question and answer text was cut off in the provided transcript. The question focuses on inflation and cost pressures, which are general industry risks for the EPC business that requires on-site labor and construction materials.

Q: Why did renewable energy generation profit grow slower than revenue, and what is the outlook going forward? / A: The full question and answer text was cut off in the provided transcript. The segment saw revenue up 24% but gross profit up only 9%, partially due to the negative impact of cable theft reducing power sales volume that weighed on profit growth. Going forward, the addition of the Saga Imari biomass plant and new solar capacity will drive profit growth starting from the next fiscal year.

Q: What will be the profit contribution and EBITDA margin of the Saga Imari Biomass Power Plant? / A: The full question and answer text was cut off in the provided transcript. Management confirms the plant started operation one month ahead of schedule with an expected annual sales scale of ~7.4 billion yen, and will begin contributing full quarterly profit starting from the 4th quarter of the current fiscal year.