TESS Holdings Co.,Ltd. Q4 FY2025 earnings call

Overall Financial Performance

• 2025 June fiscal year consolidated results: Revenue of 36.684 billion yen (+19.7% YoY), gross profit of 7.453 billion yen (+13.7% YoY), operating profit of 2.548 billion yen (+7.5% YoY), ordinary loss of 0.641 billion yen, net income attributable to parent shareholders of 0.204 billion yen (-82.7% YoY). Excluding derivative valuation gains/losses, ordinary profit is 1.186 billion yen and net income attributable to parent is 1.202 billion yen, which management presents as the company's core operating result.
• Large one-time non-operating losses led to the negative ordinary profit: 0.532 billion yen equity method investment loss from a UK energy storage project, 0.2 billion yen US dollar exchange loss, and 0.1 billion yen higher interest expense from working capital.

Core Operational Progress

• Energy Storage Business (priority growth area): Inquiries for contract EPC increased, and the company holds a large pipeline of development EPC projects. Energy storage accounts for 68.7% of new orders and 67.3% of order backlog in the period. Additional large high-voltage grid and FIP conversion + energy storage orders have accumulated since Q4. The UK investment provided operational know-how that supported the successful bid for the Shizuoka Kikugawa grid-scale energy storage project, and the UK project loss has no impact on the company's Japanese energy storage business.
• Renewable Energy & Other Business: The company's total renewable power generation capacity reached ~398.6 MW, with 22.7 MW of new on-site PPA capacity brought online in the period. 3.7 MW of on-site PPA has already been brought online in the 2026 June fiscal year, with an additional 28 MW planned. A 10,000 ton/year EFB pellet biomass fuel plant is under construction in North Sumatra, Indonesia, on track to start operation in June 2026.
• Mid-term Strategy (TX2030): The company is currently in a growth preparation phase focused on investing in energy storage business development, with plans to shift focus to the circular resource biomass fuel business in the second half of the mid-term period to drive growth toward 2030. 66 new employees were hired in the period to build capacity for mid-term targets, and the company has added supplementary qualitative disclosures to the original mid-term plan based on stakeholder feedback.
• Sustainability: Implemented hierarchical training for employees, introduced new internal career development systems, and hosted a donated course on ESG investing and management at Meiji University Business School to improve external outreach and support talent recruitment.

1. Engineering Segment: Total revenue was 16.72 billion yen, a 27% increase year-over-year; total gross profit was 2.338 billion yen, a 23% increase year-over-year. It contributes 45.6% of total consolidated revenue. Sub-segments: (1) Contract Energy Saving: grew revenue and profit year-over-year; (2) Contract Renewable Energy: recorded ~0.1 billion yen in revenue from FIP conversion + energy storage addition, but declined revenue and profit year-over-year due to fewer rooftop solar projects and provision for a loss; (3) Development Renewable Energy: grew revenue and profit year-over-year from recording EPC revenue for the Kagoshima FIT solar power plant. Total order backlog for the segment is 22.876 billion yen, up 34.4% year-over-year, with energy storage projects accounting for 67.3% of the backlog. 2. Energy Supply Segment: Total revenue was 19.963 billion yen, a 14% increase year-over-year; total gross profit was 5.114 billion yen, a 10% increase year-over-year. It contributes 54.4% of total consolidated revenue. Sub-segments: (1) Renewable Power Generation: grew revenue and profit year-over-year driven by consolidation of the Fukuoka Miyako Mega Solar, trial operation of the Saga Imari Biomass Power Plant, and increased on-site PPA capacity; (2) O&M: declined revenue and profit year-over-year due to contract expiration of large projects and inventory valuation losses; (3) Power Retail: grew revenue and profit year-over-year from increased supply volume and stable procurement costs; (4) Biomass Fuel: grew revenue and profit year-over-year despite consolidated elimination from sales to the Saga Imari Biomass Power Plant, driven by higher shipment volume and lower procurement costs.

• The 2026 June fiscal year guidance projects strong year-over-year growth: Revenue of 47 billion yen (+28.1% YoY), gross profit of 9 billion yen (+20.7% YoY), operating profit of 3.6 billion yen (+41.3% YoY), ordinary profit of 1.8 billion yen, net income attributable to parent shareholders of 1.2 billion yen (+485.8% YoY), and a dividend of 5.8 yen per share.
• Contract renewable energy EPC is projected to reach 15 billion yen in revenue, driven by rooftop solar, biomass generation equipment, and FIP conversion + energy storage addition projects. Development renewable energy EPC projects a 0.5 billion yen revenue, with negative gross profit due to upfront development costs for new pipeline projects (the Kikugawa project itself contributes positive gross profit).
• The Kyoto development project is progressing steadily, but its revenue recognition timing remains undetermined, so it is not included in the 2026 guidance consistent with prior practice.
• The dividend guidance is based on a 30% payout ratio excluding derivative impacts: 0.22 billion yen of remaining derivative receivable amortization is expected as non-operating expense in 2026, which is excluded for dividend calculation, resulting in a base net income of 1.363 billion yen for payout.
• Large-scale grid-scale energy storage projects have a 2-3 year construction timeline, so the company targets multiple large orders (equal or larger than current 4-6 billion yen per project scale) in 2026 to hit mid-term targets. There is no expected large revenue volatility from energy storage EPC in 2026, as only a small portion of revenue is projected to be recognized this fiscal year.

• Revenue and profit are currently unstable due to the early development phase of the high-growth energy storage business, and external industry factors can cause large swings in results. Large provisions or post-completion adjustments have historically occurred in Q4, which may create downside risk for 2026 full year results.
• Renewable power generation in Kyushu faced output control curtailment in the 2025 fiscal year, which contributed to 0.35 billion yen in missed profit targets for the segment. Cable theft at Kanto power plants also caused unexpected recovery costs and profit shortfalls.
• 2025 fiscal year revenue missed the November 2024 guidance by 1.316 billion yen, driven by underperformance in power retail (0.038 billion yen miss) and biomass fuel (0.4 billion yen miss), leading to a 0.2 billion yen operating profit shortfall against guidance.
• Large upfront development investment is required for pipeline grid-scale energy storage projects, with large land acquisition costs (multiple billions of yen per large-scale special high-voltage project) that require flexible, timely capital allocation, and some development costs are not yet budgeted, creating uncertain near-term cash flow impact.
• One large unprofitable project from prior periods continued to impact results, requiring the company to record an additional loss provision in 2025.

Q: Why does 2026 fiscal year development EPC have negative gross profit, and do development-type energy storage projects achieve higher gross margins than contract-type? / A: Development EPC does have inherently higher gross margins than contract EPC. The 2026 negative gross profit comes from upfront pre-development costs (feasibility surveys, land measurement, geotechnical investigation, connection review) for new pipeline projects, not the Kikugawa project itself. The Kikugawa project already contributes positive gross profit in 2026, with full large-scale revenue recognition scheduled for 2027 or later.

Q: Why is the negative non-operating spread wider in 2026 guidance than 2025, and why is the dividend base net income different from the stated guidance net income? / A: The wider negative spread comes from two main factors: 1) 0.22 billion yen of amortization for remaining derivative receivables from pre-hedge accounting valuation gains, which is classified as non-operating expense. This amortization is excluded from the derivative-adjusted net income used for dividend calculation, resulting in the 1.363 billion yen dividend base vs the 1.2 billion yen stated net income. 2) Higher interest expense from the newly consolidated Fukuoka Miyako Solar and Saga Imari Biomass plants. No large one-time derivative valuation losses like the 1.8 billion yen 2025 loss are expected in 2026.

Q: What are the main investment areas for 2026, and will total investment exceed 2025's 9.165 billion yen? / A: The main planned investments are FIP conversion + energy storage addition for the company's own solar plants, on-site PPA projects, and grid-scale energy storage development. A base budget of just over 0.1 billion yen is set for energy storage development, but large unbudgeted upfront costs will be incurred opportunistically for land acquisition and grid connection for multiple large pipeline projects, with approvals granted on a case-by-case basis. The company expects a decline in total investment from 2025, as the large investment in the Saga Imari Biomass plant is completed, so total investment will not exceed 2025 levels.

Q: How does the development EPC process work, and what types of buyers does the company target? / A: Development EPC starts with the company identifying high-potential sites with viable grid connection, pre-developing the project to define feasible storage sizing, then pitching the completed pre-development project to pre-vetted buyer candidates. Contracting occurs only after due diligence and business case validation by both parties. Buyers are typically leasing companies, financial institutions, gas/electric utilities, and energy investment funds that own renewable generation assets. The company also operates a two-tier model with over 300 inquiries for contract EPC from customers requesting turnkey development for their own sites, in addition to proprietary development EPC.