TESS Holdings Co.,Ltd. Q1 FY2026 earnings call

Growth Strategy & Market Opportunities

• Strong demand growth for storage battery EPC: cumulative large storage battery orders total 36.7 billion yen, with strong inquiry growth for both grid-scale storage facilities and FIT-to-FIP conversion + storage retrofits. Japan's 7th Basic Energy Plan targets 50% renewable energy share by 2040, which is expected to double current renewable capacity, creating large demand for grid-scale storage (estimated at 20-40% of variable renewable capacity). JPEA targets >25% FIP adoption for solar by 2030, creating over 20GW of potential for FIT-to-FIP conversion + storage retrofits.
• Ongoing pipeline expansion: the company is targeting orders from both existing past solar customers and new customers for FIP conversion projects, and plans to continue prioritizing the storage battery business.

Operational Project Updates

• Completed 2.8MW of combined utility and solar facilities for factory/business energy efficiency/renewable EPC projects in Q1.
• Launched 3 new on-site PPA projects totaling 5MW between July 2025 and the Q1 earnings release, with 7 future projects totaling ~28MW in the pipeline (including the 1,012kW Kracie Kyoto factory project).
• Completed first phase of self-operated FIT-to-FIP conversion + storage retrofit for 4 power plants in Kyushu, with 23.2MWh of storage capacity starting operation in October 2025. Additional phases will proceed sequentially.
• Total renewable power generation capacity of self-operated facilities now exceeds 400MW.
• The EFB pellet manufacturing plant in North Sumatra, Indonesia is progressing on schedule, targeting start of operations in June 2026.

Sustainability & Human Capital

• Released the 2025 Integrated Report, the second such report for TESS Group, focused on progress of priority initiatives in the mid-term management plan, published on the corporate website.
• Implemented new human resources initiatives: launched company-wide hierarchical training, sales mindset training for the sales division, career surveys, and an open transfer request system to support retention across life stages. Held the third Stakeholder Dialogue focused on human capital management and DX promotion, with outcomes published online.

1. Engineering Segment: Increased revenue year-over-year, but decreased profit overall, driven by the following sub-segments:

   • Energy-saving EPC (contracted type): Increased revenue and profit year-over-year, due to larger project scale (e.g. cogeneration) and on-schedule construction progress.
   • Renewable energy EPC (contracted type): Increased revenue but decreased profit year-over-year. Storage battery projects progressed well, but an unprofitable biomass EPC project pulled overall segment profit down. Storage battery EPC maintains a stable gross margin, bringing the overall segment gross margin down.
   • Renewable energy EPC (development type): Zero revenue recognized in the quarter (last year same period had a final utility-scale solar project), with ongoing development costs for grid-scale storage facilities resulting in a net loss for the sub-segment. Total segment order intake: 17.461 billion yen, 90% from storage battery projects (existing business maintained year-over-year order levels, with storage battery adding incremental growth). Total order backlog: 34.691 billion yen, +231.2% year-over-year, mostly from storage battery projects. Adding a post-quarter 9 billion yen large order brings current backlog over 40 billion yen.

2. Energy Supply Segment: Increased revenue and profit year-over-year overall, driven by the following sub-segments:

   • Renewable power generation: Revenue increased sharply due to the start of operations at the Saga Imari Biomass Power Plant, consolidation of Miyako, and growth in on-site PPA. Profit growth lagged revenue growth: the biomass plant has lower margins than solar, and partial output control in Q1 further reduced margins.
   • O&M: Decreased revenue and profit year-over-year, due to reduced maintenance work after a large contract expired.
   • Electricity retail: Increased revenue and profit year-over-year, due to expanded supply from a hybrid pricing model of fixed and market-linked rates.
   • Biomass fuel: Increased internal supply to the Saga Imari plant, but the intergroup transaction is eliminated in consolidation, so no revenue is recognized, only profit is recorded.

Total consolidated revenue: 12.709 billion yen (+53% YoY); gross profit: 2.298 billion yen (+9.3% YoY); operating profit: 0.995 billion yen (+5.3% YoY); ordinary profit: 0.577 billion yen (-23.7% YoY); net income attributable to parent shareholders: 25 million yen (-96.3% YoY)

• Management maintained the full-year 2026 June fiscal year earnings and dividend guidance published at the start of the period, with no upward or downward revisions.
• A large project in Kyoto is progressing steadily, but revenue and profit recognition timing is not yet finalized, so it is not included in the 2026 full-year guidance.
• Ordinary profit progress against full-year guidance reached over 25% in Q1, which is broadly in line with management's full-year plan, as the company only discloses full-year targets and not quarterly breakdowns.

• An unprofitable legacy biomass EPC project (ongoing from the prior fiscal year) resulted in a 142 million yen negative impact on ordinary profit, pulling down overall gross margin growth relative to revenue growth, and required additional provisioning in Q1.
• The Saga Imari Biomass Power Plant had lower than expected profitability in Q1 due to partial output control, and has inherently lower margins than solar power generation, which also dragged down consolidated margin levels.
• Expired large O&M contract reduced O&M revenue and profit, further pressuring consolidated margins.
• Higher than planned hiring (ahead of mid-term management plan projections) increased personnel costs in the quarter. Hiring growth is expected to moderate going forward.
• Increased interest expense due to the consolidation of Miyako and full operation of the Saga Imari plant reduced ordinary profit in the quarter.

Q: Is the Q1 ordinary profit result broadly in line with the full-year plan, with no major positive or negative deviations? / A: Tess Holdings only discloses full-year performance targets, not quarterly breakdowns. Management confirms that the Q1 result is broadly in line with the planned full-year trajectory.

Q: Was the unprofitable biomass EPC project and the Saga Imari plant's performance already incorporated into the full-year guidance, and are they progressing as expected? / A: The unprofitable biomass project is a legacy project carried over from the prior fiscal year, with partial provisions already booked last year, and the current Q1 impact was already expected. The Saga Imari Biomass Power Plant's Q1 performance is also as originally planned, with no unforeseen deviations.

Q: Is the non-recognition of deferred tax assets related to asset removal obligations for the Saga Imari plant an expected, planned outcome? Is this specific to the Saga Imari plant or common for large projects? / A: This outcome was fully expected. All fixed assets require recording asset removal obligations for future decommissioning costs. For large, long-development projects like this, large net operating loss carryforwards are generated during construction, and accounting rules do not allow recognizing deferred tax assets for asset removal obligations in this stage. This is a common technical accounting outcome for early-stage large projects, not unique to Saga Imari. It has no impact on cash flow, and once loss carryforwards are absorbed by operating profits, the deferred tax asset will be recognized, and the tax increase will reverse as a gain in future periods.

Q: What are the current gross margin targets and actual results for contracted vs development type storage battery EPC? How do they compare to past solar development margins? / A: Contracted storage EPC faces competitive bidding, so margins are lower than development type. The target is 10% to 15%, and Q1 actual gross margin for stand-alone storage contracted projects is ~13%, in line with targets. Development type storage EPC targets 15%+ gross margin, higher than contracted type. While this is lower than the ~30% gross margin of historical solar development, storage project order values are much larger, so absolute gross profit is still meaningful. Storage also requires less on-site labor than other EPC, so 15%+ margins are sufficient to meet mid-term management plan profit targets.