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Questions and Answers Regarding the FY2017-FY2019 Medium-term Management Plan Presentation

About the Group-wide Business Plan

Looking at the new Medium-term Management Plan, one objective is to expand net sales. How will you go about increasing net sales that have remained stagnant thus far?
In addition to further accelerating the pace at which we pioneer new products, businesses and fields, we are projecting an increase in sales of 50 billion yen through the “fusion” of key aspects of our activities and operations. To this end, we plan to push forward over 20 specific themes. While we have not factored into the Plan an increase in sales as a result of M&As, we have set aside an investment amount of 130 billion yen under the new Plan and will actively pursue M&A opportunities.
Your objectives are to secure net sales of 2 trillion yen and operating income of 200 billion yen in the 2020s. There would appear to have been little change in the operating income ratio of late. Are you looking at minimal improvement in the current level?
Our main priority is to increase the amount of operating income in absolute terms.
How confident are you that you will achieve an increase in net sales of 50 billion yen through “fusion?” To what degree will this contribute to profits?
We plan to push forward over 20 specific themes each with an operating income ratio that exceeds the Group-wide average. A managing director will assume responsibility for each theme and oversee both progress and earnings.

About the return of profits to shareholders and strategic investments

As far as the return of profits to shareholders is concerned, which of the dividend putout ratio of 30% and DOE of 3% will you prioritize?
Our primary goal is to achieve our target dividend payout ratio. In the past, we have continued to increase dividends paid on a consecutive basis. We newly adopted DOE as an additional indicator to ensure the stable payment of dividends even in the event of downturn in the bottom line due to such factors as a temporary loss.
Can we expect the same level of treasury stock acquisition under the new Medium-term Management Plan as the previous plan?
We will adopt a balanced approach toward forward-looking investments and the return of profits to shareholders. As far as treasury stock acquisition is concerned, we will look to flexibly acquire treasury stock while taking into consideration demand for investment capital and ROE.
What criteria do you apply with respect to such key factors as returns and hurdle rates when undertaking an M&A? In the event that any amount set aside for investment is unused, would you consider allocating as a return of profits to shareholders?
We have already identified both a long- and short-list of possible companies for purchase. Our plan is to use the full amount of 130 billion yen set aside for this purpose. We will also look to capitalize on any high-quality opportunities that exceed our current budget by raising funds through various avenues including debt finance.
Goodwill amortization can be expected to increase with each M&A. Are you considering a shift to IFRS?
Not at this stage.

About HPP Company business strategies

※HPP Company:High Performance Plastics Company

Turning to the four HPP Company strategic fields, has the amount of sales growth attributable to M&As been factored into the new Medium-term Management Plan?
The amount of M&A contribution has not been included. We anticipate reaching our targets in each of the four strategic business fields through organic growth. The four strategic business fields are expected to expand at rates that exceed market growth. In addition to increasing sales of products that exhibited robust results under the previous Medium-term Management Plan, we anticipate reaping the additional benefits of newly developed products.
What are your thoughts on market conditions for mobile-related products in the HPP Company’s electronics business field? Are there any new products or initiatives that are likely to contribute to sales?
Every effort was made to develop new products and to pioneer new application in order to minimize our dependence on mobile-related demand under the previous Medium-term Management Plan. We are already seeing some positive movement as a result of these efforts. While market conditions for mobile-related products are linked to trends in organic LEDs, we are engaging in the development of products to meet OLED demand and are now positioned to maintain an appropriate level of sales.
How will the HPP Company’s activities in the life science field expand?
We will endeavor to generate synergy effects with EIDIA, which we purchased in December 2015. For example, we will expand into such diagnostic fields as cancer, where we are yet to establish a presence.

About Housing Company business strategies

I understand that you will launch new products to capture a share of the volume market, which encompasses detached houses under 20 million yen, in the Housing Company segment. Do you have any concerns that this will negatively impact sales of existing products and your overall product mix?
Currently, our lineup is largely made up of steel-frame products. In contrast, new offerings will comprise wood-frame products. In addition, designated officers will assume responsibility for sales with the focus of sales channels on built-for-sale housing. Moreover, employing the unit construction method at the Company’s own plants to increase the number of houses sold will lead to a reduction in costs.
I understand that you are targeting a reduction of 1 million yen per house by promoting cost innovation across the entire supply chain. What is the likelihood you will achieve this goal?
We are already in sight of roughly one-third of this goal thanks to investments aimed at increasing the production efficiency of plants and efforts to unify the operations of production companies in the three major metropolitan areas implemented under the previous Medium-term Management Plan.
Procurement and distribution initiatives included in the Company’s cost innovation endeavors across the entire supply chain are projected to have the largest positive effect. What specific measures do you plan to take?
In addition to the consolidation and elimination of products, we will reduce the number of parts and optimize suppliers. Currently, there are too many products and we intend to remedy this situation during FY2017.
As other housing companies catch up, there is a sense that the competitive advantage of the Company’s smart house is beginning to fade. Are you in a position to differentiate the Company going forward?
We believe that by consistently releasing new products we will stay one step ahead of our competitors. Offering 100% energy self-sufficiency, the new Smart Power Station 100% Edition released in January, is an example of how we are working to distinguish ourselves from other companies. Our energies will therefore be directed toward developing a steady stream of new products.
You are looking to place considerable emphasis on built-for-sale housing. How will you differentiate yourself from builders who are selling at low prices? Moreover, target customers differ from your traditional client base. Do you have any concerns that established marketing methods will not have the necessary effect?
Demand for built-for-sale housing from first buyers is expected to remain firm. We plan to distinguish ourselves from any rivals by leveraging our inherent strengths and delivering our unique brand of quality and performance as well as after-care, long-term warranty and other services across each of the comfort as well as safety and security fields. As far as marketing methods are concerned, we have an established track record and know-how in the sale of built-for-sale housing. In addition, we have assigned designated staff to assume responsibility for sales and marketing. In this manner, we are confident in our ability to address trends in demand and customers’ needs.
Can you tell us why fixed costs are projected to rise in each of the Housing Company’s businesses?
The upswing in fixed costs reflects an increase in our sales force as well as other factors including the renewal of model home galleries in the Housing business and in particular new construction.

About Urban Infrastructure & Environment Products business strategies

※UIEP Company:Urban Infrastructure and Environmental Products Company

As far as the UIEP Company’s overseas business strategy is concerned, will you be able to distinguish piping and infrastructure products in Asia? Are you contemplating the local production of fiber reinforced formed urethane?
First and foremost, we are not looking to establish a production base on an independent basis in this particular business field. We will increase sales by collaborating with partners. As far as products are concerned, we intend to expand sales by marketing products as a set with high profit margin catch basins and fittings rather than single item general purpose polyvinyl chloride pipes. We anticipate that quality standards and requirements for piping materials used in infrastructure projects will become increasingly stringent in line with economic growth in Asia going forward. This is expected to generate business opportunities. For FFU, we will first undertake investments to expand production capacity in Japan. We will then consider local production should demand exceed a certain level.
Your goal is to secure operating income of 2 billion yen increase through overseas activities in the UIEP Company. This would appear to be a little high? What are your prospects for achieving this goal?
There are instances where the production capacities for certain products are becoming a little tight. We do believe, however, that ample opportunity exists to achieve our operating income target even in the context of demand trends.
What is your outlook for infrastructure renewal demand given current conditions and for example the aging of sewage pipes in the UIEP Company?
Trends in infrastructure renewal demand have been steady over the past few years. We are not anticipating any dramatic increase in the future. Rather, we will look to expand sales by pioneering new products and applications.