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TO OUR SHAREHOLDERS AND INVESTORS
We wish to express our heartfelt condolences and deepest sympathies to all who were affected by the March 11 Great East Japan Earthquake.
We are pleased to report Sekisui Chemical's performance results for fiscal year 2011, ended March 31, 2011. We are currently advancing the GS21-SHINKA! five-year medium-term management plan (fiscal years 2009 to 2013), designed to fulfill our Group vision of establishing Sekisui Chemical as a "Prominent & Profitable Premium Company."
GS21-SHINKA! is divided into two phases, the initial Stage 1, covering fiscal years 2009 and 2010, and Stage 2, starting in fiscal year 2011 and ending in 2013. In fiscal year 2010, the final year of Stage 1, management focused on implementing two fundamental strategies: steadily capture growth demand and accomplish the strengthening of the earnings structure. The initial plan in April 2009 was to attain operating income of 40 billions of yen in fiscal year 2010. Our efforts have proven successful, and we have far exceeded our target, posting an operating income of 49.3 billions of yen for the year.
Stage 2 of the plan, covering fiscal years 2011 to 2013, is focused on advancing three strategies for business growth: 1) broaden business through value chain development, 2) accelerate global development, and 3) cultivate new growth segments.
The focus in this stage is on expanding revenue in each of the business segments, particularly in the "Frontier 7" businesses* that we have designated as high-growth fields, with the objective of attaining overall operating income of 80 billions of yen in fiscal year 2013, the final year of the GS21-SHINKA! plan.
* "Frontier 7" Businesses: HPP's automotive materials (AT), IT-related materials (IT), and medical products (MD); UIEP's pipeline renewal business, water infrastructure business (overseas), and performance materials business; and the Housing Company's living environment business.
In fiscal year 2010, the Sekisui Chemical Group successfully captured growth demand by concentrating management efforts on meeting the rising demand in the "Frontier 7" businesses and in emerging countries, specifically in Asia. These efforts resulted in an 11% increase in sales over the previous year in the "Frontier 7" businesses, and a notable 23% rise in sales in the Asia region, which supported a 6.6% year-on-year increase in consolidated net sales to 915.5 billions of yen in fiscal year 2010.
We also continued strengthening the earnings structure in line with our plan, through ongoing efforts to minimize fixed costs and cut other costs. Some domestic businesses encountered intensifying competition during the year, which put downward pressure on product prices; however, we were generally able to maintain our profit margins (the difference between product sales prices and material costs, plus the effects of cost cutting). The steady progress made in increasing revenue and improving the earnings structure enabled us to achieve a substantial 37.2% rise in operating income over the previous year, to 49.3 billions of yen in fiscal year 2010, marking the highest income level since the internal divisional company system was adopted in fiscal year 2000.
The Company's manufacturing facilities in the disaster-stricken areas incurred only slight damage from the Great East Japan Earthquake in March, and are currently operating at normal levels.
* FY2011(Plan) announced at the FY2010 financial results briefing held on April 27, 2011.
For the FY2011 revised plan, please see the presentation materials.  
In Stage 1 of the GS21-SHINKA! medium-term management plan, we overcame the post-Lehman Shock economic recession by implementing structural reform to strengthen the earnings structure and by focusing on the fields and regions promising solid demand growth, while enhancing our capabilities for future business expansion.
In fiscal year 2009, the plan's first year, we substantially lowered the break-even point by implementing various structural reform measures. In fiscal year 2010, we achieved a marked recovery in earnings that surpassed our initial targets by effectively responding to the demand trends, which included both recovery demand mainly in industrialized countries and growth demand in emerging countries. We also reinforced our strategic businesses, particularly overseas, during these two years and established a high-profit structure for the Housing Company. The progress we made in structural reform proved beneficial as the UIEP Company regained profitability despite struggling amid dwindling domestic demand and intensifying competition.
We also made steady progress in strategic investment and business fortification measures to prepare for future business expansion in fiscal year 2011 and beyond. In Europe and the United States, we expanded our business portfolios in interlayer films, pipeline renewal, and the medical field, and in Asia, we established a housing production and sales company in Thailand, with the aim of expanding the housing business into overseas markets.
These activities enabled us to attain operating income of 49.3 billions of yen in fiscal year 2010, which vastly exceeded the plan's initial target of 40.0 billions of yen for the year. Based on the progress and performance results, I believe we have successfully achieved our goals for Stage 1 of the GS21-SHINKA! medium-term management plan.
  * The information presented in the “Impact of the Great East Japan Earthquake” and “Market Environment” sections reflect the business conditions as of the end of the first quarter of fiscal year 2011. Regarding the Company's forecasts for these two categories as of the fiscal year 2010 results briefing held on April 27, 2011, please refer to the “Annual Report 2011, Version 1” We have also prepared a summary report of the first half of fiscal year 2011 with a discussion of how the earthquake impacted the Company’s earnings performance (as of the end of October 2011). Please see the report "Impact of the Great East Japan Earthquake on First Half Performance (Summary Overview)" for details.
We have revised our fiscal year 2011 outlook as shown in the chart to reflect our current projections of how the disaster that struck Japan in fiscal year 2010 may affect our business performance in the year ahead. The new projections framed at the end of the first quarter replace our initial projections at the beginning of fiscal year 2011.
I would like to discuss the changes from our initial projections and the factors that we believe may have significant impacts on the business of the internal divisional companies and businesses.
Our order targets for the Housing Company are based on a market forecast that takes into account the disaster's impact. We had expected a temporary lull in the market during the first half of fiscal year 2011 due to consumer hesitancy to spend and other factors followed by the beginnings of recovery in the second quarter. We also expected reconstruction-related demand and the emergence of latent demand to drive further growth in the second half. However, in the first quarter, the impact from consumer hesitancy was less than we had anticipated and reconstruction-related demand began appearing in some areas in the Tohoku region. In the second quarter, we now forecast gradually improving market conditions as consumer sentiment improves from the first quarter, including a brief rise in demand before government policies supporting housing purchases expire.
We anticipate full-fledged demand to begin in the second half, fueled by reconstruction-related demand, centered on the stricken regions, and the emergence of latent demand, such as for replacement construction in other regions.
For the UIEP Company, we initially anticipated growth in demand for PVC pipes for emergency lifeline reconstruction, followed in the second quarter by rising demand related to full-fledged urban reconstruction along with demand for anti-seismic pipes and other materials stemming from the increasing need for seismic upgrades and disaster resistance.
In the first quarter, demand related to urgent lifeline reconstruction, such as for PVC pipes for temporary housing did occur. However, it now appears that full-fledged reconstruction related demand will not pick up until the second half. We also expect to see the start of full-fledged demand for anti-seismic pipes and other materials for seismic upgrades and disaster resistance from the second half on.
We initially anticipated the HPP Company to face risk of weakened demand due to production adjustments for end-products caused by disruptions in the supply chain, particularly in AT (automotive materials) and IT related businesses. However, as of the end of the first quarter, the situations were improving faster than expected, and we now expect demand to return to normal levels beginning in the second quarter.
Overall, the negative impact from the disaster ultimately appears to be less than we had anticipated and the outlook for the domestic market environment is becoming less uncertain. Overseas markets are developing generally as we were expecting with solid growth driven by the expansion of the developing countries and a gradual recovery in the markets of Europe and the United States.
Management will be focusing on two priority measures in fiscal year 2011, namely participation in the domestic reconstruction, and the delivery of a solid performance in the global market.
Participation in the domestic reconstruction begins with the Company extending its full cooperation to reestablish urgent lifelines in the disaster-stricken areas. These activities include the emergency production and supply of temporary housing and PVC pipes.
In the next phase of full-fledged reconstruction, we plan to take an active role by supplying products in our areas of specialty, including highly quake-resistant pipes and high-performance housing featuring exceptional anti-seismic and natural energy usage specifications, thereby playing a leading role in the reconstruction of urban environments with enhanced disaster-resistance capabilities.
Regarding the other priority measure, the delivery of a solid performance in the global market, we will maintain stable production and supply of liquid-crystal related materials, interlayer films for automobiles, and other products that command a strong market share in the global market, to eliminate the current concern over the global supply conditions in these fields. We will similarly continue to ensure stable production and supply of our diagnostic reagent products.
Whether it be in participation in the domestic reconstruction or the delivery of a solid performance in the global market, we will leverage the Company's strengths and play the role that is expected of us, with the aim of meeting the demands of society and contributing to the growth of industries.
Our goal in the business plan for fiscal year 2011 will be to increase revenues in each of the Housing, UIEP, and HPP companies, by attracting growth demand, centering on the "Frontier 7" businesses.
On the income side, we will maintain our solid earnings structure during the year by increasing product prices and cutting costs to offset anticipated rises in material costs, while also controlling our fixed costs by restraining spending other than investment for business growth.
Through the steady implementation of the business plan, we are targeting net sales of 980.0 billions of yen and operating income of 57.0 billions of yen in fiscal year 2011.
Our financial strategy is based on the key management policies of increasing corporate value and ensuring a return of profit to shareholders. In line with these policies, we have established a target dividend payout ratio of 30% on a consolidated basis to be returned to shareholders in each fiscal term. In the fiscal year under review, we provided an interim dividend payment of 5 yen per share and increased the year-end payment by 3 yen to 8 yen per share, for a total annual dividend payment of 13 yen per share. We will retain internal cash reserves of an amount sufficient for covering R&D expenses, capital expenditures, strategic investment, financing activities, and other activities that we consider vital to assuring further improvement in corporate value into the future.
Cash flow during the year will be utilized for capital investment,
financial structure reinforcement, and shareholder return. Capital
investment will focus on strategic investment to fortify our strategic
businesses, specifically for capital expenditures, M&As, and the construction
of our overseas business structure, which will be essential
for the Company's future growth.
The Great East Japan Earthquake that struck in March devastated northeastern Japan and caused substantial damage throughout the country. Our Company incurred light damage to some production equipment and other facilities, but we have been able to reestablish normal operations. Immediately following the quake, we were also concerned about potential difficulties with regard to materials procurement. However, the situation was quickly rectified, and we think the impact on our production plans will be less than initially anticipated. While we have been able to stabilize our operating status, the extent of the earthquake's impact on many of our client companies is still unclear. As a result, the operating status of our client companies could influence our production operations and sales results.
Since its founding, Sekisui Chemical has worked to develop products that meet the needs of society, including those which are useful to the daily lives of individuals, and contribute to the protection of the natural environment. Despite the current circumstances, we maintain our intention to continue contributing, through our products and businesses, to the resolution of social issues and guiding the Group to fulfill the expectations and hopes of our shareholders and stakeholders.
We thank you for your continued understanding and support of the Sekisui Chemical Group.
June 2011
 Naofumi Negishi, President |
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Copyright (C) 2012 SEKISUI CHEMICAL CO., LTD. |
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Review of Fiscal Year 2010 (April 1, 2010, to March 31, 2011)
