Mitsubishi Chemical HoldingsTHE KAITEKI COMPANY

Message from the President

The MCHC Group aims to become THE KAITEKI COMPANY and be recognized on a truly global level through sustained growth that contributes to improving global sustainability by solving issues affecting people, society and the Earth. Hitoshi Ochi

We aim for growth amid rapid change by leveraging the diverse resources of the Group.

One year has passed since I was appointed as the president on the 10th anniversary of MCHC establishment. There were a number of challenging situations that the MCHC Group confronted during its first 10 years, such as the 2008 financial crisis and the Great East Japan Earthquake in 2011, and last year was equally difficult. I am acutely aware of the increasing complexity and accelerating pace of change in the business environment. I also ponder that the medium- and long-term outlook for the global economy calls for slower growth than in the past. That is to say, the global economy has basically entered a period of low growth, not just “new normal” of China’s economy, but even in advanced economies such as the U.S. and Europe. Based on this understanding, we must manage our business from the standpoint of prospering in this new era. To sustain growth in a rapidly changing, complex and delicate business environment beset with greater volatility and uncertainty, the MCHC Group can draw strength from the portfolio reformation accomplished to date and by realizing KAITEKI *1, its vision for the future. When MCHC was established, its initial business structure was heavily dependent on businesses, such as petrochemicals, that have substantial earnings volatility to the business environment. Thus, management needed to establish a stable business structure to keep earnings volatility in check. Based on its medium-term management plan, MCHC tackled this problem head-on by transforming its business portfolio, withdrawing from unprofitable businesses and pursuing M&amo;As. As a result, MCHC has created a stronger and more stable earnings foundation. Moreover, I believe we have nurtured a corporate culture more adept at fine-tuning the business structure.

While promptly addressing change, we believe sustained growth will lead to improvement in corporate value over the longer term in line with our vision of realizing KAITEKI. Our efforts to promote a set of common values among employees based on this vision should also lead to meaningful advantages. Using our technologies to contribute to sustainable development while solving issues faced by people, society and the Earth, the MCHC Group is taking measures that ensure its own sustainable growth on the path toward becoming THE KAITEKI COMPANY and intends to further integrate them.

*1 An original concept advocated by the MCHC Group;“a sustainable condition which is comfortable for people, society and the Earth, transcending time and generations.”

Review of Medium-Term Management Plan APTSIS 15
Through decisive structural reforms, the MCHC Group has expanded its corporate scale and laid the foundation to reinforce the earnings base as drawn in the long-term strategy

Fiscal 2015 was the final year of the five-year medium-term management plan APTSIS 15, under which we aimed to polish our strengths and make steady progress on reformation of the business portfolio toward realizing KAITEKI.

We strengthened high-performance, high-value-added businesses in the Performance Products domain, which include polyester film and carbon fiber, while streamlining and rebuilding unprofitable businesses. In addition, we continued to reform the business portfolio by expanding and reinforcing the earnings foundation through the acquisitions of Qualicaps Co., Ltd., a manufacturer of capsules for pharmaceutical and nutraceutical industries in 2013, as well as TNSC, a manufacturer of industrial gases and related equipment and devices in 2014.

The MCHC Group also implemented measures to thoroughly cut costs and scale down unhealthy assets while pursuing these reforms. As a result, in fiscal 2015, the MCHC Group’s consolidated financial results recorded net sales of ¥3,823.0 billion, an increase of ¥166.8 billion (4.5%) from the previous fiscal year. Operating income totaled ¥280.0 billion, an increase of ¥114.3 billion (69.0%), and ordinary income amounted to ¥270.6 billion, an increase of ¥107.5 billion (65.9%) from the previous fiscal year. Accordingly, we were able to achieve our target for operating income in the final fiscal year of APTSIS 15. ROA and the net D/E ratio have improved since fiscal 2011, the first fiscal year of APTSIS 15, but not enough to reach their targets, owing to expansion in total assets and interest-bearing debt from acquisitions, as well as the posting of extraordinary losses related to restructuring. The ratio of overseas net sales increased by 6.5% compared with fiscal 2011, owing to a faster pace of global business development. We are in a firm position to realize growth, having strengthened our earnings foundation with the addition to our portfolio of stable businesses like industrial gases, expanded our corporate scale to be able to compete worldwide, and generated the highest level of operating income since the founding of MCHC.

Of the three management axes for KAITEKI Management, we have two axes that go beyond the pursuit of profits: Management of Technology (MOT), which fosters the creation of innovation, and Management of Sustainability (MOS), which aims to enhance sustainability. On the basis of these two management axes, I would like to look back on our achievements under APTSIS 15. First, under MOT, we prioritized the early monetization of next-generation growth businesses. Although we did not make as much overall progress as initially anticipated, we have drawn the contours of future growth drivers by promoting open innovation and established Life Science Institute, Inc. (LSII) to accelerate the development of the healthcare solutions business.

We believe MOS is an increasingly important aspect of management amid major changes in the social environment surrounding companies and the demands placed on companies by society. Our initiatives to index and quantitatively measure the degree of our contributions to sustainability, such as by reducing CO2 emissions and saving resources and energy, progressed more or less in line with our original targets, albeit with some individual issues remaining. Using the experience we accumulated during APTSIS 15, we aim to further enhance our performance in terms of these indices and tie it in with corporate value.

Current Business Challenges, Basic Policy and Key Measures of New Medium-Term Management Plan APTSIS 20
Basic policy: pursue further growth and capital efficiency by strengthening profitability

In the final fiscal year of the previous medium-term management plan, the MCHC Group posted a new record high in operating income, but did not achieve targets for ROA or the net D/E ratio, for example, leaving behind issues to be addressed under the new medium-term management plan APTSIS 20. Of these issues, I believe it is my mission as the president to pursue further growth and capital efficiency by strengthening profitability. Over this past year as the president, I formulated APTSIS 20 while discussing those issues with other members of management. My first and most important responsibility was to identify the issues and key fields that we should focus on the most, and then draw up highly effective management plans.

Here, I would like to explain the numerical targets in APTSIS 20, which organically ties together the current business challenges we have identified and decided to address, and key measures for achieving these targets.

MCHC is applying International Financial Reporting Standards (IFRS) from fiscal 2016, and has set financial targets for APTSIS 20 on an IFRS basis. As an example of a new target, the MCHC Group aims to achieve ¥380.0 billion in core operating income*2, which corresponds to operating income under J-GAAP. Under APTSIS 20, we target ROE of at least 10% as an indicator of improvement in capital efficiency.

*2 Core operating income
Gains/losses incurred by staged gain/loss introduced in accordance with transition to IFRS.
Ordinary income excluding gains/losses incurred by non-recurrring factors.

Key measures: integrate three chemical operating companies, advance well-integrated global group management, and accelerate growth in performance products to turn into a high-growth and high-profit model company

Integration of Three Chemical Operating Companies

The MCHC Group has decided to integrate its three chemical operating companies, MCC, MPI and MRC, in April 2017 to maximize business synergies, thoroughly deal with unprofitable businesses and low-profit businesses, as well as accelerate moves to boost cost competitiveness by increasing productivity. (In July 2016, MCHC decided on the equity interest transfer in the terephthalic acid business in India and China.) After integrating these three companies, the new-Mitsubishi Chemical Corporation will be able to fully leverage its business resources. I have made their integration our highest priority under APTSIS 20. To maximize the benefits from this integration, we plan to reorganize the nearly 60 strategic business units (SBUs) of the three chemical companies into 10 new business units, including high-performance polymers, high-performance chemicals, petrochemicals and new energy. These changes will allow us to take a broader approach to marketing and business strategies from a medium-term perspective, which had tended to be narrowly focused on the short term in the past. Moreover, these changes will enhance our ability to develop products that will become new growth drivers, by taking a longer view of 5-15 years on R&D plans, which had been insufficient. The changes will also enable medium-scale M&As, which had been problematic due to the smaller scales of individual business units. We aim to make it easier to pursue M&A deals that complement existing operations and increase profitability.

As an example of new possibilities from these changes, sales of MRC’s carbon fiber could be expanded more easily through the sales channels for high-performance engineering plastics in the European automobile market held by Quadrant AG, a subsidiary of MPI, because both will belong to the same business unit from fiscal 2017 onward. We are now putting the final touches on medium-term growth strategies for the new business units after the three chemical companies are merged to enhance Group synergies in tandem with tighter business integration.

Advance Well-Integrated Global Group Management

We are aware that increasing profitability overseas is a major issue. When appointed as the president, I aspired for THE KAITEKI COMPANY to be recognized on a truly global level and incorporated this goal in APTSIS 20 to create our medium-term vision under which we will advance global operations with determination.

Amid changes at breathtaking speeds in our business environment, we have noticed limitations in the conventional style of business management, where a central headquarters supervises and directs operations in each region of the world. We are taking the integration of the three chemical companies as an opportunity to define regions of operation outside Japan, as China, Asia, Europe and the Americas, and are preparing to establish regional headquarters for each region within the new-Mitsubishi Chemical Corporation. In addition, we intend to consolidate Group companies and increase management efficiency while strengthening Group governance.

Through these measures, the vertical management lines of each business will be combined with horizontal lines that stretch across regions. We will balance both autonomous regional management for each business and global management for the entire Group, which should lead to more advanced levels of management rich in diversity.

In addition to the aforementioned, we are moving quickly with a sense of agility to establish a business foundation for MTPC in the U.S., the world’s largest pharmaceutical market, and to expand operations overseas at TNSC. Through these initiatives, we aim to increase the overseas sales ratio to at least 50% and strengthen earnings potential overseas by maximizing our technology, information and trade networks in each region.

Target Growth in Performance Products Domain

To improve profitability, an issue being addressed under APTSIS 20, we aim for growth through balanced business development in the three business domains, with a particular focus on the Performance Products domain. Among our performance product business lines, we aim to improve profitability by increasing the number of high-value-added, high-performance products with sales on the scale of several ten billion yen, instead of commodity products exposed to market prices. To do so, we will leverage the integration of the three chemical companies to maximize the utilization of business resources and bolster innovation. We also aim to develop high-performance, high-value-added products, expand earnings and accelerate global business development.

In the Industrial Materials domain, we aim to continue boosting cost competitiveness in basic petrochemical products, while at the same time accelerate global business development in such businesses as MMA and industrial gases.

In the Health Care domain, we plan to improve our drug discovery capabilities through open innovation, and advance the development of overseas businesses, primarily in the U.S. Moreover, we aim to promptly realize a profit in the health and medical care business by leveraging big data and ICT.

Accelerate Growth

We must innovate our business process to implement measures faster, matching the speed of changes in the business environment. IT is the key to succeeding here. While integrating information systems throughout the Group and implementing more sophisticated decision-making support systems, it will be vital to organically embed technological innovation in the major measures I have mentioned, especially in the areas of the Internet of Things (IoT) and artificial intelligence (AI). In particular, we are currently examining ways to apply technological innovation in the Health Care and Performance Products domains. We created a project team to work on this issue, given the urgent need to acquire and train personnel able to realize the full potential of the technology, and take a completely different approach to deploying IT within the corporate organization.

Prioritize Resource Allocation

Regarding resource allocation under APTSIS 20, the MCHC Group has earmarked ¥1 trillion for priority growth investments and ¥700 billion for R&D investment. As for individual business domains, the MCHC Group is allocating a larger portion of resources to the Performance Products and Health Care domains under APTSIS 20 than under APTSIS 15. We accordingly aim to magnify and strengthen the effectiveness of the key measures I have explained so far.

Individual employees focusing on process safety, compliance and their own health

Under APTSIS 20, the MCHC Group will rapidly advance measures to accelerate growth and increase earnings, while remaining true to the core of Group corporate activities, namely process safety and compliance in corporate management. As we stand at a milestone in terms of the new management plan and new business operation structure, I’d like to once again stress the importance of each individual employee being aware of our core policy. We must motivate our employees and improve the productivity of every person, in addition to ongoing measures to prevent accidents and provide mental health care when needed. This is essential in nurturing the creativity to foresee changes in a rapidly shifting business environment and the ability to flexibly and resolutely take action. As the president, I have made a declaration to promote health management, and am committed to proactively investing in and supporting programs that promote the health of all employees with the aim of stimulating employees actively. We are working on the finer details of this action plan, and believe it will ultimately help reinvigorate not only the organization but also society.

Shareholder Returns
The MCHC Group aims to increase corporate value while maintaining a proper balance of “investment for growth,” “enhancement of shareholder return” and “strengthening of the financial position.”

While maintaining a proper balance between investing in growth businesses and strengthening the financial position, MCHC has provided a stable dividend to shareholders with a dividend payout ratio of 30% as a medium-term target. This dividend policy will not change after applying IFRS. In the previous fiscal year, MCHC paid an annual dividend of ¥15 per share, an increase of ¥2 per share. For the current fiscal year, MCHC plans to pay ¥8 per share in both interim and year-end dividends for a total annual dividend of ¥16 per share.

To Our Stakeholders
We aim to achieve sustained growth through dialog and coordination with stakeholders toward the realization of KAITEKI.

The MCHC Group intends to cooperate via dialog with shareholders, customers and other stakeholders, sharing issues and goals for realizing KAITEKI. On creating APTSIS 20, we took into account the macro outlook and viewpoints of our stakeholders when conducting the materiality assessment, and used the results from this assessment as policies for corporate strategies. The MCHC Group has specified priorities to address the global agenda outlined by the United Nations sustainable development goals (SDGs), such as climate change, water resources and food issues, as well as various challenges in healthcare. APTSIS 20 proactively incorporates external viewpoints being created with opinions from outside directors in addition to vigorous and unrestricted discussions.

With the ultimate vision of realizing KAITEKI, the MCHC Group aims for sustained growth while contributing to the sustainable development of the world and to the solving of issues faced by people, society and the Earth, through proactive and constructive dialog and cooperation with its stakeholders.

We thank all our stakeholders for their continued support and look forward to sharing success in the future.

Representative Corporate Executive Officer,President and CEO