Mitsubishi Chemical HoldingsTHE KAITEKI COMPANY

Message from the President

With the limited economic development in this low growthera, we need to grow based on our own efforts. We will steadfastly strive to achieve the medium-term management plan in order to establish a highly profitable financial position.

Progress of Medium-term Management Plan

Fiscal 2016 Results
Earnings achieved good progress due in part to the growth of performance products. As structural reforms have run its course, we have now reached the starting line of establishing a highly profitable earnings structure.

In the fiscal year ended March 2017, the appreciation of the yen had an impact on the MCHC Group’s overall results. Nevertheless, in the Performance Products domain, profit increased due to strong sales of high-performance films for displays and battery materials. In the Industrial Materials domain also, in spite of the expansion of periodical turnaround, profit increased due in part to a favorable trend in the market condition of methyl methacrylate (MMA).
In the Health Care domain, although sales volume in the pharmaceutical business rose, profit declined, mainly due to the impact of NHI drug price revision and a decrease in lump-sum revenue recorded in the previous fiscal year.
In addition to the above, MCHC implemented measures to review unprofitable businesses such as transferring and withdrawing from the terephthalic acid business (India and China), and to promote integration within the MCHC Group by turning The Nippon Synthetic Chemical Industry Co., Ltd. and Nippon Kasei Chemical Co., Ltd. into wholly-owned subsidiaries. The Group also carried out measures for structural reforms such as the acquisition of an industrial gas business in the U.S. and for strengthening profitability. As a result of these measures, core operating income reached an all-time high of ¥307.5 billion, an increase of 2.4% from the previous fiscal year.
In addition, net profit attributable to owners of the parent was ¥156.3 billion, an increase of 204.3% from the previous fiscal year. This mainly reflected the absence of impairment losses related to the terephthalic acid business that were recorded in the previous fiscal year, and lower taxes associated with the recording of deferred tax assets related to the transfer of the same business. Return on equity (ROE) was approximately 15%.
In fiscal 2016, now that the transfer of the terephthalic acid business (India and China) is completed, the structural reforms of unprofitable businesses based on the previous medium-term management plan reached a conclusion. We believe that we have now achieved a transformation to a corporate structure that will enable us to aim for high growth and high profit going forward.
Furthermore, based on the viewpoint of improving sustainability (MOS: Management of Sustainability) for the purpose of sustainable growth, we have created indices to monitor reductions in CO2, resource saving and energy saving through corporate activities, and we are implementing the initiative of quantitatively evaluating progress in these areas.
In fiscal 2016, we enhanced these activities, for example in the process of selecting MOS index items, we closely coordinated with the APTSIS 20, and reflected the materiality assessment in the selection.

Fiscal 2017 Earnings Forecasts
We forecast profit growth. Thanks to structural reforms, we have shifted to a corporate structure that will be resilient to fluctuations in market conditions. We expect performance products, especially high-performance films, to display a strong upward trend, and we will also put a highly profitable MMA plant into operation in Saudi Arabia in the middle of the year.

Looking at MCHC’s business environment for fiscal 2017, while both the Japanese economy and the world economy are likely to continue to record a moderate recovery, there are concerns regarding the rise of protectionism and geopolitical risk.
We expect that foreign exchange rates and crude oil prices will shift to comparative stability if the above risks are not to be realized and that the impact of market changes will remain small compared to the past as a result of the implemented structural reforms. In this environment, we believe that Performance Products domain will achieve higher profit than in the previous fiscal year, as demand is firm for automobile products, flat panel displays, food packaging materials and battery materials. In the Health Care domain, we are forecasting a slight decline in profit due to an increase in R&D and other expenses, but in the Industrial Materials domain, we expect profit to increase due in part to the earnings contribution resulting from the start-up of our highly competitive MMA plant. As a result, we are projecting core operating income of ¥310.0 billion and net profit attributable to owners of the parent of ¥137.0 billion.

Results of Fiscal 2016 and Forecasts

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“Pursue Growth and Continuous Reforms”

As a result of the withdrawal from unprofitable businesses and growth in performance products, earnings are increasing steadily. However, as the Japanese economy and the world economy are unlikely to record substantial growth, the MCHC Group will continue the following measures in the current fiscal year in order to achieve growth with our own efforts and solidify our business structure to generate high earnings and to steadfastly achieve the mediumterm management plan.

Evolution of the management system and thorough execution of portfolio management

From fiscal 2017, the Management Committee, which was an advisory body to the President, will be changed to the Corporate Executive Officers Committee, which will be a decision-making body where corporate executive officers will make decisions. Thus, it will lead to more decisive and swifter business execution. Furthermore, we will clarify the respective roles of the MCHC and operating companies. The MCHC will formulate fundamental medium- and long-term strategies, while each operating company will devise and execute shortand medium-term strategies based on these fundamental strategies. We will also step up our reform of the business portfolio, and as part of this we will establish management targets such as ROE and ROIC for each business domain.

The birth of Mitsubishi Chemical: “Creating a framework for growth based on our own efforts”

In April 2017, three chemical-related companies under the control of MCHC — Mitsubishi Chemical, Mitsubishi Plastics and Mitsubishi Rayon — merged to form Mitsubishi Chemical Corporation (MCC). Amid the unlikelihood of substantial growth in the world economy, we need to promote growth strategies based on our own efforts. Mainly in Europe and the U.S., customers’ needs for products have become more sophisticated. Therefore, the merger of these three companies allows us to combine their technological bases, sales channels and human resources, and I am convinced that we will be able to more immediately provide the market with solutions using excellent materials.
Three former companies were comprised a total of nearly 60 SBUs (Strategic Business Units), but we have concentrated them into fewer than half the number of units and reorganized them into 10 business divisions. We identified five markets that we expect to grow going forward, united SBUs targeting the same markets to form one division if possible, and thereby developed an integrated organization to strive together. (See the diagram below)
Owing to the divisional reorganization based on market category, we will be able to farsightedly view the industry from the perspective of “towards what direction final products for customers should evolve, and how needs for materials and ingredients will change following that direction.” At the same time, it will be easier to draw up strategy for R&D, and our ability to respond to technological progress in the market will also be enhanced. We intend to achieve the target of ¥50 billion as business integration synergies by 2020 through such initiatives at the earliest possible stage.
In the Performance Products domain especially, we intend to thoroughly strengthen products that are highly competitive due to their technological prowess such as materials and ingredients with high flexibility in processing and excellent functionality. Strategic priority areas will be materials that lighten the weight of automobiles such as carbon fiber and composite materials and performance polymers, electronics and display materials, high-performance films, battery materials, water treatment systems, and medical-related materials mainly used for artificial joints. The Performance Products domain already generates nearly 50% of MCC’s overall operating income, but we aim for further growth of this domain in the future.

The new MCC will focus its marketing activities on five markets, and accelerate growth through orchestration among the 10 business divisions. It will fully utilize management resources (human resources, technology, information, etc.), increase management efficiency and, through higher productivity, stronger competitiveness, it will generate a total of ¥50.0 billion in synergy effects by fiscal 2020.

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Acceleration of operating companies’ strategies

Mitsubishi Tanabe Pharma Corporation (MTPC) plans to establish its business base in the U.S. Life Science Institute, Inc.(LSII) aims to establish a health and medical ICT business and accelerate R&D in regenerative medicine (Muse cells).
Taiyo Nippon Sanso Corporation aims to expand its industrial gases business in the U.S. and Asia and broaden its new product lineup. In the ethical pharmaceuticals business particularly, we see overseas expansion as a really urgent challenge in light of the severity of the business environment in Japan and rapid changes in the market.
In May 2017, MTPC obtained approval for Radicava, a treatment for amyotrophic lateral sclerosis (ALS) in the U.S.
We plan to expand our presence in the U.S. market with a basis of Radicava’s sales. In July 2017, MTPC reached an agreement with NeuroDerm Ltd., which has leading development capability for Parkinson’s disease medications, where MTPC initiates the procedure of acquiring NeuroDerm as a wholly owned subsidiary.

Challenge to make use of IoT, AI and big data

In April 2017, we newly established the “Emerging Technology and Business Development Office” at MCHC. It will make use of Internet of Things (IoT), artificial intelligence (AI) and big data, and be responsible for creating new businesses while combining them with our own technologies. It aims to create new business models with free ideas from the angle of data science. It will also target different markets in addition to the mere extension of current businesses such as system control for factories, and make proposals to operating companies.
Therefore, as the internal personnel in the Company with conventional ideas are unable to go beyond existing ideas, we will appoint specialists from outside the Company and create new businesses as the world around us changes dramatically in the future.

Health management initiatives

We regard the revitalization of individual employees just as important as business strategy. By building a system in which all duties are reviewed and employees can concentrate on what is truly necessary, we are aiming to increase our employees’ sense of fulfillment and sense of satisfaction through efficient ways of working. We believe this will enhance the physical and mental health of every employee. Enhancing the health of individuals and the organization represents two sides of the same coin in terms of improving the efficiency, productivity and creativity of work. Based on the cooperative relationship between management, the manager of each workplace and employees, we aim to produce results in about three years.

Security, Safety and Compliance

Whatever kind of corporate management is conducted, the fact that thorough security, safety and compliance are the foundation of all corporate activities of the Group remains unchanged. No matter how many facilities and systems for security, safety and compliance are put in place, they will not be sufficient without the human resources and time to use them effectively. Therefore, it is essential to establish a framework that enables management and every employee to identify problems, and draw up and implement response measures. With this aim, we plan to conduct comprehensive reviews this fiscal year by returning to the starting point and evaluating whether desirable actions and work have been thoroughly established at all work places.

View regarding Shareholder Returns

In regard to shareholder returns, we are aiming for a dividend payout ratio of 30% as a medium-term level, by maintaining an appropriate balance with investment in growth businesses and the reinforcement of the financial structure. In addition, we will consider stable dividends for the implementation.
This policy has not been changed since we introduced International Financial Reporting Standards (IFRS) in fiscal 2016. For fiscal 2016, we made payments for the annual dividend of ¥20 per share. For fiscal 2017, we plan to pay an interim dividend of ¥12 per share and a year-end dividend of ¥12 per share, which equates to ¥24 for the full year.

Representative Corporate Executive Officer,President and CEO

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