Mitsubishi Chemical HoldingsKAITEKI Value for Tomorrow

Message from the CFO

Progress of the Medium-Term Management Plan, APTSIS 20
(results of FY2017 and forecasts of FY2018)

FY2017 results

In FY2017, sales continued to increase overall, especially in the Performance Products domain, while market prices remained strong in general for petrochemicals such as MMA in the Industrial Materials domain. In this largely favorable business environment, revenue increased by ¥348.3 billion year on year, to ¥3,724.4 billion, and core operating income rose by ¥73.0 billion year on year, to ¥380.5 billion, surpassing the previous record highs. ROS came to 10.2%. Net profit attributable to owners of the parent rose significantly by ¥55.5 billion year on year, to ¥211.8 billion, reflecting decreased tax expenses attributable mainly to the reversal of deferred tax liabilities resulting from the reduction of the U.S. federal corporate tax rate.

With respect to the key performance indicators of APTSIS 20, ROE stood at 17.8%, up 2.7% year on year, the net D/E ratio was 0.89 times, or improved 0.17 year on year, and the ratio of equity attributable to owners of the parent came to 27.4%, or up 2.9% year on year, all showing improvements compared to the previous year. On the cash flow side, despite capital expenditures amounting to ¥228.3 billion, which surpassed depreciation by ¥49.4 billion, and investments amounting to ¥150.2 billion, we secured free cash flow of ¥71.3 billion in real terms, thereby keeping net interest-bearing debt at almost the same level as the previous year.

FY2018 forecasts

As we announced at the beginning of this period, for FY2018, revenue, core operating income and net profit attributable to owners of the parent are expected to be ¥3,930.0 billion, or up ¥205.6 billion year on year, ¥355.0 billion, or down ¥25.5 billion year on year, and ¥184.0 billion, or down ¥27.8 billion year on year, respectively. Margins are expected to decline in the Industrial Materials and Performance Products domains due to rising prices of raw materials for some products, while the Health Care domain faces the impact of NHI drug price revisions and an increase in research and development expenses. Accordingly, we will continue to work on measures to expand sales and reduce costs. In addition, by controlling working capital, we will ensure that net cash provided by operating activities remains at the same level as FY2017.

In terms of key performance indicators for FY2018, our initial expectations are ROS of 9.0%, ROE of 13.5% and net D/E ratio of slightly less than 0.8 times, all surpassing the goals set out in the Medium-Term Management Plan.

Changes in Consolidated Performance

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*1.

To obtain a clear picture of ordinarily generated operating income/loss, “core operating income” is presented by excluding expenses associated with structural reforms and income/loss attributable to losses from extraordinary factors such as disasters. Core operating income is used as an indicator for external explanations and business management.

*2, 3.

Figures pertaining to non-continuing businesses are excluded in IFRS-based FY2015 results and FY2016.

Progress of financial strategies in APTSIS 20

Moving into the accomplishment stage of a stable and robust financial base

In the APTSIS 20 medium-term management plan for the period from FY2016 to FY2020, we have established ROE of 12%, core operating income of ¥380.0 billion and net profit attributable to owners of the parent of ¥180.0 billion as the main goals in FY2020. Even so, we are seeking to achieve ROE of at least 10% continuously in the fiscal years before FY2020 as well.

Not only by investing in and developing the Performance Products and Health Care domains, both of which contribute high growth and profitability, but also by demonstrating business synergies through the integration of three chemical operating companies and improving operational efficiency by means of workstyle reforms, we will raise profitability and meet the goals laid out in APTSIS 20, while at the same time taking into account the possibility of achieving the core operating income of ¥430.0 billion. We will use cash earned from operations to make investments for sustainable growth going forward, improve the financial base and pay appropriate and stable shareholder returns in a well-balanced fashion.

Under APTSIS 20, we are in a position to generate cash that is expected to exceed the initial plan by more than ¥200 billion as a result of improved performance and financial structure reforms such as the improvement of asset efficiency. Factoring in improved cash generating ability, we have decided to inject ¥200 billion in addition to the initially projected amount for capital expenditure and M&A-based growth investments, mainly with respect to performance products, and spend approximately ¥1,700 billion in five years.Furthermore, with regard to investments in research and development, we have decided to inject approximately ¥25 billion in addition to the initially expected amount, mainly into performance and health care products, and accelerate their growth. On the other hand, we have managed to meet the initially established goals of 30% for the ratio of equity attributable to owners of the parent and 0.8 times for the net D/E ratio, which are the specific goals for the improvement of financial position.

That being said, the acquisition of the European industrial gas business announced in July 2018 (share transfer is expected to take effect in November 2018) has turned out to be an investment that has exceeded the initially projected level.

We are expecting that financial indicators will be affected temporarily due to this investment. That said, we will continue to achieve further growth and improve profitability while seeking to create a stable and robust financial base and work to achieve the goals as soon as possible.

Changes in Consolidated Financial Indicators

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Goal for the end of FY2020

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Strengthening portfolio management

To implement the medium-term management plan effectively, we have clarified the business relationship between MCHC and the operating companies by defining the role of the former as management and the latter as execution, respectively, and have delegated a large amount of authority to the operating companies so that management is undertaken more rapidly.

MCHC is responsible for the preparation and management of business strategies and medium- to long-term plans, and based on them, it decides how resources should best be allocated. To allocate resources as appropriately as possible, we are seeking to strengthen portfolio management by reclassifying operating and affiliated companies into four types: next-generation businesses,growth businesses, cash-generating businesses and businesses to be restructured on the four-quadrant matrix, based on domainspecific indicators, with a focus on management indicators that match the respective business domains such as growth rate, ROS and ROIC. Any low-profit business, not to mention unprofitable business, is obviously subject to review if its ROIC falls below the weighted average capital cost (WACC). We conduct reviews constantly, taking into consideration not only numerical aspects but also our technological advantages and verify business model as well. So far, total revenue stands at approximately ¥300 billion for businesses to be restructured that are under review, factoring in a range of possibilities ranging from alliances with other companies to withdrawal.

We perform numerical checks and evaluations biannually with regard to the progress of action and investment plans under the medium-term management plan, as well as management indicators. Any unachieved targets will result in a review of the portfolio and resource allocation after holding discussions on the necessity of concrete measures including structural reforms.

As a result of these initiatives, the domain-specific ROIC for FY2017 stood at 8.5% for the Performance Products domain, 9.7% for the Industrial Materials domain and 9.8% for the Health Care domain, exceeding the established capital efficiency indicators of 8%, 5% and 8% for the Performance Products domain, Industrial Materials domain and Health Care domain, respectively.

Strengthening Portfolio Management

Positioning our business and affiliated companies based on domain-specific metrics indicators
Accelerating resource allocation and portfolio optimization through periodical monitoring

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Improving capital efficiency not only in Japan but also on a global basis

We established a tri-polar system including Japan and the United States by introducing the Cash Management System (CMS) in Europe. The system contributed to the improvement of cash efficiency by ¥12.6 billion during the two-year period that ended in FY2017. Moving into FY2018, we have already launched the CMS for the U.S. dollar in Asia. By FY2020, we will establish a system in which multiple Asian currencies are centrally managed, and aim to improve efficiency through globally centralized management in the four regions including Asia and further strengthen the governance of the Group including overseas subsidiaries, utilizing the CMS.

In addition, we are working to reduce Cash Conversion Cycles (CCC) with the goal of a 10% reduction, or from approximately 99 days to approximately 89 days compared to FY2016, by the final year of the medium-term management plan. In FY2017, we were able to improve the cycle by 1.5% on a year-on-year comparison, excluding the impacts of periodic turn around and the increased costs of raw materials and products. We are also working to sell off assets with less necessity of holding by periodically examining the rationale for such holdings, and striving to further improve capital efficiency.

Basic policy on shareholder returns

We aim to improve shareholder value by enhancing corporate value. In conjunction with shareholder returns, we aim to achieve a consolidated dividend payout ratio of 30% as the medium-term level, while at the same time maintaining an appropriate balance between investments in growth businesses and efforts to strengthen the financial position. We also implement dividend payments in consideration of stability. With respect to dividends per share for FY2017, we paid an interim dividend of ¥15 and a year-end dividend of ¥17, or a full-year dividend of ¥32 (up ¥12 year on year). For FY2018, we plan to pay ¥17 for the interim and year-end dividends per share, respectively, which comes to ¥34 for the full year (up ¥2 year on year), although we expect a decrease in profit year on year.

As we announced on May 10, 2018, we acquired treasury stock amounting to ¥20 billion in total during the acquisition period that ended on June 1 to implement flexible capital policies in response to changes in the business environment. While we consider dividend payments to be the basic concept of shareholder returns, we implemented shareholder returns by taking advantage of the temporary decline in tax expenses in both FY2016 and FY2017.

Shareholder Returns

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Hidefumi Date
Managing Corporate Executive Officer and
Chief Financial Officer
Sep.2018