Air Water : COO Messages

About the	Air Water's Value	Growth Strategy	The Air Water	Basic
Air Water Group	Creation Story	for Value Creation	Group's Businesses	Environment	Social	Information

For the environment, we will accelerate efforts to reduce CO2 emissions as we aim to achieve decarbonization. Previously, our goal for 2030 was to achieve a 15% reduction in emissions over fiscal 2013. However, in line with decarbonization trends and requirements, we examined our emissions reduction methods from various angles, and now plan to raise our reduction target for fiscal 2030 to 30% (over fiscal 2020). In the long term, by 2050 we aim to become carbon neutral with net-zero CO2 emissions. Measures to reduce our CO2 emissions include equipment renewals and reduced use of energy through improved productivity. We will also strive to reduce our CO2 emissions from electricity consumption by switching to power from renewable energy. At the same time, by stopping use of coal at our salt factories, we will aim to reduce emissions from coal combustion. Meanwhile, we will also move forward with technological developments and demonstrations for CO2 collection and usage systems and biogas energy systems. At the Air Water Group, in August 2021 we announced our support for the Task Force on Climate-related Financial Disclosures (TCFD), and will proceed with information disclosure based on its framework.

Boosting and Accelerating ESG Initiatives

As we promote sustainable management, as a matter of course, we will simultaneously strengthen our ESG initiatives, which are more important than ever.

For society, we will place priority on strengthening our human resource initiatives. While building a corporate culture that promotes employee independence more than ever before, we will develop and utilize personnel with a firm focus on diversity and inclusion and digital transformation.

Elsewhere, previously our personnel systems have revolved around the simultaneous employment of new graduates, seniority, and lifelong employment. Moving forward, however, we will reexamine our simultaneous employment of graduates and actively look at hiring individuals mid-career to ensure we can

Fulfilling Our Purpose

A combination of people and business

always acquire the necessary personnel. At the same time, we have set up the Air Water Group Talent Bank to discover, develop, and utilize personnel from across the Group, and through digital transformation initiatives, we will work to accumulate and make effective use of personnel data. As we have become a conglomerate through various M&As, not only does the Group have a mix of diverse corporate cultures, it also boasts a workforce with wide-ranging skills and industry experience. We have also been proactively hiring foreign personnel. Thanks to the above, we have developed a corporate culture that is highly accommodating of new trends. Moreover, we have improved our environments to promote women's participation in the workplace-in addition to promoting an optimal work-life balance, we encourage employees to take paternity leave, and provide systems to develop female managers. Through personnel system reforms, we will create unique systems and environments that will enable us to utilize our diverse personnel to maximize synergy.

As to corporate governance, in June 2020 we reduced the number of directors from twenty to nine in order to clearly separate supervisory and business execution functions. Of these nine directors, three are independent outside directors. While improving the decision-making and supervisory functions of the board of directors, this move has allowed operating officers from each department to move away from supervision and focus solely on business execution. To further strengthen our corporate governance, following the general shareholders meeting scheduled for June 2022, we are looking at establishing a nomination and compensation committee with independent outside directors making up the majority. Appointment and remuneration decisions to date have followed thorough deliberation at board of director meetings, including independent outside directors with specialist expertise and experience. Through the establishment of a nomination and compensation committee, the aim is to further enhance the independence, objectivity, and accountability of the board of directors concerning decisions on management and director remuneration and nomination.

For Group governance, while proceeding with the integration and reorganization of our domestic Group companies to improve profitability, we will work to strengthen our management and promotion structure mainly through the Global Management Office, which is responsible for strategic, specialist support of global business development, and efforts to enhance risk management and governance at our overseas subsidiaries.

To our valued stakeholders, I ask for your continued support and understanding of our direction and strategies as we seek to achieve growth over the next ten years.

Chairman and CEO

Boosting Profitability with Our Three New Regional Business Companies and Achieving Growth through the Electronics Domain and Our Businesses in India and North America

Looking Back on Fiscal 2020

Looking back on fiscal 2020, although we felt severe impacts from the pandemic in the first half of the year, in the second half of the year we succeeded in capturing new demand in sanitary products, aerosols, and other infection prevention products, as well as in the energy, agriculture, and food products domains. In addition, our industrial gas business performed strongly in India thanks to continued strong demand from the steel industry, as well as in the electronics domain in Japan thanks to a prosperous semiconductor market. These factors combined with improved productivity brought about by workstyle and other operational reforms saw revenue decrease 0.3% year-on-year to 806.6 billion yen, operating profit grow 1.2% to 51.2 billion yen, and operating profit margin increase to a record high of 6.4% (an increase of 0.1%). Fiscal 2021 marks the final year of our current mid-term management plan NEXT-2020 Final. Although at the start wetargeted 1 trillion yen in revenue, 60 billion yen in operating profit, and 10.8% ROE, in line with our successful response to environmental changes caused by the pandemic, we have revised our full-year forecast for fiscal 2021 to 890 billion yen in revenue and 65 billion yen in operating profit, while we anticipate an operating profit margin of 7.3%.

In fiscal 2018, the year prior to the start of our mid-term management plan, we posted 42.8 billion yen in operating profit and an operating profit margin of 5.8%. Looking at both our results in fiscal 2020 and our forecast for fiscal 2021, we can see that our earnings structure has become significantly stronger in these three years. I believe this is a result of successful structural reforms in each of our businesses and initiatives aimed at total optimization.

About the	Air Water's Value	Growth Strategy	The Air Water	Basic
Air Water Group	Creation Story	for Value Creation	Group's Businesses	Environment	Social	Governance	Information

Steady Implementation of Growth Strategies

1. Domestic Businesses

To ensure further growth of the Air Water Group, our policy moving forward is to boost profitability in our domestic businesses and use this robust foundation to grow our global businesses. Responsible for driving domestic growth are our three new regional business companies: Air Water Hokkaido, Air Water East Japan, and Air Water West Japan. Our regional strategy (more details on which can be found on pp. 21-22) involves making maximum use of our business infrastructure-which includes our manufacturing, logistics, and sales sites-as well as our customer touchpoints and other marketing capabilities to build and strengthen partnerships and other initiatives with local governments and regional industries. At the same time, we will use the diverse businesses we have at our disposal as a conglomerate to go beyond the frameworks of our existing endeavors in industrial gas, medicine, and energy and further strengthen our profit structure, and create new businesses that can provide solutions to regional issues.

As we aim to advance our domestic businesses, the three centers we have established will play a key role in facilitating cross-functional activities. The Gas Products Center we built in April 2020, for example, is creating an integrated management system to control our more than 200 industrial gas plants both inside and outside Japan, all of which had previously been managed vertically. In these and other ways, the center is accelerating efforts to build a competitive manufacturing and supply system and streamline logistics in the industrial gas domain. We will continue to promote greater efficiency through total optimization in order to further enhance the profitability of our domestic businesses.

Initiatives are also underway for new business creation. To date, we have engaged in technological development for biogas plants mainly in Hokkaido. As a result, we have developed technologies for methane fermentation systems, biogas separation and purification, and the processing of biogas into liquefied biomethane. Using these technologies, we are building a sustainable, regional recy-cling-based energy supply model to recycle unused resources such as food residue and animal manure into energy. Part of these efforts have already been approved by NEDO.* As social environments change in line with movements toward decarbonization, building energy supply models like these according to regional characteris-tics will not only allow us to make contributions to local communities, but will also underpin the future growth of our businesses.

*New Energy and Industrial Technology Development Organization

A hydrogen farm in Shikaoi, Hokkaido

2. Global Businesses

Overseas, we have set India and North America as our key regions, with industrial gas, related equipment, and engineering as our key business areas.

The Indian government has announced measures to expand domestic annual production of crude steel to 300 million tons (approximately three times the current volume) by 2030. As a result, we forecast strong demand from the steel industry in line with further economic development in the country. Numerous plans for new blast furnaces are already underway. To lay the groundwork for rapid growth in our industrial gas business in India, in July 2021 we shifted to a local business promotion system run by a wholly owned subsidiary. Through more flexible decision-making and proactive capital investments, we will implement a range of growth strategies with large-scale on-site gas supply projects for steel manufacturers at the core. We will also look at extending our reach to the northern and western regions of India and work to capture gas demand in each area by expanding our gas manufacturing plants, filling stations, and other sites. At the same time, we will strengthen our downstream operations-that is, use of tank trucks and cylinders-to reinforce our industrial gas and medical oxygen supply business.

In North America, meanwhile, demand for hydrogen is growing in line with decarbonization movements, and hydrogen gas consumption is expected to grow from 11 million tons in 2019 to 17 million tons by 2030. In November 2021, we invested in FirstElement Fuel, Inc., a major developer and operator of hydrogen stations. Our aim is to make proactive contributions to the creation of a hydrogen supply chain in North America-in addition to engaging in the engineering business and in the manufacture and sale of low-temperature equipment for the storage and transportation of industrial gases, we are working alongside local gas dealers with a view to rolling out an industrial gas supply business.

3. Electronics

We have positioned the electronics market, which has seen huge growth as a result of the pandemic, as a growth driver for the entire Group, and we will combine our industrial gas and chemical domains to generate groupwide synergy. In our industrial gas business, we handle large-scale nitrogen gas supply systems, special gases and chemicals, gas refining equipment, and more. In the chemicals business, meanwhile, we possess outstanding technologies in electronic materials, circuit materials, and SiC (silicon carbide) substrates. In related domains, we also operate the O-ring business, which offers high-performance seal materials for semiconductor manufacturing equipment, and the high-power UPS business mainly for data centers. As Japan moves forward with measures to invigorate the electronics industry, major semiconductor manufacturers are boosting their production systems. At the Air Water Group, we will utilize our diverse technologies to meet their increasingly diverse, complex, and advanced needs, and boldly work to expand our businesses in the electronics domain.

Financial Strategy and Shareholder Returns

Investments will be essential as we work to implement our growth strategies. Based on a stable profit foundation, we will proactively yet carefully move forward with growth investments and use ROIC as an indicator to improve our overall capital efficiency. By boosting profitability, we will increase operating cash flow and secure the capital for further growth investments.

Financial Policies for the Next Ten Years

For investments, we will continue to carefully select growth projects that meet our requirements. For domestic projects, we will select those with an internal rate of return (IRR) of more than 8%, while for overseas projects, we will consider country risk on top of IRR. Meanwhile, our basic policy for funding is to do so through bank borrowings, straight bonds, and other debt financing. Our financial indicators in line with our investment strategies for the next ten years are as follows: Ratio of equity attributable to owners of the parent of 35-40% and a net D/E ratio of 0.75-1.2. Further, by using ROIC as an indicator for capital investments, M&As, and R&D investments, as well as to trace past investments, we will strive to improve capital efficiency across the whole Group.

Regarding shareholder returns, we are continuing to increase dividends in tandem with growing profits. Looking at annual dividends per share, we have overseen a 2.5 times increase from the 22 yen in fiscal 2011 to the 54 yen in fiscal 2021. At the Air Water Group, returning profits to shareholders is a key management task. While enhancing internal reserves to ensure we can make strategic investments aimed at medium- to long-term growth, we are targeting a dividend payout ratio of 30% of the net income attributable to owners of the parent. Our basic policy for the future is to ensure stable dividends in line with business results. Based on this policy, while reinforcing our management foundation to ensure continuous improvement of our corporate value, we will strive to enhance the return of profits to our valued shareholders.

President and COO

Virtuous Growth and Investment Cycle