Bridge Report:（6250）YAMABIKO First Half of Fiscal Year December 2019

President Yoshiaki Nagao	YAMABIKO CORPORATION(6250)

Company Information

Stock Information

* The share price is the closing price on September 13.
The number of shares issued, DPS, EPS and BPS were taken from the brief financial report of the 2Q of FY 12/19. ROE was taken from the previous term results.

Earnings Trend

*The forecast was made by the company. Unit: Million yen or yen. From the FY 3/16, net income is profit attributable to owners of the parent. Hereinafter the same shall apply. FY December 2017 was a 9-month one. The DPS of 40 yen for FY December 2018 includes the 5 yen dividend for commemorating the company ‘s 10th anniversary.

This report introduces YAMABIKO CORPORATION’s earnings results for the First Half of Fiscal Year ending December 2019 and other financial details.

Table of Contents

Key Points
1.Company Overview
2.First Half of Fiscal Year ending December 2019 Earnings Results
3.Fiscal Year ending December 2019 Earnings Forecasts
4.2019 Medium-term Management Plan　－Activities in the major market －
5.Conclusions
<Reference1: Regarding “2019 Medium-term Management Plan“>
<Reference2：Concerning corporate governance>

Key Points

• The sales for the second quarter of the term ending December 2019 were 65 billion yen, increased 3.1% compared to the same term last year. The sales in Japan increased, as the sales of agricultural machinery dropped, butthe sales of industrial machinery grew significantly. The overseas sales rose, as the performance of outdoor power equipment in the Americas recovered. Operating income grew 23.6% to 5.2 billion yen. Gross margin rate rose 0.8 points and gross margin increased 6.0%, due to the increase in sales volume and the improvement in cost rate. SG&A expenses were unchanged from the previous year, and profit grew by double digits, exceeding the initial estimate.

   

• There is no revision to the earnings forecast. The sales for the term ending December 2019 are estimated to be 125 billion yen, increased 5.9% from last term. Its domestic performance is steady. As for their overseas market, the performance is expected to get recovered in North America and Europe area. Operating income is projected to rise 3.3% to 6.5 billion yen. Although there are some negative factors that augment SG&A expenses, including the impact of tariffs arising out of the U.S.-China trade friction, the augmentation of labor costs in the U.S., the increase in expenses for research and development, and the investment for strengthening the business base for starting the robot business in North America, profit is expected to grow thanks to the increases in sales volume and improvement in production efficiency. The assumed exchange rates are 1 US dollar = 110 yen (unchanged from the previous term) and 1 euro = 125 yen (131 yen in the previous term). As for dividends, the company plans to pay a common dividend of 35 yen/share. The estimated payout ratio is 32.1%.

   

• The overall progress rate for sales in the first half is 52.1%. The progress rates in Japan and the Americas are both over 50%, indicating healthy performance in each major market. The progress rate in Europe is not so low, although the performance in Russia is sluggish. The business of the company is strongly affected by weather and climate changes, so it is difficult to forecast whether business performance will remain healthy, but the effects of its original measures, including the enrichment of its product lineup and effective marketing activities, are becoming evident.

   

• The company look forward to achieving at least 125 billion yen sales in this term, that is the final fiscal year of “the Medium-term Management Plan 2019” in order to smoothly proceed to the next medium-term management plan, which is scheduled to be announced in Feb. next year.

   

1. Company Overview

YAMABIKO CORPORATION develops, manufactures and sells outdoor power equipment (e.g. trimmers, chain saws etc.), agricultural machinery (e.g. pest control equipment, sloop mower), industrial machinery (e.g. generators, welders etc.) in Japan and overseas. The overseas sales occupy about 60% of their total sales. In terms of manufacturing and selling outdoor power equipment, the company not only has the top share in Japan but also a large share in the US. Its strength is owning unique production technology, a variety of product line-ups, and an excellent technical support system.

1-1 Corporate history

YAMABIKO CORPORATION started as a joint holding company established in December 2008 through a merger between KIORITZ CORPORATION (listed in the first section of the Tokyo, Osaka and Nagoya Stock Exchanges), which dealt with agricultural machinery in Japan and outdoor power equipment overseas, and Shindaiwa Corporation (listed in the second section of the Tokyo Stock Exchange), which dealt with outdoor power equipment and industrial machinery globally. In October 2009, YAMABIKO CORPORATION established its current business entity by mergering both KIORITZ and Shindaiwa.

KIORITZ CORPORATION was established in 1947 in Tokyo and originally called KIORITZ AGRICULTURAL EQUIPMENT CORPORATION. It has been a leading company in both agricultural equipment business through which they developed “Japan’s first speed sprayers” and outdoor power equipment business through which they developed “Japan’s first motorized backpack trimmers” and “the world’s first handheld power blowers”. Furthermore, since its establishment, it has been focusing on self-development of engines for outdoor power equipment. The accumulative number of engines produced in 2008, before the merger, was about 40 million.

Shindaiwa Corporation was established in 1952 in Hiroshima and was originally called Asamoto Precision Manufacturer. It not only developed “Japan’s first electric chain saws” for the outdoor power equipment business, but also manufactured and sold engine generators and engine welders for the industrial machinery business. Its strength was high technological development capabilities, as can be seen in the development of the world’s first mixed fuel 4-cycle engine.

In the late 1990s, with growing concern about global warming caused by greenhouse effect gas, and as engine’s emission gas control became stricter in the Western countries, especially in the US, research and development expenses increased to comply with the new regulations. In the 2000s, the medium and small-sized companies that could not afford these expenses went through rapid industry restructuring on a global scale in the outdoor power equipment industry.
Moreover, the business environment became further uncertain due to a flood of cheaper products from newly emerging countries and diversification of customers’ needs.

Under these circumstances, the two companies concluded a business and capital alliance agreement in May 2007 on the premise of future business integration in order to strengthen the vitality to survive and win the intensifying competition.
In December 2008, YAMABIKO CORPORATION was established as a joint holding company to achieve better efficiency and expansion for all its businesses including development, manufacturing, logistics, sales and management. In October 2009, YAMABIKO CORPORATION conducted an absorption-type merger of KIORITZ and Shindaiwa and became the current business entity.

The company name “YAMABIKO” derives from the mountain god, “Yamabiko”. Its corporate philosophy is to “create the bridge that bonds people and nature with the future”. This expresses the company’s willingness to contribute to the conservation and improvement of the nature and environment.

1-2 Corporate philosophy, etc.

YAMABIKO Group’s corporate philosophy is formed from three elements: “Essence”, “Purpose of Existence” and “Code of Conduct”.
“Essence”, which incorporates both “Purpose of Existence” and “Code of Conduct”, expresses in a single word what YAMABIKO Group aims to be as a company, and the essence of its corporate activities.
“Purpose of Existence” sets out the role and responsibilities of YAMABIKO Group in society, and makes a commitment to this.
“Code of Conduct” defines the attitude of each YAMABIKO Group employee in relation to their work.

(From the Company’s website)

<Essence>

<Significant Beliefs>

<Principles>

In addition, the company established 14 detailed measures that augment the Code of Conduct to facilitate the implementation of business activities in accordance with the corporate philosophy.
President Nagao disseminates messages that are based on “Essence”, “Purpose of Existence” and “Code of Conduct” at various occasions. They are also making daily efforts so that the corporate philosophy would lead to each employee’s actual activities in each workplace.

* Profile of President Yoshiaki Nagao
President Yoshiaki Nagao was born in February 1953 (Age 66). Since his childhood, he enjoyed “creation” such as building plastic models. When he was in the middle school, his interest grew in automobiles, especially those made in the US. He majored in “combustion engineering” in graduate school, where he studied engines. He began working at KIORITZ CORPORATION in April 1978.
At KIORITZ, he worked at the research department. He was involved with research and development of various engines, especially chain saws engines, under the corporate culture that supported the employees’ spirit to find and work on the issues of their interest. Instead of focusing on his research only in the lab, he went out to the mountains and interviewed woodsmen who were the users of their products to hear opinions and identify the demands in detail.

After working in the technology area for most of his time at KIORITZ, he was appointed as President and CEO of ECHO Incorporated, an affiliate of KIORITZ in the US in February 2006. His focus at ECHO Incorporated was to observe the actual situation of the emission gas control regulations in the US, to find measures to meet the regulations, and to enhance the users’ satisfaction. During the merger process of KIORITZ and Shindaiwa, he facilitated fast and drastic organization of the local sales routes. He recalled, “It was an important step to diversify my work”.
After the establishment of YAMABIKO CORPORATION, he managed to implement smooth integration as a board director / managing officer / industrial machinery division officer in Hiroshima where the head office of Shindaiwa Corporation was located. In June 2011, he was appointed CEO and President of YAMABIKO CORPORATION.

1-3 Market environment

Although no detailed statistics about the outdoor power equipment market is available, it is known that the largest market is in North America including the US, followed by Europe. In Japan, about 1 million outdoor power equipment/tools are sold per year. The indicators that may impact the company’s trend in the earnings include “number of housing start”, “commodity price”, and “crude oil price” for the overseas market and “rice price” for the Japanese market.

The company recognizes that there are two global manufacturers of outdoor power equipment in Europe (Germany and Sweden).

1-4 Business contents

1. Segment
YAMABIKO Group operates businesses in three sectors: Outdoor power equipment, Agricultural machinery and Industrial machinery. These three segments are reported.

(Developed by us based on YAMABIKO CORPORATION’s financial report.)

“Outdoor power equipment business”
YAMABIKO CORPORATION manufactures and sells handheld or backpack-style forestry and landscape maintenance machinery powered by small internal combustion engines. The main products includes chain saws, trimmers, power blowers, hedge trimmers, etc.
In Nov. 2014, the company acquired “Belrobotics SA,” a Belgian venture company, which develops, manufactures, and sells robotic mowers for professional use. (In Jan. 2017, Belrobotics SA was renamed “Yamabiko Europe SA” for the purpose of enhancing sales in Europe.)

Based on the accumulated experiences and know-how and excellent development capabilities that meet the customers’ needs, YAMABIKO CORPORATION continues to produce high performance, highly durable and high-quality engines.

<Chain saws>	<Trimmers>
＜Power blowers＞

(Gasoline engine system)
The engines for outdoor power equipment such as chain saws and trimmers are mainly 2-stroke gasoline engines. As described later, the company’s excellent capability to develop engines is one of their most important features/strengths.
Brief information concerning the company’s engines is provided below because knowing the gasoline engine system and characteristics of each engine type helps to understand the business of the company,

Basically, a gasoline engine generates power by moving the piston down with the combustion of gasoline through the following 4 steps.

Reciprocating motion of the piston is converted into revolution by a crankshaft. The rotating motion turns the rotating shaft of axel of a car or revolving shaft of a chain saw.
The gasoline engine is largely categorized in two types (2-stroke engine and 4-stroke engine), depending on the number of reciprocating motions by piston to complete “1 cycle” of the 4 steps.

“2-stroke engine”
One power cycle is completed by 2-stroke. In other words, a power is generated by “1 piston reciprocating motion, 1 crankshaft revolution”.
First stroke (piston moving up): “Intake” and “compression” of air-fuel mixture occurs.
Second stroke (piston moving down): Piston moves down due to the “expansion” of air-fuel mixture and “exhaust” occurs later.

“4-stroke engine”
One power cycle is completed by 4-stroke. A power is generated by “2 piston reciprocating motions, 2 crankshaft revolutions”.
First stroke (piston moving down): “Intake” of air-fuel mixture occurs.
Second stroke (piston moving up): “Compression” of air-fuel mixture occurs.
Third stroke (piston moving down): Piston rapidly moves down as a result of “expansion”.
Fourth stroke (piston moving up): Combusted gas is “exhausted”.

The advantage of the 4-stroke engine is the easy control of intake and exhaust. However, its structure is complicated compared to a 2-stroke engine, because the intake/exhaust valves of a 4-stroke engine are installed at the cylinder head, while intake and exhaust of a 2-stroke engine occur at the port that is located on the body of the cylinder. Because of this structure, the weight of a 4-stroke engine is heavier than a 2-stroke engine.

On the other hand, a 2-stroke engine has a larger ratio of burning engine oil and fuel in order to make smooth piston motion and blow-by of air-fuel mixture. This means it releases more harmful substances in the exhaust gas as compared with a 4-stroke engine. However, because of its simple structure and smaller number of parts, the 2-stroke engine can be smaller and lighter. The overhaul is also easier for the same reasons. Therefore, a 2-stroke engine is the most appropriate engine for outdoor power equipment.

“Agricultural machinery business”
YAMABIKO CORPORATION manufactures and sells pest control equipment for Japan and agricultural harvesting equipment for North America.
Its major products include pest control equipment (speed sprayers, mounted equipment for cropland pest control, power sprayers), sloop mower, soy and potato harvesters, etc.

YAMABIKO CORPORATION’s technological strengths in this business segment are KIORITZ’s blowing, spraying, and pumping technology as well as technology to create small and light equipment. These technological capabilities have been built up over many years at KIORITZ.

＜Mounted equipment for cropland pest control＞	＜Speed sprayers＞
＜Sloop mowers＞

“Industrial machinery business”
YAMABIKO CORPORATION manufactures and sells equipment for construction, civil engineering and iron works.
Its major products include generators, welders, lighting equipment, cutting machines and high-pressure washers.

Technological strengths in this business segment are established by the R&D knowledge accumulated since YAMABIKO CORPORATION started business as Shindaiwa, and such strengths can be found in alternator designing capability improved by their efforts for alternative current motor development, as well as technologies for electronic control and noise prevention.

＜Generators＞

＜Welders＞

“Others”
The company manufactures and sells accessories and the parts for after purchasing service for various machines and equipment.
The profitability in this segment is the highest among all segments.

＜Maintenance kit＞

＜Nylon trimmer line＞

＜Fuel/Oil＞

2. Brand
YAMABIKO CORPORATION was established based on the integration of two companies. The products of both companies are well recognized both in Japan and overseas for many years. Therefore, YAMABIKO CORPORATION maintains the brand names as KIORITZ, Shindaiwa, and ECHO.
YAMABIKO CORPORATION is proactively investing in marketing as well as exploring new sales routes to enhance its brand values.

3. Development structure
Each business segment is working on development with a focus on the following priority issues.

The exhaust gas regulations are expected to be further tightened in the future. Therefore, addressing them is of paramount importance.
In addition, the company is conducting research on control technology in the field of electronic control.

4. Production structure
The company has 3 plants (Yokosuka, Morioka, and Hiroshima) and 4 production related subsidiaries in Japan and a total of 10 production related subsidiaries in the USA, Belgium, China and Vietnam.

5. Sales route and sales methods
The company supplies its products in over 90 countries for about 28,000 stores.
More than 60% of the sales are from overseas sales.

<Domestic market>
Seven sales subsidiaries, which were separated mainly by region, were merged into YAMABIKO JAPAN CO., LTD. in April 2017, with the aim of allocating management resources in a more efficient manner, strengthening sales capabilities, and improving customer services through a unified management system and integral operation of business assets.

YAMABIKO JAPAN CO., LTD sells the products to distributors, ZEN-NOH (National Federation of Agricultural Cooperative Associations), home improvement retailers, and construction machinery rental companies, etc. Through them, the products are supplied to the end users including farmers/foresters, companies in the construction, civil engineering and iron industries and landscapers.
The company presents their products in exhibitions in collaboration with dealers and distributors and facilitates sales through demonstration and test drive.
Furthermore, the company accompanies dealers to visit end users to understand their needs and utilize the information for product development.

<North American market>
ECHO Incorporated Group, one of the company’s subsidiaries, sells the products to The Home Depot (*) and other distributors, through which the products are supplied to the end users such as landscapers, homeowners, farmers/foresters, and companies in the construction/civil engineering industry.

*The Home Depot
The Home Depot, Inc. is the world’s largest home improvement retailer and construction products and services. It was established in 1978. Sales in 2018 were US$108.2 billion and net income was US$11.1 billion. It has over 2,200 stores in the US, Canada and Mexico. It is listed on the New York Stock Exchange. (Excerpted from the company’s website)

The Home Depot classifies their products into GOOD, BETTER and BEST in accordance with the quality. It is only YAMABIKO CORPORATION that supplies the high-quality BEST products to The Home Depot. This is one of the proofs that the company’s products are highly reputed in the North American market.

In the Central and South American market, ECHO Incorporated, one of the company’s subsidiaries, sells the products to the distributors of each country, and made their products supplied to the end users through dealers.
Yamabiko Europe SA in Europe and ECHO MACHINERY (SHENZHEN) Co., Ltd. in China, both of which are subsidiaries of Yamabiko, sell products to distributors in their respective countries
Asia and other areas, YAMABIKO CORPORATION sells the products to the distributors in each country.

The overseas dealers display the products by brand, and salesperson conducts person-to-person sales while understanding the needs of the end users.
The home improvement retailer also displays the products by type and price. The end users purchase the products based on the needs, budget and image they have from advertisement, etc.

1-5 Characteristics and strengths

①Unique production and technological capabilities and vertically integrated production
The most important characteristics and strengths of the company are the “unique production and technological capabilities and vertically integrated production capabilities”.
Their mainstay 2-stroke engines that are mounted to the outdoor power equipment are manufactured by an integrated production system solely by the company from development, procurement of aluminum, molding, parts production, processing to assembly, which is said to be unique anywhere in the world. The power sources for the products of agricultural machinery and industrial machinery are also engines, but they are mostly procured externally.

The company have solved various issues with their unique technologies including iron plating and electric discharge processing. This results in the quality improvement and production capacity improvement of the company.
Specifically, the company has established the following technologies.

<Example 1: Iron plating>
Plating is a surface covering method in which the surface of a metal is covered by a thin layer of another metal. For engine production, inside of the cylinder should be plated to avoid abrasion caused by friction with a piston.
The conventional method is to use chrome plating from durability and cost perspectives. However, chrome plating gives negative impact on the environment. Its production efficiency is also low. Therefore, there was an increasing demand for different materials for plating.

The company has been working on “iron plating” since 1978 to reduce environmental load.
Initially, they could produce only hundreds per day. However, as a result of improved productivity, enhanced plating precision, and reduction of environmental load, the company now has the iron plating technology that does not require finish processing. Their technology has drastically smaller environmental load. Furthermore, their daily production capacity increased significantly, reaching thousands.
The company holds 5 patents related to iron plating.

<Example 2: Electric discharge processing>
As described above, a 2-stroke engine requires a smaller number of parts and has a simpler structure as compared to a 4-stroke engine. Therefore, it is most suitable for the “handheld” and “backpack-style” outdoor power equipment. However, it releases some fuel mixed gas. In order to respond to the increasingly strict exhaust gas regulations globally, the company was faced with a challenge to control the flow of the fuel mixed gas for efficient burning.
In order to achieve it, the company explored the production methods to modify the internal shape of the cylinder (by installing a wall between the fuel mixed gas passage and internal shape of the cylinder).

A “wall” can be created by die-casting (*), but it requires a horizontal hole to lead the fuel mixed gas to a combustion chamber. With die-casting, it was impossible to create a horizontal hole. It was also difficult to carry out machining due to small space in the chamber.

The company came up with the idea of using “electric discharge processing (*)” to create a form while taking advantage of die-casting.

Although electric discharge processing enabled to create complicated forms, it was costly due to long processing time and high electrode consumption. The company conducted research on processing conditions for a large volume production and developed designs of special electrode form. As a result, it succeeded in producing a large volume of products, by shortening processing time, saving personnel, lowering the cost of electrode and enhancing efficiency.
Having obtained three patents related to electrode processing, the company has established the unique technology that cannot be imitated by other companies.

(*) Die-casting
Die-casting is one of the metal mold casting methods. By injecting melted metal in a metallic mold, a large amount of casting with high precision can be produced within a short period of time. It enables to create a thin product at low cost.

(*) Electric discharge processing
Electric discharge processing is a machine processing method to remove a part of the surface of a non-processed workpiece through repeated electrode discharge at short cycles between electrode and the non-processed workpiece. It enables to cut out complicated outline on extremely hard steel.

With “advanced capabilities for creation” such as the above-mentioned technologies, the Company not only complies with exhaust gas regulations but also responds to various needs including weight reduction, enhancing durability and cost reduction. It succeeded in developing and mass-producing “a light weight and highly durable 2-stroke engine that meets the exhaust gas regulations”.
While many companies in the world are forced to leave the industry because they cannot address these issues, YAMABIKO CORPORATION continues to make further development as a leading manufacturer.

②Unique research and development capabilities for each business segment
The company’s capability to address environmental issues is high. The company possesses one of the highest number of US Environmental Protection Agency (EPA)-accredited engines in the world.
Furthermore, not only for outdoor power equipment, the company also has unique research and development capabilities for the agricultural machinery and industrial machinery. Based on the technological capacities that have been accumulated by KIORITZ and Shindaiwa for many years, the company is further brushing up the capabilities.

③Extensive product lineup and expansion of sales network and domestic services network
The company has an extensive lineup of products that meet various needs of the customers in each of the three business segments.
It also currently supplies the products to about 28,000 stores in more than 90 countries across the world.
As a result of merging KIORITZ and Shindaiwa, YAMABIKO CORPORATION’s product lineup and sales network were further expanded.
With the aim of improving the satisfaction level of diversifying users, the company established “Yamabiko Service Shop” inside Japan in 2013, and is operating service systems for maintenance, repair a failure, etc., which are not offered by competitors, throughout Japan. The number of affiliated shops is 430 as of Mar.2019.

④Excellent technical support system
The company also provides excellent technical support in order to enhance credibility of the products and strengthen the relationships with distributors and dealers.
In addition to offering about 40 service schools annually both in Japan and abroad, in 2018, the company started to provide a new e-learning course using its originally developed teaching materials targeted at overseas distributors in an attempt to enhance their repair skills and deepen their understanding of the mechanism of the engines.
Furthermore, the European subsidiaries of the company recently organize road show-style education and training sessions for nurturing trainers at distributors, and lecture classes designed for distributors’ salespersons, endeavoring to further fortify its service capabilities.

⑤High product share
By demonstrating the above-mentioned characteristics and strengths (1-5-1) to (1-5-4) in an integrated manner, the company is becoming highly competitive at a global level. For the outdoor power equipment business, the company has the top market share (more than 30%) in Japan and is ranked high in North America, the largest market.

1-6 Return on Equity (ROE) Analysis

The estimated net income margin for this term is 3.60%, which is at almost the same level as the previous term. Although leverage is showing a downward trend, the company is expected to achieve a ROE of around 8%.

2. First Half of Fiscal Year ending December 2019 Earnings Results

2-1 Consolidated Business Results

*Unit: million yen. Net income means profit attributable to owners of parent.

Sales and profit grew due to the significant rise in sales of industrial machinery. Profit exceeded the estimate.
Sales increased 3.1% to 65 billion yen compared to the same term last year. As for the domestic market, while the sales of agricultural machinery dropped, the sales of industrial machinery grew significantly.
The overseas sales rose, as the performance of outdoor power equipment in the Americas has recovered.
Operating income grew 23.6% to 5.2 billion yen. Gross margin rate rose 0.8 points and gross margin increased 6.0% due to the increase in sales volume and the improvement in cost rate. SG&A expenses were unchanged from the previous year, and the profit grew by double digits, which exceeds the company’s initial forecast.

2-2 Trends by Segment

*Unit: million yen. The composition ratio for operating income means the ratio of operating income to sales.

◎ Outdoor power equipment

*Unit: million yen

(Japan)
The sales of chain saws for home improvement retailers increased.
However, the sales of the company’s core product trimmers were affected by the unfavorable weather condition and the OEM declined as well, which caused the sales of domestic Outdoor power equipment remained unchanged from the same term last year.

(Overseas)
The performance in Central and South America remained stagnant, but the sales performance in North America, which is the main market for the company, increased especially the sales of products for professionals because the problematic effects of inventory adjustment dissolved, and the new marketing strategy was implemented when the weather was ideal,
The sales performance in Europe was affected by the downturn in Russia, whose economic outlook is bleak, and the depreciation of
Euro against Japanese yen. In addition, the sales performance in Australia, Asia, and some other countries were negative.
Overall, the overseas sales in most countries other than the Americas dropped. However, the total sales in overseas markets increased.

◎Agricultural machinery　

*Unit: million yen

（Japan）
The sales of speed sprayers grew, as new products were released, but the sales of other large-scale pest control machines decreased through the shrinkage of the subsidized business, and the sales of sloop mowers, which had generated good profits until recent declined. This caused the domestic sales decreased.

（Overseas）
In North America, amount of sales of potato harvesting machines were stable, but the sales of mounted equipment for pest control, which was launched targeting the Chinese market in the previous year declined due to the weakening demand caused by the new subsidy policy. As a result, total overseas sales dropped.

◎Industrial machinery

*Unit: million yen

（Japan）
The sales of generators, which are core products, grew significantly, thanks to the strong demand for infrastructure development and BCPs. Welders mainly for construction machinery rental sold well. In addition, the sales of mist generators for preventing heatstroke increased. Overall, the sales show a positive result.

（Overseas）
While the sales growth of generators in North America has been slight, the sales in other countries increased favorably.

◎Other

*Unit: million yen

Sales dropped, mainly because of the decline in sales of prototype parts for automobiles.

2-3 Financial standing and cash flows

◎Main Balance Sheet

*Unit: million yen
*Trade payables include electronically recorded accounts payable.

Current assets increased 7.4 billion yen from the end of the previous term, due to the growth of trade receivables, etc. Noncurrent assets rose 500 million yen from the end of the previous term, due to the rise in investments and other assets. Total assets increased 7.9 billion yen from the end of the previous term to 107.2 billion yen.
Total liabilities augmented 6.2 billion yen from the end of the previous term to 51.9 billion yen, due to the increases in trade payables and long-term interest-bearing debts, etc.
Net assets rose 1.7 billion yen from the end of the previous term to 55.2 billion yen. As a result, equity ratio dropped 2.3% from the end of the previous term to 51.6%.
The balance of short and long-term interest-bearing debts augmented 900 million yen from the end of the previous term to 17.3 billion yen.

◎Cash Flow

*Unit: million yen
The surplus of operating CF expanded, due to the increases in profit before income taxes and trade payables, etc. and free CF turned positive.
Financing CF turned negative, as the net increase in short-term interest-bearing debts was less than that in the same period of the previous year.
The cash position improved.

3. Fiscal Year ending December 2019 Earnings Forecasts

3-1 Full-year earnings forecasts

*Unit: Million yen. The forecast was those released by the company.

There is no revision to the earnings forecast. Sales and profit will increase thanks to favorable sales growth in Japan and recovery in sales overseas.
There is no change to the earnings forecast.
Sales are estimated at 125.0 billion yen, up 5.9% year on year. The company is expected to see a stable sales increase in Japan. Sales are projected to recover in North America and Europe.
It is forecasted that operating income will grow 3.3% year on year to 6.5 billion yen. There are compelling negative factors, such as the rising SG&A expenses, including expenses for research and development, and investment in strengthening the business foundation following the launch of a robotic product business in North America, in addition to the impact of tariffs imposed due to the U.S.-China trade disputes and an increase in labor costs in the U.S.; however, it is anticipated that a profit increase will result from the growing sales volume and improved production efficiency.
The exchange rate is assumed to be 1 U.S. dollar = 110 Japanese yen (which remains unchanged from the previous term) and 1 euro = 125 Japanese yen (which was 131 Japanese yen in the previous term).
The ordinary dividend is to be 35 yen/share. The estimated payout ratio is 32.1%.

3-2 Sales Outlook by Region

4. 2019 Medium-term Management Plan－Activities in the major market－

The situations of the primary measures and recent efforts in each region for achieving sales of 125 billion yen in the term ending December 2019 are as follows.

4-1 Activities in each business segment

①North American market
The company anticipates that the engine product market will rebound in its outdoor power equipment business in 2019.
The company aims to further improve its brand power and market share by expanding sales via its major sales channels, which are distributors and The Home Depot.

(Various Efforts)

②European market
The company aims to popularize the brand by implementing the growth strategies of major distributors and promoting the sales of robotic mowers.

(Various Efforts)

③Japanese market
The company aims to expand its market share by expanding its sales channels and OEM supply and enhancing the capability of offering services.
The company aims to increase sales volume, by grasping demand in the market accurately.

(Various Efforts)

④Industrial machinery
In the Medium-term Management Plan, sales of 11.0 billion yen in Japan and sales of 3.2 billion yen in overseas nations are forecasted for the term ending December 2019, but the company achieved both of the targets a year ahead of schedule in the term ended December 2018.
It will redouble the efforts to “take in demand rising from preparations for 2020 Tokyo Olympic Games, fortify product competitiveness, and enhance sales and service capabilities” in Japan, and “develop new markets, establish an OEM business, expand sales routes, and enrich product lineup” in overseas countries.

⑤Forecast about each market and each business this term
Regarding outdoor power equipment, sales are expected to rise in all of the three markets compared to 2018.
It is projected that industrial machinery will grow considerably in Japan.

4-2 Initiatives to improve productivity and profitability

The company will reform its production system through the following activities.

The planned funds for capital investments were not fully used in the second preceding and previous terms, and this term, the planned amount was revised upwardly. The company will conduct investment continuously and appropriately in order to boost productivity and grow further.

（Source: the company）

4-3 Numerical goal・Plan

*Unit: Billion yen

4-4 Annual variation and positioning of the Medium-term Management Plan

The theme of the ongoing “Medium-term Management Plan 2019” is “to grow 3 major businesses and recoup the investment made in the past 3 years.”
Based on the ongoing plan, the company is currently designing the next medium-term management plan with the theme of “endeavoring to create new value at the turning point of the business environment,” which is planned to be released in February 2020.

5. Conclusions

The overall progress rate for sales in the first half term is 52.1%. The progress rates in Japan and the Americas are both over 50%, indicating healthy performance in each major market. The progress rate in Europe shows a slight decrease which is not too severe in general. However, the performance in Russia is sluggish. The business of the company is strongly affected by the local weather and climate changes, so it is difficult to forecast whether business performance will remain positive, but the effects of its original measures, including the enrichment of its product lineup and effective marketing, are becoming more evident.
It is believed that the company will achieve sales of 125 billion yen and earn more this term, that is, the final fiscal year of the Medium-term Management Plan 2019, in order to smoothly proceed to the next medium-term management plan, which is scheduled to be announced in Feb. next year.

(Japan)

*Unit: 100 million yen

(Americas)

*Unit: 100 million yen

(Europe)

*Unit: 100 million yen
*Figures for each market are based on company data.

<Reference1: Regarding “2019 Medium-term Management Plan” >

① Basic policy and vision
The company set two visions for clearly sharing what kind of company they should aim to develop in the medium to long term.

The company considers that the period of “2019 Medium-term Management Plan” is for exerting the effects of active investment conducted during the period of the previous Medium-term Management Plan.

② Key initiatives
In order to actualize the visions set in the above basic policy, the company will take the following key initiatives.

③Regarding the return to shareholders
As the company will keep paying dividends stably and its consolidated financial standing is improving, the company has decided to change the target consolidated payout ratio from “about 25%” for the previous Medium-term Management Plan to “25% or higher” for the new Medium-term Management Plan.

<Reference2：　Concerning corporate governance>

*Composition of the organizational structure, directors and auditors

◎Corporate Governance Report
Last update date: March 29,2019

<Basic policy>
YAMABIKO CORPORATION (“the company”) actively promotes various measures to enhance the corporate value of the entire Group, including an optimization strategy and supervision function at the Group level, as well as the allocation of resources in order to achieve the Group’s global management strategy and growth.
To realize these objectives, the company implements sound and highly transparent Group management in order to deliver value to all of its stakeholders, including regional companies, shareholders, customers and employees. We do this by building a robust corporate culture based on our Corporate Philosophy and Code of Conduct, while enhancing and strengthening a system of corporate governance focused on Group compliance and risk management.

Our board of directors is composed of 7 directors, including 2 outside ones, and makes important decisions regarding our group’s management policy and strategy, and the guidance and supervision for business administration of group companies. In the board of directors, directors monitor and oversee the work of other directors and report their own performance regularly at their meetings. In order to put resolutions of the board of directors into action accurately and swiftly, the management strategy council deliberates them to a sufficient degree.

Our company adopted the auditor system, organizing the board of auditors with a total of 4 auditors, composed of 2 corporate auditors and 2 outside ones.
Auditors participate in the meetings of the board of directors, the management strategy council, and operating officers, and other important in-house meetings, to audit the business execution of directors, and secure the effectiveness of audit in cooperation with accounting auditor and the internal audit section, in accordance with the regulations for the board of auditors and the standards for auditors’ audit.

＜Reasons for Non-Compliance with the Principles of the Corporate Governance Code (Excerpts)＞

<Disclosure Based on the Principles of the Corporate Governance Code (Excerpts)>