Bridge Report:（7242）KYB the first half of the fiscal year March. 2020

Representative Director, President Executive Officer Masao Ono	KYB Corporation (7242)

Company Information

Stock Information

* Share price as of closing on November 29. Number of shares issued, DPS, EPS, BPS were based on the results of the first half of the term ending March 2020. ROE is from the last year-end.

Earnings Trends

* Unit: Million yen or yen
*The forecast is from the company. From the term ended March. 2016, the IFRS has been used. The amounts in the term ended March. 2015 are those after the IFRS adjustment. From the term ended March 2016, net income is profit attributable to owners of the parent.
*The company conducted 1-for-10 reverse share split on October 1, 2017. DPS for the term ending March. 2018 represent the amounts taking the 1-for-10 reverse split into account. EPS and DPS are not adjusted. The dividend of the term ending March 2020 has not been determined yet.

This Bridge Report presents details and analysis of KYB earnings results for the first half of the fiscal year March. 2020.

Table of Contents

Key Points
1.Regarding nonconforming acts in the inspection process for seismic isolation/mitigation oil dampers for buildings
2.Company Overview
3.The first half of Fiscal Year March. 2020 Earnings Results
4. Fiscal Year March. 2020 Earnings Estimates
5. Progress in the 2017 Mid-term Management Plan
6. Conclusions
<Reference 1: 2017 Midterm Management Plan>
<Reference 2: Regarding Corporate Governance>

Key Points

• The sales for the first half of the term ending March. 2020 were 197.6 billion yen, down 2.5% year on year. The business performance was affected by the yen appreciation and the downturn of the Chinese market caused by the trade friction between the U.S. and China. The AC and HC businesses saw the drop in sales. Segment profit rose 25.9% year on year to 11.9 billion yen. The profit of the AC business increased thanks to the improvement in profitability. The profit of the HC business declined due to the decrease of orders received. Operating profit improved year on year from a loss of 11.3 billion yen to a profit of 4.5 billion yen, mainly because the provision for product warranties, which was posted in the same period of the previous year, decreased and there was no longer the loss related to the U.S. antitrust law in the first half of this term.

   

• The full-year earnings forecast has been revised downwardly. The sales for the term ending March. 2020 are estimated to be 390 billion yen, down 5.4% year on year. The forecasted trend of the Chinese construction machinery market, etc. were taken into account. There is no revision to the estimated segment profit. Operating profit is projected to drop 66.5% year on year to 6.5 billion yen. The company took into account the possibility of augmentation of cost for product warranties regarding seismic isolation/mitigation oil dampers, etc. Net profit is estimated to go into the black, thanks to the decrease in expenses for seismic isolation/mitigation. The dividends are still to be determined.

   

• The earnings forecast has been revised downwardly, but segment profit, which indicates the earning from the core business, remains unchanged. Since six-month segment profit has been stable at the level of 10 billion yen since fiscal 2017 and net profit is projected to be positive thanks to the decrease in cost for seismic isolation/mitigation, it seems to be considered in the stock market that the performance of the company has bottomed out.

   

• However, we need to keep in mind that the business environment is not good and the AC and HC businesses have some problems to be solved. We would like to pay attention to how much the company can proceed in the second half of the year before the next mid-term management plan.

   

   

1.Regarding nonconforming acts in the inspection process for seismic isolation/mitigation oil dampers for buildings

（Overview）
In October. 2018, it was revealed that the performance inspection records for seismic isolation/mitigation oil dampers products, which are manufactured and sold by KYB and its subsidiary named Kayaba System Machinery Co., Ltd., were falsified and then the products that do not comply with the criteria approved by the Ministry of Land, Infrastructure, Transport and Tourism (MLIT) or clients’ specs were attached to buildings.

(The number of target objects for unknown products and non-conforming products, and the number of products; as of 2019 Sep. 30)

◎ Regarding the seismic isolation/mitigation oil dampers for buildings

As a result of investigation, 991 non-conforming products and 12,113 unknown products are found.

(Taken from the reference material of KYB)

(Correspondence and Progress)

(Taken from the reference material of KYB)

(Measures to prevent recurrence)

In the report, 9 causes including “lack of awareness of the rules,” “corporate culture in which staff avoid facing the truth,” and “factories which are operated assuming that orders are received,” are stated, and “enhancing the awareness of the rules and reforming corporate culture,” “Evaluation of business feasibility and review of business operation and information sharing systems,” “improvement of inspection system and method,” and “fortification of internal audit and control systems” are listed as starting points for the measures to prevent recurrence.
Then, the company started announcing the progress of measures for preventing recurrence every 3 months.
The progress as of Sep. 30, 2019 was disclosed through the second progress announcement on Oct. 16, 2019, and its outline is as follows.

(Taken from the reference material of KYB)

（Effects on business performance）

As for a provision for product warranties related to the matter, 35,146 million yen was posted as an expense in fiscal 2018, and the balance of a provision for product warranties regarding the incident as of the end of Sep. 2019 was 30,837 million yen.
The company acknowledges that if additional provisions are posted according to future progress, it may cause a significant impact on performance.

2.Company Overview

The largest manufacturer of independent hydraulic equipment in Japan. Based on hydraulic technology, the company offers products and technologies in a wide range of fields such as "automobiles", "motorcycles", "construction machinery", "industrial vehicles", "aircraft", "railroads" and “special purpose vehicles”.
KYB has a high market share with many products. For instance, shock absorbers for automobiles account for 40% of the domestic market and 15% of the global market.

【2-1 Corporate history】

The roots come from “Kayaba Research Center”, which was established by Shiro Kayaba, who is an inventor and a founder, in November 1919.In January 1927, a self-employed enterprise, Kayaba Seisakusho, was established for manufacturing hydraulic dampers, catapults, etc. for aircraft.
In March 1935, Kayaba Manufacturing Co., Ltd. was established.After the end of World War II, in June 1956, Kayaba Auto Service Co., Ltd. was established for offering products and services.In October 1959, company’s stocks were listed on the Tokyo Stock Exchange.In July 1974, KYB Corporation of America was established in the United States in order to enter the North American commercial market. Then, the company actively entered foreign markets such as Asia and Europe.
In October 1985, the company name “Kayaba” was changed from kanji (Chinese characters) to katakana (Japanese Characters).In October 2015, the trade name was changed from Kayaba Manufacturing Co., Ltd. to KYB Corporation in order to further strengthen the brand image.

【2-2 Corporate Philosophy/Management Philosophy】

◎KYB Corporate Symbol
As they changed the corporate name from "Kayaba Manufacturing Co., Ltd." to "KYB Corporation" in 2015, they aim to popularize the KYB brand on a global basis.Therefore, as shown below, the logo “KYB” has the meaning and spirit

（Taken from KYB’s website）

Slanted slits in each letter represent comfortable sunlight cast through the trees and sunbeams illuminating the road ahead. The logo represents an image of unconstrained growth and flexible response to the trends of the era. The right side of the letter “B” represents liquid pressure indicating the origin of KYB. Using italic letters expresses a sense of speedy movement, progressiveness, growth potential, innovativeness.

(What the corporate color means）
The corporate color, red stands for love, enthusiasm and passion, etc. and it gives the image of a sun’s warmth, heat and power to grow life that realize an epoch-making society. Red is also a positive color, and represents manufacturing that goes the extra mile.
(Taken from KYB’s website)

）

The characteristics of products such as precise quality and reliable technology are expressed with the statement.It means that not only providing reliable quality to general consumers and business partners leads to stakeholders’ “advantage (superiority)”, but also the joy of manufacturing, which enables each employee to realize that they can change the world with sure quality, becomes “advantage (merit).”

◎Corporate Spirit
As the KYB Group, which aims to contribute to society by providing technologies and products for making the living of people safe and comfortable, it reflected on the improper act revealed in Oct. 2018, and revised its Corporate Spirit and Corporate Guiding Principles.

（Corporate Spirit）

（Management Vision）

(Corporate Guiding Principles)
See the following URL:
https://www.kyb.co.jp/english/company/guidelines.html

【2-3 Environment Surrounding the Company】

(1) Market EnvironmentThe automobile market and the construction machinery market have a great effect on KYB's performance.
KYB recognizes the current and future situations of the two markets as follows.

①Automobile Market

KYB supplies shock absorbers (SA) for new vehicles directly to automobile manufacturers as Tier 1, and also supplies them to auto parts stores, repair shops, etc. through agencies for aftermarket as well.The company calls the former "OEM" and the latter "marketed".
Japanese cars are popular in Asia, the Middle East and others, and the commercial market is important for KYB.

(Taken from the reference material of KYB)

②Construction Machinery Market

The company estimates that the demand for excavators weighing 6 tons or over will peak out in some regions while the demand for excavators weighing less than 6 tons will remain high.

(Taken from the reference material of KYB)

(2) Competitors
①AC Business
KYB’s domestic competitors include Showa Corporation (7274, TSE 1st section), 33.4% of whose shares are held by Honda, and Hitachi Automotive Systems, Ltd. (unlisted), a group company of Hitachi.
Its global competitors consist of ZF in Germany, Tenneco in the U.S., and so on. ZF has a long history and intimate relationships with European automobile manufacturers.
The company’s share in the commercial product market is slightly less than 20%. Tokico (which was acquired through M&A by Hitachi and is unlisted; today it is one of the brands of Hitachi Automotive Systems) and Monroe (a commercial brand of Tenneco) have earned a large market share in Japan and globally, respectively.

KYB competes with Showa, which is closely related to Honda, in the market of shock absorbers for motorcycles, and with JTEKT Corporation (6473, TSE 1st section) and NSK Ltd. (6471, TSE 1st section) in the steering market.

②HC Business
In the market of cylinders, which are the parts with the highest sales ratio in KYB, Chinese manufacturers and the like are extending their influences.
KYB’s competitors include Nabtesco (6268, TSE 1st section) in the market of control valves for which KYB has the advanced technology, and Nabtesco and Nachi-Fujikoshi (6474, TSE 1st section) in the market of travel motors.
In addition, the largest construction machinery manufacturer in Japan manufactures a number of parts internally.

*The sales and growth rates are forecasts for this term estimated by the company with the unit being million yen. ROE is the results from the previous term.
The aggregate market capitals are the closing price on November 29.The unit is million yen. PER (estimates) and PBR (results) are based on the closing price on November 29 with the unit being times.
The operating income of KYB is segment profit (calculated by subtracting cost of sales and SG&A from sales.)

Due to the downturn of markets, mainly the Chinese one, all companies in the list have revised the full-year earnings forecast downwardly.

【2-4 Business contents】

(1) Segments
KYB’s business segments are composed of the following three segments: the “AC Business” consisting of hydraulic shock absorbers for automobiles and motorcycles, power steering, etc., the “HC Business” including hydraulic equipment for industrial use mainly for construction machinery, and the “Others” segment which handles special purpose vehicles such as concrete mixer trucks, aircraft components, seismic isolation/mitigation oil dampers for buildings, electronics, and the like.

①AC(Automotive Component)Business
This segment consists of shock absorbers for automobiles and motorcycles, hydraulic equipment for automobiles, and other products.

Composition ratio for the first half of Fiscal Year March 2020

*unit: 100 million yen

<Major Products>
◎Automobiles
(Shock absorbers)
A shock absorber is a device that absorbs vibration of the car body, being mounted between the body and the tires together with a spring.

(Taken from KYB’s website)

Each automobile is equipped with a “suspension” which is the system that improves riding comfort and operational stability.
Suspensions have two main functions; one is, as buffers, to prevent transmission of rough road profiles to the car body and another is to set the position of the wheels and axles and press the wheels down on the roads.
Basically, a suspension is composed of a suspension arm which fixes the wheel position, a spring which supports the car weight and absorbs vibration, and a shock absorber (damper) which dampens vibration of the spring

Automobiles absorb shock caused by uneven road profiles by contracting the springs, but due to their characteristics, the springs rebound to get back to their original position after the contraction.
The top of a spring is connected to the car body and the bottom is coupled with a suspension that includes the heavy tires and brake, which results in, due to inertia, repetition of expansion and contraction of a spring in a range wider than one necessary for returning to its original position.
The role of shock absorbers is to reduce the above-mentioned excess vibration as soon as possible in order to stabilize the car body.

（Taken from KYB’s website）

The vehicle in which the shock absorber is functioning properly achieves the following:

The force that controls expansion and contraction of springs and reduce vibration is called “damping force.” The “hydraulic technology,” which KYB has cultivated and improved since its inauguration, plays a significant role in generating “damping force.”

The tube of a shock absorber contains oil with a piston moving in it.

A piston has holes through which oil passes when the piston moves following vibration, and the resistance of the oil generates “damping force.” In addition, the moving speed of pistons varies with the degree and velocity of vibration from the car body, and the faster a piston moves, the larger “damping force” becomes. This is called “damping force characteristics.”

（Taken from KYB’s website）

KYB’s shock absorbers developed based on its sophisticated technology has earned reputation from a number of automobile manufacturers worldwide, leading to the large market share as mentioned below.
Furthermore, it is said that shock absorbers usually need to be replaced after 5 years from the date of first registration or when the travel distance reached 100,000 km as they deteriorate due to various factors including travel distance and lapse of time and the function decreases.
This replacement demand, which in other words is the commercial product market, is one of the greatest business opportunities for the company.

(Steering)
It is the steering system that provides “the function of taking curves,” one of the three basic functions of automobiles including “driving,” “taking curves,” and “stopping.”

（Taken from KYB’s website）

KYB’s steering components include the “hydraulic power steering (PS)” that uses the hydraulic power assist unit to support turning of the steering wheel done by drivers and steer the tires, and the “electric power steering (EPS)” that uses the electric power assist unit composed of a motor, a controller, a torque sensor, etc. to support turning of the steering wheel and steer the tires.
The “PS” enables steering operation by a mere movement thanks to hydraulic force and is an indispensable component for safe driving because of its ability to expeditiously avert risks, whereas the “EPS” whose power source is a battery improves fuel efficiency compared to the “PS” whose power source is the engine of a car.

◎ Motorcycles
(Suspensions)
Suspensions minimize shock to the car body regardless of road surface conditions, pursuing comfort.

（Taken from KYB’s website）

*Rear cushion unit (RCU)
The company’s RCUs boost riding comfort by maintaining the posture of vehicles and absorbing vibration and shock from the road surfaces.

(Taken from KYB’s website）

② HC (Hydraulic Components) Business
The HC Business consists of hydraulic equipment for industrial use and other products.

Composition ratio for the first half of Fiscal Year March 2020

* unit: 100 million yen

<Major Products>
The mechanism of the drive system of construction machinery such as shovels consists of various parts as shown below, including control valves, piston pumps, travel motors, swing motors, and cylinders; it is the control valve, which is the “brain” of construction machinery, that controls a variety of actuators (a drive unit which converts energy to translational or rotary motion through hydraulic pressure and electric motors) to enable smooth movement of driving, turning, and bending and stretching of the arms.
KYB’s control valves have realized more advanced control by combining electric control with its special hydraulic technology.

In addition, KYB is one of the few manufacturers that manufacture all of the above-mentioned parts.
KYB’s competitive edge is that it can make suggestion to construction machinery manufacturers because its manufacturers all kinds of parts as just mentioned.

(Taken from KYB’s website)

③Special purpose system, etc. (System products and others)
This is composed of special purpose vehicles, hydraulic equipment for aircraft, system products, electronics, and such.

Composition ratio for the first half of Fiscal Year March. 2020

* unit: 100 million yen

KYB’s concrete mixer trucks have high mixing and emission performance, accounting for about 80% of the domestic market share.
It offers highly-reliable products for aircraft, including various actuators, weight-saving accumulators, and wheel brakes.

(2) Clients and sales channels
◎Clients
The following is a list of KYB’s major clients.
Its shock absorbers are mounted on about 60% of automobiles manufactured by Toyota globally. They are also adopted to about 30% and about 10% of automobiles manufactured by Nissan and Honda, respectively, contributing to KYB’s large market share.

◎Sales channels
As previously mentioned, KYB supplies its shock absorbers through 2 sales channels including the OEM production system for new vehicles and sale on the market for used vehicles.
Although sales of OEM products are higher, its commercially-available products sold as its private brand show great profitability and thus the company will expand the business to the global markets.

KYB’s commercially-available shock absorbers can be mounted on about 90% of Japanese, American, and European automobiles used worldwide today. What is behind such a high coverage rate is the strong relationships KYB has with major automobile manufacturers including Toyota.

(3) Global network
In 24 countries worldwide including Japan, KYB has 48 group companies, establishing strong global networks.

(As of the end of Sep.2019）

(4) Research and Development
(Structure)
KYB has established a global and optimum research and development (R&D) structure by setting R&D bases in 5 regions including Japan, North America, Europe, China, and Thailand.

While the R&D bases in regions other than Japan basically engage in development of model products and development for enhancing product appeal such as performance improvement and cost reduction, R&D from the long-term perspectives are carried out mainly in Basic Technology R&D Center (Sagamihara-shi, Kanagawa) and Production Technology R&D Center (Kani-shi, Gifu) in Japan and R&D of highly unique prior art, etc are performed.

In addition, the know-how about production equipment designing which has been cultivated in Production Technology R&D Center and each plant is gathered in Machine Tools Center (Kani-shi, Gifu) in order to strengthen and propel internal manufacturing of equipment, jigs, and tools for which KYB has strived to boost innovative spirit and reliability.
In Electronics Technology Center (Sagamihara-shi, Kanagawa), a system that collects technologies for designing and evaluating electronics, increases development capabilities, and conducts a series of processes ranging from product development to prototype evaluation and mass production in a smooth and prompt manner has been established.
Regarding high-functionality and systematization of its products, KYB, in addition to independent development, propels joint research and development with its clients or related equipment manufacturers. The company is also endeavoring proactively to developing advanced technology through industry-academia collaboration.

(Variation in R&D expenses)
Since the term ended Mar. 2013, the company has raised its awareness about the ratio of R&D expenses to sales, maintaining the ratio at about 2%.

(Area of focus)
KYB is propelling the development of products by dealing with performance improvement, high functionality, and systematization and considering eco-friendliness with respect to energy and environmental issues through weight saving, energy saving, reduction in environmentally hazardous substances. At the same time, it is striving to strengthen its production technology capabilities.
In addition, following the accelerated globalization, it aims to set up a strategic and global production, sales, and technological structure, including development of human resources with global outlooks and establishment of a standardized management system.

Lately, the company has focused on product development related to autonomous driving systems.

One example is the technology that integrates EPS (electronic steering) and shock absorbers.
KYB considers that the technology, which enables more comfortable and smoother driving in any road surface conditions independently of the drivers’ skills and judgment, is definitely indispensable for automobiles with the autonomous driving system.
Furthermore, KYB deems the “steering by wire” system is another technology whose importance will grow in the future.
In the conventional steering operation, movement is transmitted to the steering gear box and tires through the steering shaft, whereas the “steering by wire” system conveys steering movement via electronic signals.
Some of the system’s advantages include the capability of relieving drivers’ fatigue due to less vibration from the tires, and the capability of automatically adjusting sideslips of the car body due to strong winds which conventionally needed to be adjusted through an intentional steering operation by drivers. In addition, thanks to the “steering by wire” system, the steering wheel may not necessarily be mounted on the right front of a car, and therefore, the system’s potential for considerably changing the way automobiles are, including the design and functions, has attracted much attention.
Although several issues still exist, KYB is further brushing up the system as its unique EPS technology.

【2-5 Characteristics and strengths】

◎ Large shares in various product markets
KYB has earned a large market share of multifarious products, with the domestic share of OEM shock absorbers for automobiles being 40% and its global share being 15%, the global share of hydraulic cylinders for construction machinery being 31%, the domestic share of concrete mixer trucks being 79%

◎ Superior core technology
Such large market shares are attributed to the great trust in its products from clients as indicated by the fact that KYB has about 60% share on a global basis in Toyota Motor which vies with Volkswagen and GM for the position of the world’s largest automobile manufacturer. The basis of the clients’ trust is nothing else but the superior “hydraulic” technology that KYB has cultivated and enhanced for the past 100 years since its foundation.
KYB’s two core technologies, the “vibration control technology” represented by its shock absorbers and oil dampers for seismic isolation and vibration suppression and the “power control technology” typified by its control valves for shovels and electric power steering, have gained high reputation from clients and thus are used in diverse circumstances.

【2-6 ROE analysis】

3.The first half of Fiscal Year March 2020 Earnings Results

(1) Overview of consolidated results

* unit: million yen
*Segment profit corresponds to the operating income in the Japanese standard. Quarterly profit is the profit attributable to the owner of the parent company.
*The previous forecast was announced in Feb. 2019. From the first quarter of FY3/19, “Loyalty income” and “Income related to compensation for metal molds” which were recorded in “Other incomes” on P/L have been changed to be recorded in “Sales.”

Sales dropped due to the yen appreciation, but profitability improved considerably, allowing the company to go into the black.
Sales were 197.6 billion yen, down 2.5% year on year. The business performance was affected by the yen appreciation and the downturn of the Chinese market caused by the trade friction between the U.S. and China. The AC and HC businesses saw the drop in sales.
Segment profit rose 25.9% year on year to 11.9 billion yen. The profit of the AC business increased thanks to the improvement in profitability. The profit of the HC business declined due to the decrease of orders received.
Operating profit improved year on year from a loss of 11.3 billion yen to a profit of 4.5 billion yen, mainly because the provision for product warranties regarding the improper act, which was posted in the same period of the previous year, decreased and there was no longer the loss related to the U.S. antitrust law in the first half of this term.
As rationalization, etc. progressed after the improper act, the company posted the effects of provision for product warranties and its reversal for the cost for producing oil dampers for seismic isolation/mitigation, the expense for replacing oil dampers for seismic isolation, the cost for structural calculation, etc. and the expenses for personnel in the headquarters to deal with the improper act in the section of other expenses. The balance of provision for product warranties as of the end of Sep. 2019 is 30,837 million yen.

◎Trend in each region

* unit: 100 million yen

The sales in Europe and the U.S. declined, partially due to exchange rates. The Chinese markets of automobiles and construction machinery were sluggish.
The ratio of overseas sales decreased from 56.1% in the same period of the previous year to 54.6%.

(2) Trend in each segment

* unit: million yen
*The composition ratio for income is an income margin.

①AC Business

* unit: 100 million yen

* unit: 100 million yen

Despite the negative effect of the yen appreciation, the profitability of the shock absorber for four-wheeled vehicles (OEM) improved and fixed costs were reduced, so profit increased while sales decreased.

②HC Business

* unit: 100 million yen

* unit: 100 million yen

The reduction of fixed costs did not compensate for the decrease of orders from major clients, so sales and profit declined.

(3) Financial standing and cash flows

◎ Major BS

* unit: million yen
* “Cash, etc.” means cash and cash equivalents. “Trade receivables” means trade receivables and other receivables. “Trade payables” mean trade payables and other payables

Current assets decreased 22.7 billion yen from the end of the previous term, due to the decline in cash, etc. trade receivables, etc. Noncurrent assets increased 21 billion yen from the end of the previous term, due to the rise in property, plant and equipment, etc., and total assets declined 1.7 billion yen from the end of the previous term to 439.4 billion yen.
Current liabilities dropped 8.1 billion yen from the end of the previous term, due to the decline in trade payables, etc. Noncurrent liabilities rose 9.3 billion yen from the end of the previous term, due to the increase of other financial liabilities, etc., and total liabilities increased 1.2 billion yen from the end of the previous term to 286.7 billion yen. The total capital amount declined 2.9 billion yen from the end of the previous term to 152.7 billion yen.
As a result, the ownership ratio of shareholders of the parent company dropped 0.6 points from 33.9% at the end of the previous term to 33.3%.

◎ Cash Flow

* unit: million yen

The surplus of operating CF shrank, due to the decrease in the provision for product warranties, etc. The deficit of free CF augmented. The deficit of financing CF expanded, due to the augmentation of repayments of lease liabilities, etc. The cash position improved.

4.Fiscal Year March 2020 Earnings Estimates

(1) Full-year earnings forecast

* unit: 100 million yen
*The forecast was announced by the company. Segment income corresponds to the operating income in the Japanese standards.
*Net income is profit attributable to owners of the parent.

The earnings forecast revised downwardly. Sales dropped, but a profit earned.
The company has revised the earnings forecast downwardly. Sales are estimated to decline 5.4% year on year to 390 billion yen. The forecasted trend of the Chinese construction machinery market, the effects of the yen appreciation, etc. were taken into account. There is no revision to the estimated segment profit. Operating profit is projected to be 6.5 billion yen. The company took into account the possibility of augmentation of cost for product warranties regarding seismic isolation/mitigation oil dampers, etc. Net profit is estimated to go into the black, thanks to the decrease in expenses for seismic isolation/mitigation.
The assumed (average) exchange rates are 1 US dollar = 105 yen and 1 euro = 115 yen from the third quarter, and 1 US dollar = 106.81 yen and 1 euro = 118.21 yen for the full year (1 US dollar = 110.91 yen and 1 euro = 128.40 yen for the previous fiscal year). The dividend has not been determined.

(2) Trend in each segment

* unit: 100 million yen
*The composition ratio for profit is the income margin.

①AC Business

* unit: 100 million yen

②HC Business

* unit: 100 million yen

The profit of the AC business is expected to rise, thanks to the increase in sales volume of shock absorbers for four-wheeled vehicles. However, the growth of profit rate is estimated to be stagnant, because the automobile market will decline.
The sales and profit of the HC business are projected to decline, due to the sluggish demand for construction machinery in China and Southeast Asia and the drop in the shares of major clients in the Chinese market.

5.Progress in the 2017 mid-term management plan

(1) Basic policies for fiscal 2019

Under these circumstances, this term, which is the final fiscal year for the 2017 mid-term management plan, has the following basic policies, and the company considers this term to be a year to “overcome the painful reforms and realize a profitable structure.”

* Thoroughly diffuse corporate culture that prioritizes compliance and safety* Quickly adapt seismic isolation/mitigation oil dampers for buildings* Determine unprofitable businesses and bases to discontinue, work on restructuring and integration, specialize in core business* Develop new competitive products, and promote innovative manufacturing

As for the next mid-term management plan, the company aims to develop products mainly in fields with high profitability and a favorable business environment (high market share x significant growth) in the AC business, and plans to improve profitability in the HC business.

(Taken from KYB’s website)

(2) Activities in each business

①AC business
The company engages in the following activities, under the mid-term policy of “getting on a growth track by integrating and dismantling business footholds according to the change of regions where clients demand products, developing products with high added value, and promoting their sales.”

* Completion of drastic structural reform
The company aims for an optimal layout that matches its strategies for markets, customers, and business.

* Stabilization of the revenue base
As for the integration of global specs for shock absorbers for mass retailers, the company is preparing standard specs, and it is to be completed in fiscal 2019.
As for the improvement in productivity through innovative manufacturing of SA, the company is designing equipment specs, and will start the production of equipment in fiscal 2020.

* Sustainable growth
The company plans to keep developing products with high added value and expanding sale. As for the order receipt and sales promotion for value-added products, the company has 64 proposals, 9 business inquiries, and 7 mass production projects. The company started a presentation of new technologies for German Premium 3.
As for the increasing order receipt and sales promotion for products for SUVs, EVs, and pickup trucks, the company has received 2 business inquiries and 5 orders, and has 2 mass production projects.

②HC business
Under the mid-term policy of “securing stable sales and profit that are not affected by market fluctuations,” the company will enhance sales promotion in growing markets into which the company has not yet made inroads based on shovels.

* Completion of drastic structural reform
The transfer of control valve lines for medium-sized excavators was delayed a little, but is to be completed by the end of fiscal 2019.
With regard to the integration of motor products in Sagami Factory, the layout for restructuring in China Factory, etc. was determined, and the company started them. The integration and restructuring are scheduled to be finished in Sept. 2020.

Through such transfer and integration, the company plans to reduce the number of production lines without degrading production capacity, and actualize a structure resistant to fluctuations in production volume by making production lines flexible.

* Stabilization of the revenue base
As local and foreign-affiliated companies in the Chinese market are making rapid progress, the company actively promotes sales and receives an increasing number of orders from these manufacturers.
In addition, with regard to compact and large-sized shovels whose demand is expected to remain strong, the company is aiming to establish a structure which is less susceptible to market fluctuations by improving production capacity to maintain a high market share, etc.

*Sustainable growth
The company is promoting the sales of products in the non-construction machinery market, including valves for loaders, HST (hydraulic static transmission: a continuously variable transmission in which a hydraulic motor is connected with a closed circuit) for farm equipment in the Indian market, and gear pumps for forklifts.

6.Conclusions

The earnings forecast has been revised downwardly, but segment profit, which indicates the earning from the core business, remains unchanged. Since six-month segment profit has been stable at the level of 10 billion yen since fiscal 2017 and net profit is projected to be positive thanks to the decrease in cost for seismic isolation/mitigation, it seems to be considered in the stock market that the performance of the company has bottomed out.
However, we need to keep in mind that the business environment is not good and the AC and HC businesses have some problems to be solved. We would like to pay attention to how much the company can proceed in the second half of the year before the next mid-term management plan

<Reference 1: 2017 Midterm Management Plan>

KYB has formulated a 3-year mid-term management plan with the year 2017 (the term ending Mar. 2018) being the first fiscal year and the year 2019 (the term ending Mar. 2020) being the final fiscal year and the plan is ongoing.

(1) Numerical goals
Under the slogan of “A GLOBAL KYB – CHALLENGE & INNOVATION –,” KYB is striving to “complete drastic structural reform” in FY2017 and will make efforts to realize “sustainable growth,” “stabilization of the earning base,” and “solving managerial issues” in FY2018 and 2019.

(2) Vision for each business
① AC Business

KYB aims to increase the number of shock absorbers sold to 88 million (OEM products and commercially-available products account for 68% and 32%, respectively) for fiscal 2020 from 72 million (OEM products and commercially-available products account for 70% and 30%, respectively) in the previous term.

Points are as follows:

②HC Business

Points are as follows:

③Other
Points are as follows:

<Reference 2: Regarding Corporate Governance>

◎ Organization type and the composition of directors and auditors

◎ Corporate Governance Report
Last update date: July.16, 2019

<Basic approach>
In order to respond to the expectations of the stakeholders through realization of sustainable growth and corporate value improvement as well as fulfill the corporate social responsibility of contributing to society, it is our basic approach to pursue the development of a rapid and efficient management structure centered on the Board of Directors and establishment of fair and transparent management supervision functions and work on strengthening and enhancing corporate governance based on the following management philosophy and basic policies.

(Management philosophy)
“KYB group contributes to the society, by serving technologies and products that make people’s life safe and comfortable.”

(Basic policies)

To regain trust
　Since our company presented our values regarding appropriate cooperation with stakeholders, respect of their interests, ethics for sound business activities, etc., and stipulated the “corporate conduct guidelines” as a code of conduct each of us must observe, we have made continuous efforts to widely diffuse the guidelines in the front lines of our business activities inside and outside Japan for observance (Principle 2-2). As an example, we hold briefings on the corporate conduct guidelines, conduct various compliance education programs, have compliance education as a promotion requirement, conduct one-on-one inspection activities with applied employees, and thoroughly promote the whistleblower system. We have continued fulfilling daily work with a sense of tension and thorough awareness that the products and services we provide to society through our corporate activities and various opportunities including these are related to safety of many people’s lives, bodies, and property, and that slacking of individual work may affect the entire society, as all of us engage in quality management directly and indirectly. In addition, we have continuously worked on enhancing awareness of and observing “Bad News 1st,” which is the policy where we immediately report inconvenient news in all workplaces and try to solve the problem while it is small.
　However, as announced in the press release on Oct. 16th, 2018 or later, it was revealed that the performance inspection records for some of seismic isolation/mitigation oil dampers, which are manufactured and sold by our company, were falsified and then the products which do not comply with the performance evaluation criteria approved by the Ministry of Land, Infrastructure, Transport and Tourism (MILT) or the clients’ specs were attached to buildings.
　We deeply apologize, for all the concern and inconvenience we have caused, to everyone in society including the property owners, occupants, people related to construction companies and design firms, our shareholders, and people using the buildings.
　With determination, our company plans to make every endeavor to diffuse our corporate conduct guidelines among all “individual” employees in the front lines of our business activities inside and outside Japan for observance.

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

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

The back number of Bridge Reports (KYB:7242) and contents of Bridge Salon (IR seminars) can be seen at www.bridge-salon.jp/