Bridge Report:（8130）Sangetsu the second quarter of the fiscal year ending March 2021

Shosuke Yasuda, President	Sangetsu Corporation (8130)

Company Information

Stock Information

*The share price is the closing price on November 30. The numbers of shares issued, DPS, and EPS are taken from the financial report for the second quarter of the fiscal year ending March 2021. ROE and BPS are based on the previous term.

Earnings Trend

*Unit: million yen, yen. Estimates are those of the Company. Net income is profit attributable to owners of the parent. Hereinafter the same shall apply.

This Bridge Report provides an overview of the second quarter of the fiscal year ending March 2021.

Table of Contents

Key Points
1. Company Overview
2. The second quarter of the Fiscal Year ending March 2021 Earnings Results
3. Fiscal Year ending March 2021 Earnings Forecasts
4. Conclusions
<Reference1: Long-term Vison of Sangetsu Group 【 DESIGN 2030 】 and Medium-term Business Plan (2020-2022) 【D.C. 2022】>
<Reference2: Regarding Corporate Governance>

Key Points

• In the second quarter of the term ending March 2021, sales fell 13.1% year on year to 69.5 billion yen. Except for the space creation segment, all segments suffered a decline in sales, due to the negative impact from the COVID-19 pandemic, such as construction delays and cancellations for housing and non-housing buildings. In the interior segment, sales declined across all product categories. Gross profit margin declined 0.4 points and gross profit decreased 14.0% year on year. While SG&A also fell, operating income dropped 44.1% year on year to 2.5 billion yen, due to sales decline. On a first-half basis, sales declined year on year for the first time since the first half of the term ended March 2010, while gross profit declined for the first time since the first half of the term ended March 2008.

   

• Sangetsu revised its earnings forecasts for the term ending March 2021. Although the outlook remains uncertain amid difficulty in predicting when the COVID-19 pandemic will subside, the economy is gradually picking up due to resumed economic activity both inside and outside Japan, and earnings did not deteriorate as much as initially expected in the first half of the term. The company projects sales to fall 13.2% year on year to 140 billion yen, and operating income to fall 41.7% year on year to 5.4 billion yen. Its dividend forecasts are unchanged, still calling for an interim dividend of 29.00 yen/share (up 0.50 yen/share year on year), and a year-end dividend of 29.00 yen/share (flat year on year), for a total annual dividend of 58.00 yen/share (up 0.50 yen/share year on year). The estimated dividend payout ratio is 100.4%.

   

• The company upgraded its full-year earnings forecasts due to earnings not deteriorating as much as initially expected. The market share of wallcovering materials increased even amid a decrease in sales. However, with company-wide sales declining at mostly the same rate as the market, the company is not satisfied with the sales performance, even though the business condition is harsh.

   

• While it will take some time to recover to pre-COVID-19 levels, the company aims to expand the volumes and market share of interior materials without relying on pricing strategies, leveraging its unrivaled product appeal, delivery capabilities, and installation capabilities. It views that enhancing its design capabilities and the functionality of its wallcovering materials and other products are essential.

   

• The COVID-19 pandemic put a damper on the Long-term Vison of Sangetsu Group 【 DESIGN 2030 】 and Medium-term Business Plan (2020-2022) 【D.C. 2022】, which had just kicked off. Nonetheless, our eyes will be on the progress of measures geared toward achieving sales of 172 billion yen and an operating income of 12 billion yen in the term ending March 2023.

   

1. Company Overview

Sangetsu Corporation is the largest among all Japanese trading companies specializing in wallcoverings, flooring materials, curtains and other interior decorating products. Being a trading firm, the Company also operates as a “fabless company” that plans and develops interior decorating products. Sangetsu boasts of a business model that is able to produce stable earnings and top market share in its main product realms. The group is composed of seven companies including “Sangetsu Okinawa Corporation,” which sells interior materials in the Okinawa area, “Sangetsu Vosne Corporation”, a distributor specializing in curtains “Sungreen Co., Ltd.”, a dedicated distributor of exterior products, “Sangetsu (Shanghai) Corporation”, the company responsible for business in China, “Koroseal Interior Products Holdings, Inc.,” the United States company conducting sales of wallcovering materials for non-residential applications, “Goodrich Global Holdings Pte., Ltd.,” the company selling interior materials in Southeast Asia, and “Fairtone Co., Ltd.”, which seeks to grow orders on the back of enhanced installation capabilities.

1-1 Corporate History

Sangetsu was founded in 1849 under the original name of “Sangetsudo” to sell various traditional Japanese interior decorating products including scrolls, wall scrolls, folding screens, sliding doors, partitioning screens, and other products made of cloth and paper. Sangetsu Corporation was incorporated in 1953 by the founding family. From the latter half of the 1970s onwards, the business was expanded into Tokyo, Fukuoka, Osaka and other parts of Japan. In 1980, Sangetsu was listed on the Second Section of the Nagoya Stock Exchange, and later in 1996 its shares were also listed on the First Section of the Tokyo Stock Exchange. Currently, Sangetsu is expanding its operations into overseas markets and has established itself as a large total interior decorating product provider.
Shosuke Yasuda was appointed as the first President who is not from the founding family of Sangetsu in April 2014. He will direct the Company during its third stage of growth entitled “Our Third Founding Phase,” following on the heels of the original first phase of founding and the second phase when the company became a publicly listed corporation.

1-2 Corporate Philosophy

Sangetsu established a new corporate philosophy including a new brand philosophy in February 2016 that will enable it to take on the challenge of implementing reforms necessary to take it to its next stage of growth.
A new “brand philosophy” has been added to the “corporate creed,” “corporate mission,” and “Three Principles of Sangetsu” to create an expanded corporate philosophy.
In addition, “The Long-term Vison of Sangetsu Group 【 DESIGN 2030 】,” which was produced in 2020, specified that the company aims to become “a space creation company.” (For details, please see Reference1: Long-term Vison of Sangetsu Group 【 DESIGN 2030 】 and Medium-term Business Plan (2020-2022) 【D.C. 2022】)

<Corporate Creed>
Sincerity

<Corporate Mission>
To contribute to society through interior design and strive to create daily culture of enrichment

<Three Principles of Sangetsu>
Creative Designs, High Reliable Quality, Fair Price

<Brand Philosophy>

Sangetsu endeavors to share the joy of creating new value with all stakeholders involved in the company, including the manufacturers and users of interior products.

1-3 Market Environment

◎ Overview
The market environment for the main wallcoverings and flooring materials is strongly influenced by trends in the Japanese construction market. Declines in new housing start arising from declining population and changing family structures within Japan, and deflationary trends have depressed sales of the interior products market as shown in the graph below.

At the same time, the graph below shows the correlation between sales of Sangetsu relative to sales of the Japanese interior market and new housing starts (Ministry of Land, Infrastructure, Transport, and Tourism data).
The trends for both Sangetsu’s sales and the Japanese interior market have been closely linked to new housing starts. After the Lehman Brother’s Shock, however, this link has been overcome with Sangetsu’s sales reaching consecutive record highs despite the sluggish trends in new housing starts and the weak overall market.

Besides M&A, this strong recovery can be attributed to Sangetsu’s efforts to cultivate business in the non-residential realm in addition to private housing.

According to “Outlook for investment in construction in 2019” published by the Ministry of Land, Infrastructure, Transport and Tourism, both the investment in housing construction and the investment in non-housing construction in the private sector have been recovering since the bankruptcy of Lehman Brothers, but the investment in housing construction is still around 80% of the level in 2000, while the investment in non-housing construction is over 30% higher than the level in 2000.
The total floor area of newly built offices and shops had been healthy for several years, but started declining in fiscal 2018, so it cannot be said that it is healthy.

According to “Outlook for Investment in Construction based on a Construction Economy Model” released by Research Institute of Construction and Economy (on October 28, 2020), The growth rate of investment in private, non-residential buildings increased 11.8% in FY 2017, 1.5% in FY 2018 (estimate), and 0.5% in FY 2019 (estimate), but is expected to fall 5.4% in FY2020 (estimate) and 3.4% in FY 2021 (estimate). Therefore, the growth is estimated to become sluggish. Investment in accommodation facilities and shops is expected to decrease due to the impact from the COVID-19 pandemic.

The floor area of offices to be constructed increased 10.3% in FY 2016, but dropped 4.6% in FY2017, and decreased 3.9% in FY2018. It recovered in FY 2019, growing 2.3%, but is expected to fall sharply by 10.8% in FY 2020 (estimate). Said floor area is estimated to recover in FY 2021 (estimate), growing 9.8% thanks partly to the easy year-on-year comparison, but the decline trend looks set to continue. According to the given Outlook, while investments in large-scale projects, etc., centered in metropolitan area will continue, but new orders are beginning to decrease, due in part to a rise in vacancy rates.
The floor area of shops to be constructed has continued to fall since FY 2014. It decreased 20.5% in FY 2019, and is projected to show a double-digit decline in FY 2020 (estimate), down 19.9%. In FY 2021 (estimate), said floor area is not expected to stage a recovery, staying flat. The Outlook says, that amid a medium/long-term downturn, the floor area of shops to be constructed is expected to drop even further.

For the above reasons, the residential and non-residential market environments are currently harsh, but there is steady demand for renovations in the non-residential market, so the company is intending to meet the demand mainly through the contract sales department. They are also making efforts to develop overseas segment, pursuing further growth by reinforcing the advantages they have over other companies.

◎Competitors
In addition to Sangetsu, there are eight publicly traded competitors that operate in the interior decorating market.

*Unit: million yen, times. Estimates are from those of the respective companies this term. Total market capitalization, PER and PBR are based upon the closing share price of each stock on November 30, 2020. ROE is based on the previous year. The estimate of. Suminoe Textile Co., Ltd. is still to be determined.

1-4 Business Description

The main businesses include planning, development, and sales of wallcoverings, flooring materials, curtains, upholstery and other interior products. Sangetsu takes a “fabless operation,” which does not maintain any manufacturing facilities, and it is not a typical trading firm as all the products it sells are planned, designed and developed in-house. Sangetsu also provides exterior products through its subsidiary. The overseas segment is operated by three subsidiaries located in the U.S., China, and Singapore.
In the term ending March 2021, the Interior segment will be divided into the Interior segment and the Space Creation segment, increasing the total number of segments to 4. (In the graph, the new segments are used for the term ended March 2020. The sales and operating income shown in the following passages are those of the old segments.)

①“Interior Segment”
(FY3/20: Sales and Operating Income of ¥125,381 million and ¥9,518 million respectively)

◎Main Products

Sangetsu boasts a diverse product lineup with about 12,000 different products in total. There are about 4,300 different wallcovering products alone. Sample books are updated every two years (those for curtains are updated every three years), with an existing product replacement rate for wallcoverings of 30% to 40%.
Disposal of outdated products leads to producing wastes, but because keeping a sample book up-to-date is necessary to enhance customer satisfaction, the company has maintained a balance between efficiency and freshness through the company’s energetic engagement and long-cultivated know-how.

◎Marketing Structure
In addition to the headquarters located in Nagoya, Sangetsu maintains 8 regional offices and 50 marketing offices throughout Japan, with 8 of these marketing offices also hosting showrooms as important marketing offices.

The downstream interior finishing process includes the final delivery of products, booking of sales, and receipt of cash. The main customers are interior construction companies and interior and building material shops that are serviced through dealers. Furthermore, public relations and advertising for products at the start of the process are also very important.
By the time the house or building is completed, a large number of players such as the client (owner), design office, design office, general contractor, subcontractor, house maker, etc. are involved, and the interior is finally selected from design and function. In many cases, decision making starts upstream.

Therefore, Sangetsu conducts public relations and advertising for its products through its sample books, showrooms, and others. In addition to these “passive” marketing activities, Sangetsu also conducts “proactive” marketing of its products through its Contract Sales Department and its 700-marketing staff to provide and gather information, and propose products to clients.
While the main marketing efforts are conducted through dealers, Sangetsu also conducts direct marketing to customers in the Nagoya and surrounding Chubu area, and the number of its directly accessed customer totals 6,000 in these regions alone. While the number of customers dealt with through dealers is not known, the total number of customers is estimated to amount to several tens of thousands nationwide.

◎Distribution Structure/Delivery System
Sangetsu maintains a network of 11 distribution centers nationwide. Most products are normally stocked at the Company’s distribution centers in Tokyo, Nagoya, Osaka and Fukuoka, with the number of products shipped from these centers surpassing 60,000 per day, and the out-of-stock ratio is 0.9% in average.
Sangetsu seldom asks their clients for backordering because the out-of-stocks are covered by surrounding distribution centers immediately.
Sangetsu’s nationwide distribution network makes “Just-in-Time” provision of products to match the interior construction schedules of its clients possible. Products are sourced from a wide range of about 100 supplier companies.
For streamlining logistics, we are constructing logistics centers, and plan to build and integrate Kansai LC equipped with labor-saving equipment to secure the sustainability of services and shorten lead time further by the end of 2020. The company will install the same equipment in other LCs mainly in the Tokyo Metropolitan Area.

As for delivery, the company is improving its own delivery system, to cope with the increase of logistics costs.
In the Tohoku region, the company developed a regional delivery system, and in other regions, too, the company will establish regional delivery systems and develop a system for delivering heavy cargoes mainly in metropolitan areas.

②“Exterior Segment”
(FY3/20 Sales and Operating Income of ¥16,079 million and ¥642 million)
Sungreen Co., Ltd., which was turned into a subsidiary in 2005, sells doors, fences, terraces and other exterior products within Japan.
In the new Medium-term Business Plan, the company will concentrate on the landscape business mainly in the Tokyo Metropolitan Area.

③“Overseas Segment”
(FY3/20 Sales and Operating Income of ¥19,804 million and ¥ -932 million)
This segment comprises 3 companies, i.e., Koroseal Interior Products Holdings, Inc. acquired in November 2016, Sangetsu (Shanghai) Corporation established in April 2016, and Goodrich Global Holdings Pte., Ltd. acquired in December 2017.

④“Space Creation Segment”
This is the segment added in the term ending March 2021.
Based on the designing capability of Sangetsu and the interior finishing capability of Fairtone, the company incorporates the new abilities, which is part of the company's soft power, to design spaces, come up with, envisage, and propose spaces, give consultation services, etc. as well as comprehensive skills for woodworking, lighting, electricity, etc., and strengthens the capability of managing installation works, to create and offer the most appropriate spaces for customers.

1-5 ROE Analysis

In the Medium-term Business Plan (2020-2022) 【D.C. 2022】 which was started this term, the goal is to achieve ROE of 9% in the term ending March 2023.
It is indispensable to take measures for improving profitability.

1-6 Characteristics and strengths

①Business Model Capable of Yielding Stable Earnings
Sangetsu is a pioneer in the realm of “fabless operation” with no in-house manufacturing facilities and therefore has lower fixed expense burdens because they do not have to carry facilities for the manufacturing process. Besides, the Company boasts of over 12,000 products, sourced from over 100 suppliers, supplied to several tens of thousands of customers, which diversifies risk in many ways. Moreover, while Sangetsu may be considered as an economically sensitive company as its business and earnings performances are closely linked to trends in the construction market, the Company has never posted losses in consolidated financial statements since its founding.

②“Creating,” “Proposing,” “Providing”
“Creating”
While the actual manufacturing of products is not conducted in-house, Sangetsu performs the planning, design and development process internally. The Company launched its original wallcoverings for the first time in 1965. Since the establishment of its fundamental values in 1973, Sangetsu has continuously made active investments for “creative designs,” one of the three principles of the Company. 25 in-house designers develop new and original versions of products based upon numerous basic designs. The cultivation of designers responsible for various products is done through participation in foreign exhibitions, communication with marketing staff, and discussions with outside design consultants as part of their on-the-job training. Furthermore, Sangetsu maintains a policy of actively taking the perceptions and opinions of younger designers and staff into consideration. Sangetsu also boasts of an overwhelming number of products of about 12,000 that far exceeds the number of products of its competitors. In addition, the Company conducts revisions of its products on a regular basis every 2 to 3 years with more than 30 types of sample books, which surpass by far those of its competitors.

(Source: the company)

“Proposing”
Nearly half of all employees or about 690 staffs work in marketing functions at Sangetsu, the largest marketing function within the industry. These marketing staffs are assigned to 50 offices and 8 branches located throughout Japan and conduct proposal-based marketing to clients. Sangetsu also staffs its 8 showrooms with about 110 employees. In addition, about 60 interior designers create design boards that combine samples of various products for customers to use when choosing interior products. This high level of proposal-based selling capability is unmatched within the industry and sets Sangetsu apart from its competitors.

(Source: the company)

“Providing”
As mentioned earlier in this report, Sangetsu normally maintains inventories of all of its products so that they can be provided on a “Just-in-Time” basis using their nationwide distribution network. However, the Company is required to conduct speedy processing techniques as product orders are placed so that loss rates can be limited to avoid the maintenance of excess inventories and reduced efficiencies. Generally, wallcoverings are produced in rolls as long as 50 meters, and for example, Sangetsu cuts the rolls into a 30 meters and ships it when a 30 meters order is placed for shipment. The remaining segments of wallcoverings are then cut to match other orders to eliminate losses. This type of custom-made cutting technology has been cultivated over the long years of experience in the interior decorating business and is an important factor that differentiates Sangetsu from its competitors.

(Source: the company)

2. The second quarter of the Fiscal Year ending March 2021 Earnings Results

(1) Earnings Results

*Unit: million yen

Sales and profit decreased
Sales fell 13.1% year on year to 69.5 billion yen. Except for the space creation segment, all segments suffered a decline in sales, due to the negative impact from the COVID-19 pandemic, such as construction delays and cancellations for housing and non-housing buildings. In the interior segment, sales declined across all product categories. Gross profit margin declined 0.4 points and gross profit decreased 14.0% year on year. While SG&A also fell, operating income dropped 44.1% year on year to 2.5 billion yen, due to sales decline. On a first-half basis, sales declined year on year for the first time since the first half of the term ended March 2010, while gross profit declined for the first time since the first half of the term ended March 2008.

(2) Business Segment Trends

*Unit: million yen. Ratio to sales of operating income represents the operating income margin. The fabric materials category of sales includes both curtains and upholstery. Due to changes in reportable segments, figures for the second quarter of the term ended March 2020 have been retroactively adjusted to reflect these new segments.

①Interior segment
Sales and profit declined, with sales falling for all products.
However, operating income exceeded levels seen in the first halves of the terms ended March 2018 and March 2019, backed by gross profit improvement centered on wallcoverings in recent years, and efforts to curb SG&A.

<Wallcovering Materials>
Sales fell due to the shrinkage of the market caused by the COVID-19 pandemic.
However, sales of mass-produced wallcoverings, SP, remained solid, and those of the sample book for glass films, CLEAS grew. In addition, the sample book of certified fire-proof wallcoverings, FAITH, was distributed not only in the non-housing market, an area the company has been targeting for a while, but also in the housing market, as it met market needs for antiviral wallcoverings. Although sales dropped, the market share increased thanks to the shipment volume exceeding the declined shipments across the entire industry.

<Flooring Materials>
Sales decreased, due to the shrinkage of the non-housing market centered on accommodation facilities, offices, etc., and the construction cancelations/delays. However, with people’s movements resumed following the lifting of the government’s state of emergency, the housing and non-housing renovation markets appear to have recovered slightly.
Sales of the sample book for PVC tiles, FLOOR TILE , the sample book for cushion vinyl sheets for home, H Floor, and non-slip vinyl sheets, Non-Skid, remained solid. Also, sales of home-use carpet tiles, Style Kit, which can be easily fitted in homes, grew on the back of increasing needs for a better living environment due to people staying at home.

< Fabric Materials >
Sales decreased due to the shrinkage of the new housing market.
The sample book for housing curtains, AC, continued to drive sales, and for the sample book for upholstery, UP, deliveries progressed smoothly, particularly for highly functional vinyl leather products. Also, amid heightened needs for safety and hygiene, the company published the sample book, Contract Curtains, geared toward various types of facilities, which contains products with antiviral and antibacterial properties perfect for medical and welfare facilities. In addition, sales also increased for the group company Sangetsu Vosne’s e-commerce business specialized in curtains, WARDROBE sangetsu, boosted by the stay-at-home economy.

<Others>
Sales fell. Fees for installation work and sales of adhesives are included.

②Exterior Segment
Sales and profit declined.
As there are no longer the temporary demand before the consumption tax hike, or the demand for recovery after the natural disaster in the first half of the previous term, and the entire industry is shrinking due to the COVID-19 pandemic, sales of mainstay products such as fences and carports were sluggish, resulting in a decrease in fees for installation work. Meanwhile, sales of delivery boxes, post boxes, small storage spaces, etc. were relatively solid thanks to heightened e-commerce demand and demand from people staying home. The company also saw progress with deliveries for orders for large-scale facilities, etc., made prior to the spread of COVID-19. Also, as outlined in the medium-term business plan, they carried out measures to enhance its delivery and installation capabilities, and to develop human resources.

③Overseas Segment
Sales fell and operating losses widened. The market shrunk sharply, causing competition with rivals to intensify.
Group companies’ earnings for January to June 2020 are included in the first half earnings results for the overseas segment.

For Koroseal, which targets the North American market, the impact on earnings results from the COVID-19 pandemic was limited in January to March 2020, but worsened in April onward. However, the company worked to continue providing a stable supply of products as well as to improve its product appeal, quality, and production efficiency through full-scale operation of its new wallcoverings manufacturing facility.
Regarding sales activities, the company aimed to expand its target markets and shift away from its previous focus on the hospitality market. Also, in terms of synergies with Sangetsu, the company made efforts to expand sales of the adhesive-attached decorative film, REATEC, in the U.S. market.
SG&A was reduced by 870 million yen. 350 million yen of this was associated with year-on-year improvement stemming from the booking of impairment losses for goodwill and intangible assets at the end of the previous term. The company also reduced the number of employees from 556 to 471, at the end of 2019.

Amid restrictions on sales activities and construction delays/cancelations due to the COVID-19 pandemic, Sangetsu (Shanghai) Corporation, which targets the Chinese market, worked to carry out sales activities geared toward increasing small-lot transactions for wallcovering and flooring materials, as well as for curtains and upholstery.
Sangetsu (Shanghai) Corporation also moved forward with its partnership with Goodrich Global Holdings Pte., Ltd. in China, laying the groundwork for reorganization and structural improvement of businesses in China.

At Goodrich Global Holdings, which operates business in the Southeast Asia market, amid the harsh business environment due to the lockdowns at many Southeast Asian countries, they have made progress in revisioning costs through labor reduction in Singapore, Malaysia, and China, integration of sales branches in Malaysia, and such.
Also, headway has been made with bolstering strategic locations such as Sangetsu Goodrich Vietnam (joint investment by Sangetsu and Goodrich; started operations in April) and Sangetsu Goodrich Thailand (100% owned by Goodrich; started operations in November) in the pursuit of an optimized business model and localized operations suited to the products and markets of each country.

④Space Creation Segment
Sales grew while profit decreased.
At Fairtone, new building construction in the contractor market and support construction, etc. for major interior contractors progressed steadily, driving sales, but repair works, which are more easily impacted over the short term, suffered a decrease in the amount of work from the end of May due to the COVID-19 pandemic.

Meanwhile, in Sangetsu’s space creation segment, the company made headway with moves to strengthen personnel involved in design and construction management, and establish a sales structure, while also carried out sales operations for the renovation market in the non-housing field, centered on offices, utilizing the resources built up through operations in the interior segment.
While sales increased, this sales growth pushed up overhead expenses, causing profit to decline.

(3) Financial standing and cash flows

◎Main BS

*Unit: million yen.

While receivables decreased, marketable securities and inventories increased, and current assets increased 900 million yen from the end of the previous term. Noncurrent assets remained almost unchanged, and total assets increased 1 billion yen from the end of the previous term to 165.1 billion yen.
Long-term debt increased while payables decreased, resulting in a 400 million yen increase in total liabilities from the end of the previous term to 70.3 billion yen.
Net assets increased 500 million yen from the end of the previous term to 94.7 billion yen. As a result, capital-to-asset ratio increased 0.1 points from the end of the previous term to 56.9%.
The balance of long- and short-term debt increased 6 billion yen from the end of the previous term to 26.5 billion yen.

◎Cash Flow

*Unit: million yen.

The surplus in operating CF and free CF shrank due to a decrease in net income before tax and other adjustments.
Financing CF turned positive due to the increase in long-term debt. The cash position improved.

◎Cash Conversion Cycle
The cash conversion cycle increased by 2.9 days from the same period of the previous year. The receivables turnover period and the payables turnover period decreased 4.4 days and 1.6 days, respectively, but the inventory turnover period increased 5.7 days.

3. Fiscal Year ending March 2021 Earnings Forecasts

(1) Earnings Forecasts

*Unit: million yen. Estimates are those of the Company

Revision of the earnings forecasts
Sangetsu revised its earnings forecasts for the term ending March 2021. Although the outlook remains uncertain amid difficulty in predicting when the COVID-19 pandemic will subside, the economy is gradually picking up due to resumed economic activity both inside and outside Japan, and earnings did not deteriorate as much as initially expected in the first half of the term. The company projects sales to fall 13.2% year on year to 140 billion yen, and operating income to fall 41.7% year on year to 5.4 billion yen. Its dividend forecasts are unchanged, still calling for an interim dividend of 29.00 yen/share (up 0.50 yen/share year on year), and a year-end dividend of 29.00 yen/share (flat year on year), for a total annual dividend of 58.00 yen/share (up 0.50 yen/share year on year). The estimated dividend payout ratio is 100.4%.

(2) Business Segment Trends

*Unit: 100million yen. In the term ending March 2021, the Interior segment business was divided into the Interior segment and the Space Creation segment. The figures for the term ended March 2020 are those of the new segments.

The company raised its sales estimates for the interior segment and the space creation segment, while downwardly revising its forecast for the overseas segment.

(3) Impact from the COVID-19 pandemic and future outlook

① Response
The basic policies are to give top priority to the safety of customers and employees, to receive orders without running out of stock, and to maintain the system of shipping nationwide.
The company recognizes that as the company with the top market share, it is their responsibility to ensure that ordered products are delivered to customers without fail, and that construction sites operate normally.

Also, in the interior industry, where face-to-face interviews are the norm, it will take measures to prevent the spread of COVID-19, such as promoting telecommuting, online meetings, and holding webinars, they are exploring efficient and effective sales activities utilizing telecommuting.

② Recovery outlook for each market
Based on the order situation for house makers and house builders (comparison with the same month of the previous year), it is expected that deliveries of the company's products will turn positive from January-April 2021 for houses built for sale, and from March-July of the same year for custom-built homes.
Renovations are expected to recover relatively sooner than that.
Meanwhile, the non-housing market is expected to remain in the negative range due to structural issues.
Under these circumstances, based on overall market trends, the company thinks that sales in the interior segment may exceed the pre-COVID-19 levels seen in the term ended March 2020, from the first half of FY2022 to the first half of FY2023 (April 2022 to September 2023).
This will represent a swifter recovery than that following the Global Financial Crisis.

Meanwhile, the non-housing market in United States, which deteriorated sharply from March 2020 due to the impact from the COVID-19 pandemic, bottomed out in April 2020, and has been on a recovery trend since September. The overseas segment (North American market) is also expected to recover from the next term.
In Southeast Asia, markets in Thailand, Vietnam, and Singapore are recovering.
In China, sales turned up year-on-year in the July-September quarter, marking a swift but modest recovery.

4. Conclusions

The company upgraded its full-year earnings forecasts due to earnings not deteriorating as much as initially expected. The market share of wallcovering materials increased even amid a decrease in sales. However, with company-wide sales declining at mostly the same rate as the market, the company is not satisfied with the sales performance, even though the business condition is harsh.
While it will take some time to recover to pre-COVID-19 levels, the company aims to expand the volumes and market share of interior materials without relying on pricing strategies, leveraging its unrivaled product appeal, delivery capabilities, and installation capabilities. It views that enhancing its design capabilities and the functionality of its wallcovering materials and other products are essential.
The COVID-19 pandemic put a damper on the Long-term Vison of Sangetsu Group 【 DESIGN 2030 】 and Medium-term Business Plan (2020-2022) 【D.C. 2022】, which had just kicked off. Nonetheless, our eyes will be on the progress of measures geared toward achieving sales of 172 billion yen and an operating income of 12 billion yen in the term ending March 2023.

<Reference1: Long-term Vison of Sangetsu Group 【 DESIGN 2030 】 and Medium-term Business Plan (2020-2022) 【D.C. 2022】>

Long-term Vison of Sangetsu Group 【 DESIGN 2030 】
From 2014 when Mr. Yasuda, who is not from the founding family for the first time, was appointed as president, President Yasuda has made various reforms to the management structure, governance structure, the way of working, communication with the outside, etc. and as a result, the company has transformed and profoundly changed.
However, as for businesses per se, the business model of selling interior materials has not changed, and the company recognizes the need to reform this business model itself.
In order to do this, the company made its vision clear and recognizes the need to continue to steadily implement different strategies while keeping in mind its future goals, thus set Long-term Vison of Sangetsu Group【 DESIGN 2030 】.

【 DESIGN 2030 】stands for designing the ideal state of the company in 2030.
The respective letters of “DESIGN” represent the initials of various policies the company aims to follow.

(Source: The company)

(1) Goal: “a space creation company”

Based on the company’s expertise in design, marketing, and distribution of its current things and products, it will conceptualize and design new spaces, develop its ability to make proposals, and aim to be a company that creates new spaces.

(2) Steps for the long-term vision

To achieve the long-term vision, the company will set the basic management policy as “design-driven management” and aim to improve its brand value and transform its business with designs. Further, it will recognize “diverse professionals” and “cooperation and utilization for business-related data” as the business and management base in order to be “an organization where diverse professionals with on-site capabilities fulfill” and also “use DATA to increase the efficiency of business and transform business.”
As for the main functions, the company aims to make a complete about-face from the function of selling items to the function of selling services.
Moreover, the business area will be the Pacific Rim region primarily in North America, Japan, China, and Southeast Asia.
Thanks to this approach, the business will shift directions to “a space creation company” while working towards creating social value.

(Source: The company)

(3) Design-driven management

The concept of Design-driven management is as below.

“Sangetsu Group will aim to increase the value we can provide through designing to transform our business.

Not only pursuing the beauty, function and coordination of products and spaces themselves, we will conceptualize, design and propose the interaction of people and space by considering the way people spend time, live, experience and act.

In addition to designing entities and space, we will increase our brand value by designing and proposing experiences, and will aim to transform, from the company that sells things, into the company that creates spaces, and proposes and realizes matters.”

(4) Social value for which the company strives

The company sets its goals for social values as “contributing to achieving an inclusive, sustainable, and enjoyable society.” Moreover, it sets SDGs for each of the “Inclusive,” “Sustainable,” and “Enjoyable.”

An equal and healthy inclusive society   Sangetsu Group will contribute to realize an equal, healthy and inclusive society, where diversity of gender will be respected, through creation of healthy and comfortable spaces.
The global environmental protection with sustainable society   Sangetsu Group will minimize our environmental footprint of the supply chain as a whole and will contribute to realize a sustainable society that will protect the global environment, through creation of spaces usable for the long term and utilization of stock buildings.
A more affluent and enjoyable society   Sangetsu Group will contribute to realize a more enjoyable society by promoting equal, safe, reassuring and efficient ways of working which respect human rights, through creation of spaces appropriate to various cultures and living.

Regarding the third aspect: “enjoyable,” based on the basic concept of SDGs: “to not leave anyone behind,” the company considered its businesses and took one step further setting realizing more prosperous and more enjoyable society as one of the social values it will provide.

(5) Numerical targets

For the term ending March 2030, 10 years from now, the company aims to achieve “sales of 225 billion yen and operating income of 18.5 billion yen.”

Medium-term Business Plan (2020-2022) 【D.C. 2022】

The 3-year medium-term business plan, 【 Design & Creation D.C.2022 】 is the first step towards achieving this long-term vision.

(1) Review of the previous medium-term Business plan “PLG2019”:

*The achievement of quantitative goals

(2) Outline of the Medium-term Business Plan (2020-2022) 【D.C. 2022】

①Positioning and basic policies
【D.C. 2022】 is the medium-term business plan for 3 years and serves as the first step of the long-term vision “DESIGN 2030.”
In the 3 years, the company aims to become a space creation company. Its four basic policies are “expand earnings through qualitative growth of core business,” “growth of profitability in next-generation businesses based on resources of the core businesses,” “strengthen management and business foundations,” and “achieving social value.” The company aims to grow by “expanding the revenue from the core business” and “making next-generation businesses profitable.”

Basic policy

(Source: The company)

②Numerical goals of sales and profit
They aim to achieve “sales of 172 billion yen and operating income of 12 billion yen in the term ending March 2023.”
As for segments, the Interior Segment will be dominant in terms of value, but the key points are the bottoming-out and recovery of overseas segment and the launch of the new segment: the space creation segment.

*Unit: 100 million yen. CAGR was calculated by Investment Bridge.

③Outline of each basic policy
③-1 Expand earnings through qualitative growth of core business
◎Interior segment
*Market environment
The housing market (new construction and renovation) and the non-housing market (new construction) are on a plateau as a whole, and their quantitative growth cannot be expected, but the market of renewal of non-housing facilities is expected to expand due to the increase of real estate in stock.

*Basic strategies in 4 markets

*Three measures
(1) Enhancement of design capabilities and strategic purchasing
◎Advancing and strengthening design capabilities
In addition to strengthening the capability of designing products, the company will improve the capabilities of designing spaces and services.
Through the mutual interaction among the three designing capabilities, the company will enhance the comprehensive designing capability step by step.

As for designs, the company has proposed product designs in the product development section of each business department, non-housing space designs in the interior design division, coordination mainly related to housing in showrooms, and a variety of space designs in the space creation business department. Fairtone, too, recruited designers, to increase construction works with good designs.
The marketing section, too, has discussions with design firms, designers, and interior coordinators about designs, and gleans information.

Like this, respective sections of the company recognize design as an important issue, and will strive to improve the designing capability in multiple manners. As the base of their efforts, the company will clarify company-wide design strategies and set them while taking into account designs, functions, and costs demanded by the market, to improve the entire designing capability step by step.

◎Strategic purchasing
The product lineup is composed of a wide array of products whose quantities, designs, and transaction lots vary.
Of these, for products that have plentiful designs and products that are traded in small lots, it is important to emphasize the diversity of designs, diversify suppliers, and receive proposals for designs from various suppliers.
For products whose designs and diversity are limited and that are traded in large lots, it is considered essential to enhance cost competitiveness and cement the alliances with specific manufacturers and suppliers. So, the company will clarify procurement policies and promote strategic procurement according to the characteristics and situations of products.

(2) Expansion and Upgrading of our Service functions
The company’s processes for receiving orders, shipping and delivering products are as follows:

Order taking (from interior finishing firms via distributors) → Shipping (to distributors) → Delivery (to construction sites from distributors or directly from the company)

The lead time from receipt of orders to shipping is usually 2 to 4 hours, during which products are prepared and shipped in units of 10 cm or a few sheets.
Based on this shipping, the company performs quick delivery to interior finishing firms and clients within the day of ordering or the following day.
Meanwhile, it takes several weeks or months for a manufacturer (supplier) to produce products after receiving an order from the company.

Under these circumstances, it is important to offer services of receiving orders and shipping and delivering products promptly, but the amount of work of interior finishing firms, which are clients, varies considerably from season to season about installation, and the work of interior finishing firms sometimes becomes excessive or insufficient.
When their schedules are tight, they call for support for construction, and in response to such demand, distributors or the company often support construction directly. This is considered as an important function.
While considering that the company’s services and businesses can be strengthened by enriching and improving comprehensive services of receiving orders, storing, shipping, and delivering products, and installing them amid the shortage of manpower, it is necessary to implement measures during the period of this medium-term business plan as well.

(Order taking)
The rate of employees’ involvement in receiving orders dropped considerably from 78.7% through the adoption of business process outsourcing (BPO) during the period of the previous medium-term business plan, and further declined to 13.3%, and BPO ratio decreased to 46.4%, due to the expansion of the ratio of order receipt with EDI and online order receipt.
During the period of the ongoing medium-term business plan, the company will raise the ratio of online order receipt from 40.3% to 62% and decrease BPO ratio and employees’ involvement ratio to 32% and 6%, respectively. The company is also thinking of utilizing AI.

(Shipping)
During the period of the previous medium-term business plan, the company renewed, newly established, and integrated shipping equipment nationwide.
By the end of 2020, the company will establish and integrate Kansai Logistics Center (LC) equipped with labor saving equipment. In order to secure the sustainability for inventory and shipping, the company plans to install labor-saving equipment in the Tokyo Metropolitan Area and the Chubu Area.

(Delivery)
During the period of the previous medium-term business plan, the company established delivery systems mainly in the Tohoku region. The company will upgrade local delivery systems in northern Kanto, Shizuoka, Hokuriku, Kansai and Kyushu regions, and develop systems for delivering heavy items mainly in metropolitan areas.

(Construction)
In Fairtone, about 650 engineers are engaged in installation work. In addition, combined with the engineers entrusted by Sangetsu, partner firms, etc., the company has about 1,000 interior finishing engineers at the moment.
During the period of the ongoing medium-term business plan, the company will strengthen and upgrade the interior finishing capability, improve comprehensive skills, and enrich the network for interior finishing.

(3) Deepening collaboration with distributors and strengthening sales structure
The ratio of sale via distributors rose from 57.7% in the term ended March 2016 to 65.4% in the term ended March 2020.
Since it is important to cement the cooperation with distributors, in order to streamline business operations and expand sales quantity, the company plans to strengthen the cooperation with distributors quantitatively and qualitatively, and increase the ratio of volume of sales via distributors to 70% in the term ending March 2023, which is the final year of the plan.
Furthermore, the company will aim to streamline operations and divide labor by sharing and utilizing information and data.

As for the selling system, which needs to be improved, the company will allocate employees mainly to activities related to specifications in the non-housing market, without changing the current number of sales staff members: 850 to 890, to improve the competitiveness of specifications in the non-housing market.
The company will also strive to enhance marketing while utilizing the designing capability.
The interior design division, which is in charge of marketing designs targeted at non-housing clients, proposes space designs and custom-made designs mainly for non-housing facilities, while the show room, which is a foothold for marketing designs targeted at builders, house makers, and remodeling contractors, concentrates on the proposals for design coordination mainly for housing.

◎Exterior segment
They will enhance marketing in the downstream market, expand their business in the Tokyo Metropolitan Area, and enter the landscaping field.
In addition, they will improve the system for delivering mainly heavy objects and installation work, as the functions of the existing businesses.

③-2 Growth of profitability in next-generation businesses based on resources of the core businesses
*Overseas segment
In each country, they will develop a robust management base, pursue optimal models, localize their services thoroughly, and enhance brand development and the product portfolio.

◎Build a solid management foundation
The company will invite new management staff, improve personnel, and establish new business bases mainly for Koroseal, which posted the impairment in the previous term, and Goodrich, which is a foothold for cultivating the huge Southeast Asian market.

(Source: The company)

◎Pursuit of the optimal business model and full commitment to localization, and strengthening branding and product portfolio
While pursuing optimal models, the company will localize services thoroughly, because local power is essential for the interior material business.
For improving the product portfolio, the company will enhance brand development while upgrading products demanded in the market of each country.
As for brand development, the company will reinforce the Koroseal brand in the U.S., the Metro brand in Canada, the Sangetsu and Goodrich brands in China, the Goodrich brand in Hong Kong, the Goodrich and Sangetsu brands in Vietnam and Thailand, and the Goodrich brand in Malaysia and Singapore.

(Source: The company)

*Space creation segment
The company aims to become a space creation company, first with the initiatives of the space creation segment, and the company also aims to operate businesses in other sections with company-wide efforts.

Sangetsu possesses plenty of knowledge and strengths in the existing core businesses, including the customer base (such as hotels, accommodation, offices, commerce, and welfare), the capability of designing in cooperation with about 60 staff members of the interior design division and external interior designers, who propose non-housing space designs, and Fairtone’s capability of interior finishing. The role of the space creation section is to acquire and improve the capabilities of designing spaces, coming up with, envisioning, and proposing space designs, and giving consultation services, comprehensive skills for wood-crafting, lighting, and electricity, and specialized skills for strengthening construction management, to create and offer optimal spaces for customers and expand the space creation business.

③-3 Strengthen management and business foundations
◎Strengthening business execution capabilities and efficiency
The company will improve the capability of executing business by enriching education and training programs, expanding the recruitment of advanced specialized personnel, strengthening on-site operation skills and specialized abilities, and promoting employment of a variety of staff, and also streamline business operations by reforming them, adopting constant telework, and promoting regular, close communication inside the company.
The company will also shift to the personnel and salary systems emphasizing the duties, for strengthening on-site operation skills and specialized abilities.
In addition, the company will keep conducting health-oriented management, increasing engagement, and promoting the employment so that all employees’ abilities will be utilized.

◎The establishment of a system for the advanced utilization of data
As the company receives orders for a lot of various products from a lot of various customers and ships enormous amounts of products, a huge volume of various data is emerging on a daily basis.
These data can be classified into “data related to order receipt,” “data related to shipping and delivery,” and “data related to marketing.” Among them, “data related to order receipt” and “data related to shipping and delivery” are obtained in cooperation with distributors, etc., at the moment but the company has not obtained the data related to shipping and delivery of distributors.
There is no structure for obtaining data related to marketing.

In order to visualize and streamline business operations utilizing data, conduct effective marketing, and enable business transfer in each business in the future, it is necessary to obtain new data through various efforts, organize them, transform marketing data, which are not organized, into qualitative data, and coordinate and analyze data.
The goal is to establish a system for utilizing data steadily in an advanced manner step by step during the period of the ongoing medium-term business plan.

③-4 Achieving social value
The company will extract ESG issues in 4 groups: the earth environment, human capital, social capital, and governance, design and execute measures after clarifying materiality.
The company will extract ESG issues and execute measures, while linking them with pursuing three values specified in the long-term visions: “Achieving social value,” “Inclusive, Sustainable, Enjoyable,” and “Enjoyable to everyone forever.”

③-5 Quantitative goals
The company sets quantitative goals (KPIs) regarding the three points: its economic value; social value; and capital policy.

(1)Economic value：Goals for FY3/23

(2) Social value: goals in the term ending March 2023

*The goals of reducing greenhouse gas emissions in 5-15 years set by enterprises to keep global air temperature from rising 2℃ from pre-industrial levels (Well Below (WB) 2°C) or limit the temperature increase to 1.5℃ above pre-industrial levels.

(3) Capital policy
◎Capital policy

◎Capital allocation policy
To be determined once three-year business results outlook is clear.

＜Reference 2:Regarding Corporate Governance＞

◎Organization type and the composition of directors

◎Corporate Governance Report
Last update date: ：June 26, 2020

<Basic Concept>
Our corporate creed is “Sincerity,” and we aim to foster good relationships with all stakeholders to improve our corporate value and grow stably on a long-term basis.
To attain these goals, we consider that it is essential to improve our corporate governance based on the transparency, swiftness, and efficiency of business administration.
Our company has been reorganizing to a company with an audit committee, with the aim of strengthening the auditing and supervising functions of the board of directors, by having outside directors join the management.
Under this governance system, we will make efforts to further improve our corporate value.

<Reasons for Non-compliance with the Principles of the Corporate Governance Code (Excerpts)>
The company implements each principle of the Corporate Governance Code.

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