Bridge Report:（8130）Sangetsu Second quarter of the fiscal year ending March 2022

Shosuke Yasuda, President	Sangetsu Corporation (8130)

Company Information

Stock Information

*The share price is the closing price on December 13. Shares outstanding, DPS and EPS are taken from the financial report for the second quarter of the fiscal year ending March 2022. ROE and BPS are results for the previous fiscal year.

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. From the beginning of the fiscal year ending March 2022, the company will apply the “Accounting Standard for Revenue Recognition” (ASBJ Statement No. 29), etc.

This Bridge Report provides an overview of the second quarter of the fiscal year ending March 2022 of Sangetsu Corporation.

Table of Contents

Key Points
1. Company Overview
2. The Second quarter of Fiscal Year ending March 2022 Earnings Results
3. Fiscal Year ending March 2022 Earnings Forecasts
4. Management strategy: Progress of Medium-term Business Plan (2020-2022) 【 D.C. 2022 】
5. 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

• Since the fiscal year ending March 2022, the company has been applying “Accounting Standard for Revenue Recognition.” Sales were 69.9 billion yen, and operating income was 2.7 billion yen. If the Accounting Standard for Revenue Recognition was not applied, sales would be 74.4 billion yen, up 7.1% year on year, and operating income would be 2.7 billion yen, up 7.0% year on year. The contents about the growth of sales and profit below indicate the cases where the revenue recognition standard was not applied.

   

• Regarding sales, Wavelock Interior, which was acquired as a subsidiary, contributed, and the Interior Segment increased its market share. The Exterior and Space Creation Segments saw sales growth. On the other hand, the recovery in the Overseas Segment is delayed in the U.S. and Southeast Asia.

   

• Sales growth resulted in an increase in gross profit, offsetting the augmentation of SGA, for upgrading sample books in the Interior Segment, starting the operation of the new Kansai Logistics Center, and acquiring Wavelock Interior as a consolidated subsidiary. Net income dropped, due to the reversal of deferred tax assets for Koroseal in the U.S. and the exclusion of non-controlling shareholders’ equity for Goodrich in the previous term and Wavelock Interior in this term. Sales were almost in line with the initial forecast, SGA exceeded the forecast slightly, and profit fell below the initial forecast.

   

• The earnings forecast has been revised upwardly. For the fiscal year ending March 2022, sales are forecast to be 146.5 billion yen (if the revenue recognition standard was not applied, sales would be forecast to rise 7.4% year on year to 156 billion yen) and operating income is expected to grow 13.4% year on year to 7.6 billion yen. Sales are expected to grow in all segments. Through the sales growth, gross profit is projected to rise. Due to the price hike, gross profit margin will rise. Procurement costs will augment, expenses for personnel and distribution will increase due to the recovery of marketing activities, and the expenditure for opening the new Kansai Logistics Center and publishing sample books will increase, but they will be offset, and operating income is expected to grow by double digits. The dividend forecast has been revised. The company plans to pay a dividend of 70.00 yen/share, up 12.00 yen/share from the previous term. The expected payout ratio is 91.6%.

   

• The progress rate of results in the first half was 47.8% (when the revenue recognition standard is applied) or 47.7% (when the revenue recognition standard is not applied) for sales, and 36.0% (when the revenue recognition standard is applied) or 35.8% (when the revenue recognition standard is not applied) for operating income. Sales were almost as usual, but operating income was slightly lower than usual. They said that the augmentation of procurement costs due to the rise in material prices from October and the additional price hike is not taken into account in the revised forecast, but we would like to pay attention to how much they will increase sales and profit from the third quarter.

   

• Regarding the progress of the mid-term management plan, the expansion of the market share of mass-produced wallpaper is progressing as planned, and it is noteworthy. The acquisition of Wavelock Interior as a subsidiary is apparently producing good effects, and we would like to expect that it will contribute to revenues.

   

   

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.
As of the end of March 2021, the group is composed of eight 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, Japan’s largest manufacturer of vinyl wallcovering, Wavelock Interior Co., Ltd.

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” and “corporate mission,”
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

<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.

（Source: the company）

At the same time, the graph below shows the correlation between net sales of Sangetsu relative to net sales of the Japanese interior market and new housing starts (Ministry of Land, Infrastructure, Transport, and Tourism data).
The company’s net sales and trends in the domestic interior market have been largely linked to the number of new housing starts, but following the collapse of Lehman Brothers, while the overall market and new housing starts have remained at low levels, the company’s net sales have been at record highs continuously until March 2020. In the fiscal year ended March 2021, net sales declined for the first time in 11 years, due to the impact of the COVID-19 pandemic, but not as much as the decline in the overall market, and the company is improving its market share for its main products.

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 the “Outlook for investment in construction in FY2020” released by the Ministry of Land, Infrastructure, Transport and Tourism, both private-sector residential construction investment and private-sector non-residential construction investment were on the way to recovery after the collapse of Lehman Brothers, but private-sector residential construction investment has been reaching peaks since FY2017, and private-sector non-residential construction investment, which had been above the 2000 level, has recently turned down, partly due to the impact of the COVID-19 pandemic. In addition, the total floor space of offices and shops (newly constructed) is on a downward trend, however there are ups and downs, and the contraction of the market is considered to be structural in nature.

In addition, according to “Outlook for investment in construction based on a construction economy model” released by Research Institute of Construction and Economy on November 16, 2021, nominal private investment in non-housing construction rose 11.8% in fiscal 2017, 0.6% in fiscal 2018, and 0.6% (estimated) in fiscal 2019, and dropped considerably by 9.2% (estimated) in fiscal 2020 due to the coronavirus pandemic, but is expected to grow 3.6% (forecast) in fiscal 2021 and 3.8% (forecast) in fiscal 2022, showing a recovery.

The floor area of offices to be constructed increased 10.3% in FY 2016, but dropped 4.6% in FY 2017, and decreased 3.9% in FY 2018. It recovered in FY 2019, growing 2.3%, but is expected to fall again by 7.3% in FY 2020 (estimate). It is expected to increase in fiscal 2021 and fiscal 2022, but they said, “It seems that investment, which was put off in fiscal 2020, is being resumed, and floor area of offices to be constructed in the first half was up 28.7% from the previous fiscal year. On the other hand, vacancy rates are increasing nationwide and the average rent in Tokyo is dropping, so the increase in said floor area is projected to become stagnant in the second half of the current fiscal year.”

The floor area of shops to be constructed dropped 20.5% in fiscal 2019 and 2.0% in fiscal 2020, but is expected to grow in fiscal 2021 and fiscal 2022. They said, “The floor area of shops to be constructed had been declining from the previous fiscal year since fiscal 2014, but since March 2021, it has been increasing year on year for 7 consecutive months, and is expected to recover to the level in fiscal 2019.”

Like this, there is a sign of recovery in the non-residential market from the impact of the novel coronavirus, but the residential and non-residential markets remain harsh.
However, there is steady demand for renovations in the non-residential market, so Sangetsu is intending to meet the demand mainly through the Market Development Department and 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 in December 13, 2021. ROE is based on the previous term.
As Sangetsu and TOSO will apply the “Accounting Standard for Revenue Recognition” from the beginning of this fiscal year, the increases in net sales and operating income are not shown. TOSO also does not state its profit growth rate.

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.

The company has 4 business segments, which are Interior Segment, Exterior Segment, Overseas Segment, and Space Creation Segment.

①“Interior Segment”
(FY3/21: Net Sales and Operating Income of 110,462 million yen and 7,082 million yen 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.

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

（Source: the company）

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 residence or building is completed, a large number of players such as the client (facility owner), design office, design office, general contractor, subcontractor, residential manufacturer, 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” sales activities, Sangetsu also conducts “proactive” sales of its products through its 850-890 sales staff which belongs to its Market Development Department and its Contract Sales Department, etc. to provide and gather information, and propose products to clients.
While the main sales efforts are conducted through dealers, Sangetsu also conducts direct sales 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 10 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. On January 5, 2021, the Kansai LC was newly established and began operation, aiming to strengthen the logistics system for the entire western Japan and to automate and save manpower in logistics operations. The company will consider installing the same equipment in other LCs, including those in the Tokyo metropolitan area and other regions.

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”
(FY3/21 Net Sales and Operating Income of 14,624 million yen and 417 million yen)
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”
(FY3/21 Net Sales and Operating Income of 15,034 million yen and -985 million yen)
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.
In Southeast Asia and China, the company is currently reforming its business structure in order to improve profitability.

④“Space Creation Segment”
(FY3/21 Net Sales and Operating Income of 5,195 million yen and 201 million yen)
This is the segment added in the term ended March 2021.
It consists of Sangetsu’s Space Creation Department and its subsidiary, Fairtone Co., Ltd.
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 except for some parts 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 little 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 sales 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 700 staffs work in sales functions at Sangetsu, the largest sales function within the industry. These sales staffs are assigned to 50 offices and 8 branches located throughout Japan and conduct proposal-based sales to clients. Sangetsu also staffs its 8 showrooms with about 110 employees. In addition, about 70 contract design staff 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 Fiscal Year ending March 2022 Earnings Results

(1) Earnings Results

＊Unit: million yen. The company has been applying the “Accounting Standard for Revenue Recognition,” etc. from the beginning of the first quarter of the fiscal year ending March 2022. It was not applied in the second quarter of the fiscal year ended March 2021. “Y/Y (1)” means the year-on-year rate of change from 2Q of FY 3/21 to 2Q of FY 3/22 (the revenue recognition standard is applied), which is calculated by Investment Bridge Co., Ltd. “Y/Y (2)” means the year-on-year rate of change from 2Q of FY 3/21 to 2Q of FY 3/22 (the revenue recognition standard is not applied).

When the Accounting Standard for Revenue Recognition is not applied, sales grew.
Sales were 69.9 billion yen, and operating income was 2.7 billion yen. If the Accounting Standard for Revenue Recognition was not applied, sales would be 74.4 billion yen, up 7.1% year on year, and operating income would be 2.7 billion yen, up 7.0% year on year.
Regarding sales, Wavelock Interior, which was acquired as a subsidiary, contributed, and the Interior Segment increased its market share. The Exterior and Space Creation Segments saw sales growth. On the other hand, the recovery in the Overseas Segment is delayed in the U.S. and Southeast Asia.
Sales growth resulted in an increase in gross profit, offsetting the augmentation of SGA, for upgrading sample books in the Interior Segment, starting the operation of the new Kansai Logistics Center, and acquiring Wavelock Interior as a consolidated subsidiary. Net income dropped, due to the reversal of deferred tax assets for Koroseal in the U.S. and the exclusion of non-controlling shareholders’ equity for Goodrich in the previous term and Wavelock Interior in this term. Sales were almost in line with the initial forecast, SGA exceeded the forecast slightly, and profit fell below the initial forecast

(2) Business Segment Trends

*Unit: million yen. The fabric materials category of sales includes both curtains and upholstery.
The company has been applying the “Accounting Standard for Revenue Recognition,” etc. from the beginning of the first quarter of the fiscal year ending March 2022. It was not applied in the second quarter of the fiscal year ended March 2021. “Y/Y (1)” means the year-on-year rate of change from 2Q of FY 3/21 to 2Q of FY 3/22 (the revenue recognition standard is applied), which is calculated by Investment Bridge Co., Ltd. “Y/Y (2)” means the year-on-year rate of change from 2Q of FY 3/21 to 2Q of FY 3/22 (the revenue recognition standard is not applied).

①Interior Segment
The residential market (new construction and renovation) is healthy, but the recovery of the non-residential market is slow. In this situation, the company strengthened its marketing system mainly by publishing new sample books, and sales grew. The market share of wallcoverings and PVC flooring materials expanded.
Regarding wallcoverings, the performance of middle-grade products is recovering, but while the deflation is worsening, the sales of low-priced mass-produced wallcoverings grew considerably.

To strengthen its marketing system, the company shifted from a structure in which the contract sales department in Tokyo handles large-sized properties to a structure in which each of Tokyo, Chubu, and Kansai Branches has a contract sales division to follow sales staff in each region. Then, it became to take more meticulous hands-on measures.
The enhancement of approaches to the so-called “upstream” clients, such as general contractors and builders, started producing effects.

<Wallcovering Materials>
While there were some impacts of COVID-19, including the declaration of state of emergency and the steep increase of infected people, the demand in the market of newly built housing recovered, but the demand for renovation was sluggish.
Regarding the sample book of mass-produced wallcoverings “SP” published in June, the sales and product development departments developed products for satisfying customer needs, and it was highly evaluated in the market, increasing sales. For the sample book of residential wallcoverings “Fine 1000,” the company expanded the lineup of anti-virus wallcoverings certified by SIAA to meet social needs. As the market of renewal of non-residential facilities recovered, the sales of the sample book of non-residential wallcoverings “FAITH” were healthy, and the sales of the adhesive-attached decorative film “REATEC” increased, thanks to the activities of the dedicated sales division, etc.

<Flooring Materials>
The sales of residential products grew, thanks to the recovery of the market of newly built housing. In particular, the designs of “Floor Tiles,” which can be used broadly in both residential and non-residential facilities, were highly evaluated, and the products sold well.
In the non-residential market, the number of works for renewal recovered in each field, and the company witnessed the good performance of “S Floor,” the sample book of floors for various facilities, in the field of medical and welfare facilities, “NT-700H Series,” carpet tiles, in the office field, and “Non-skid,” non-skid PVC flooring sheets, in the field of large-scale repair of condominiums, etc.

< Fabric Materials >
The impact of COVID-19 is lingering, but “STRINGS,” a sample book of curtains published in May, contributed to sales. In addition, the sales of “Contract Curtains,” a sample book of curtains for various facilities, increased thanks to the recovery of the non-residential market, and “UP,” a chair fabric sample book, performed well, thanks to the market recovery and the distribution of sample books. Furthermore, the company published “Simple Order,” a sample book of curtains with a single price so that customer can choose a curtain more easily, in September, to enrich the product lineup. The sales of the EC business of Sangetsu Vosne Corporation increased, as the company increased the number of products and implemented continuous measures for reeling in customers.

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

②Exterior Segment
Despite the impact of COVID-19, demand for nest-dweller demand continues to grow, in addition to an increase in exterior construction due to the recovery in new housing starts. Sales of post boxes, storage sheds, wooden decks, and other products were strong through home centers and e-commerce retailers, and sales of carports and terraces also grew. Furthermore, as part of the expansion of business areas based on the medium-term management plan, the Space Creation Segment and other divisions strengthened sales activities to propose integrated interior and exterior spaces, and developed new business areas.
Sangetsu also focused on strengthening construction capabilities and strived to improve profitability.

③Overseas Segment
In the Overseas Segment, the results of each company from January to June 2021 were included in the results for the second quarter of the fiscal year ending March 2022.
In North America, there was a sign of recovery in the construction market, and the number of orders received was on a recovery trend, but the problems related “restricted supply,” the skyrocketing of prices of materials, the delay of arrival of goods, the shortage of human resources, and the resultant rises in wages, augmented, and the business environment was harsh. While the hospitality market, which is the primary market of the company, remained stagnant, the company concentrated on marketing activities targeted at educational facilities, which are on a recovery trend, and medical and welfare markets, and the sales of new strategic products, including whiteboard wallcoverings and sound-absorbing/insulating wallcoverings, increased. As a measure for strengthening the designing skill, the company engaged in the development of products in collaboration with the famous designer Stacy Garcia, and released new products on October 1. The company considers that its product competitiveness and designing skill have been improved through the installation of new equipment, the employment of more designers, etc., and will improve and energize marketing and customer services.

In the Chinese and Hong Kong markets, their marketing activities are recovering to the pre-pandemic level, as the Chinese economy and the entire construction market are recovering. Their community-based activities for increasing new customers and meticulous marketing activities the company has conducted since before having paid off, and sales grew. In addition, the company strived to improve its management system and establish a system for expanding sales channels for Sangetsu products, with the aim of increasing revenues and streamlining business operations in the Chinese market.
The Southeast Asian market remained harsh, due to the restriction on transportation of people, although the situation varies among countries. In particular, it affected the sightseeing industry considerably, and the hospitality market, which is the primary market of the company, slowed down, and many construction works were postponed or cancelled, so the company enhanced marketing targeted at new strategic markets, including the healthcare and residential markets. In addition, the company started stocking Sangetsu products in Malaysia, Thailand, and Vietnam, and proceeded with the establishment of a system for selling mainly functional wallcoverings while utilizing Japanese high-quality products.

④Space Creation Segment
Regarding Fairtone Co., Ltd., there were concerns over the impact of COVID-19 and the decrease of works in the Tokyo Metropolitan Area due to the Olympics, but sales were healthy, as the entire market was on a recovery trend.
On the other hand, profit was sluggish, due to the intensification of competition for undertaking works and the augmentation of SGA. In the Chubu area, their marketing efforts utilizing the product competitiveness of Sangetsu and the capability of Fairtone paid off, contributing to sales. In addition, the company expanded its trading areas in the Hokkaido and Tohoku areas, and made efforts to fortify the company-wide marketing base and improve its workflow.

The Space Creation Division of Sangetsu conducted marketing by utilizing the customer base that has been nurtured through the Interior Business. Then, it undertook not only office renovation, but also hotel renovation. By sharing customer information and cooperating in marketing with the sales division of Sangetsu, it exerted synergy in the entire corporate group.

The company is improving its business structure by employing more designers and so on, but aims to expand its business scale at an accelerated pace for increasing revenues.

(3) Changes due to the application of the “Accounting Standard for Revenue Recognition”, etc.

Changes due to the application of the “Accounting Standard for Revenue Recognition”, etc. are as follows.

The largest effect is a decrease of 4.68 billion in sales from agency transactions in the Exterior Segment.

(4) Financial standing and cash flows

◎Main BS

*Unit: million yen.

Total assets dropped 2.6 billion yen from the end of the previous term, due to the decreases in cash & deposits, accounts receivable, etc.
Total liabilities declined 2.3 billion yen, as accounts payable and debts decreased.
Net assets decreased 300 million yen, due to the drop in retained earnings. As a result, capital-to-asset rose 0.7 points from the end of the previous term to 59.5%. The balance of short and long-term debts decreased 300 million yen to 15.5 billion yen.

◎Cash Conversion Cycle(CCC)
CCC declined due to an increase in the accounts payable turnover period.
It is improving steadily.

3. Fiscal Year ending March 2022 Earnings Forecasts

(1) Earnings Forecasts

*Unit: million yen. The company has been applying the “Accounting Standard for Revenue Recognition,” etc. from the beginning of the first quarter of the fiscal year ending March 2022. It was not applied in the fiscal year ended March 2021. “Y/Y (1)” means the year-on-year rate of change from FY 3/21 to FY 3/22 (the revenue recognition standard is applied), which is calculated by Investment Bridge Co., Ltd. “Y/Y (2)” means the year-on-year rate of change from FY 3/21 to FY 3/22 (the revenue recognition standard is not applied). The initial forecast has been partially revised, due to the change in the scope of application of the revenue recognition standard and the change in items used by the audit corporation in July 2021.

The earnings forecast and the dividend forecast revised upwardly
The earnings forecast has been revised upwardly. For the fiscal year ending March 2022, sales are forecast to be 146.5 billion yen (if the revenue recognition standard was not applied, sales would be forecast to rise 7.4% year on year to 156 billion yen) and operating income is expected to grow 13.4% year on year to 7.6 billion yen. Sales are expected to grow in all segments. Through the sales growth, gross profit is projected to rise. Due to the price hike, gross profit margin will rise. Procurement costs will augment, expenses for personnel and distribution will increase due to the recovery of marketing activities, and the expenditure for opening the new Kansai Logistics Center and publishing sample books will increase, but they will be offset, and operating income is expected to grow by double digits. The dividend forecast has been revised. The company plans to pay a dividend of 70.00 yen/share, up 12.00 yen/share from the previous term. The expected payout ratio is 91.6%.

(2) Business Segment Trends

*Unit: million yen. The company has been applying the “Accounting Standard for Revenue Recognition,” etc. from the beginning of the first quarter of the fiscal year ending March 2022. It was not applied in the fiscal year ended March 2021. “Y/Y (1)” means the year-on-year rate of change from FY 3/21 to FY 3/22 (the revenue recognition standard is applied), which is calculated by Investment Bridge Co., Ltd. “Y/Y (2)” means the year-on-year rate of change from FY 3/21 to FY 3/22 (the revenue recognition standard is not applied). The initial forecast has been partially revised, due to the change in the scope of application of the revenue recognition standard and the change in items used by the audit corporation in July 2021.

*Interior Segment
The Japanese market was expected to recover to the level down 4% from fiscal 2019 at the beginning of the term, but it is now projected to reach the level down 5.5-6.0% from fiscal 2019.
Through the rise in material prices until September, the costs for procuring wallcoverings and flooring materials are forecast to augment.
The price hike, which was started from the order received on September 21, is delayed for some products, and it is considered that it will take time to raise prices of all products.
In the revised forecast, the company does not take into account the augmentation of procurement costs due to the rise in material prices or the additional price hike from October, but the company started discussing further price hikes, considering the external environment.

*Exterior Segment/Space Creation Segment
The overall exterior market is expected to be similar to that of the overall interior market.
The Space Creation Segment is projected to expand its business in the current fiscal year.

*Overseas Segment
Regarding the U.S. construction market, the number of orders received is recovering, the backlog of orders is at a record-high level, the revenue in the period from July to September was sluggish due to the restriction on supply, and it is considered that it will take time to increase sales and improve revenues.
The Southeast Asian market was affected significantly by lockdowns in July and August. It is expected to recover in the period from October to December.
In the Chinese and Hong Kong Market, it is expected to move into the black in the period from October to December. An extraordinary loss is forecast to be posted, due to the withdrawal from Dubai.

4. Management strategy: Progress of Medium-term Business Plan (2020-2022) 【 D.C. 2022 】

In the Medium-term Management Plan 【 DC 2022 】, which stretches over three years and is considered the first step in the Long-term Vision 【 DESIGN 2030 】, the company aims to become a "Space Creation Company." The four basic policies of the plan are "expanding revenues through qualitative growth of the core business," "growth of profitability in next-generation businesses based on resources of the core businesses," "strengthening 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."

The following sections show the progress highlights in "expanding revenues through qualitative growth of the core business," "growth of profitability in next-generation businesses based on resources of the core businesses," and "achieving social value."

4-1 Progress of basic policies

(1) Expanding revenues through qualitative growth of the core businesses
①Progressive enhancement of design capabilities and promotion of strategic procurement
◎ Responding to the market deflation trend
Regarding products, the company takes measures against deflation in the market and thoroughly differentiating its products with high-quality designs.

After releasing “SP,” the mass-produced wallpaper sample book, in June, the company released “Simple Order,” the one-price curtain sample book, in September. In November, in addition to the products with a retail price of 6,000 yen or higher, the company added products with a new retail price of 4,900 yen to the lineup of “REATEC,” adhesive decorative films. These products are popular as they meet the needs for reducing construction costs.

◎ Advancing design capabilities and products
In November, the company released “NT double eco,” a decarbonizing carpet tile that uses recycled nylon for the tile's front side and recycled material for the backing. The GHG (greenhouse gas) generated in the production process is reduced by about 60%, and Sangetsu also issues a certificate at the time of sale. The response from builders and business owners with environmental needs is unprecedentedly significant, and the number of customers using these tiles is increasing. These tiles are expected to become a great driver for promoting sales of carpet tiles.
As for roller blinds, the company has released “CS Roll Screen,” which is child safe.
In terms of design, the company signed a design contract with the leading British design company, Sanderson Design Group. They jointly developed a product using the design of William Morris, which is historically highly regarded. The design is scheduled to be launched in East Asia, including Japan, and Southeast Asia.
Currently, the company is developing products in the fields of wallpaper, flooring materials, and fabrics, and some products will be released next year.
The decorative film with PVC adhesive “REATEC” and “CLEAS Glass Film” received the Good Design Award. The roller blinds with the child safety function “CS Roll Screen” won the Kids Design Award.

◎ Efforts after the acquisition of Wavelock Interior Co.,Ltd.
Currently, demand for digital prints that can express various designs is increasing, especially for hotels.
Wavelock Interior, which became a subsidiary in March 2021, plans to adopt two inkjet printers in January 2022. Furthermore, the company is improving the designers' capabilities toward launching inkjets.
In addition, the company has prototyped fleece wallpaper and non-woven wallpaper for overseas markets and is preparing to launch them in overseas markets.

② Improving and advancing service functions
◎ Fairtone acquires HEKISO Co., Ltd. as a subsidiary
Fairtone has acquired HEKISO Co., Ltd. (Miyagi Prefecture), a leading construction company in the Tohoku region, as a subsidiary. Initially, Sangetsu held 25% of its shares, and then it acquired the remaining 75% of the shares, making it a wholly-owned subsidiary of Fairtone.
The company will increase its various initiatives, such as improving relationships with general contractors through construction and expanding the construction network in the Tohoku region.
The company will also consider acquiring similar resources outside the Tohoku region.

(2) Making next-generation businesses profitable based on core business resources
① Improving business in the Pacific Rim
◎ Development of strong organization and management bases in all countries
The company worked for over a year in 2021 on reorganizing, simplifying, and streamlining the management system, which had been rather complicated.
Goodrich Global Holdings, a wholly-owned subsidiary headquartered in Singapore that is directly under Sangetsu, supervises the business in Southeast Asia.
The business in Hong Kong and China is supervised by Goodrich Global Hong Kong, a wholly-owned subsidiary of Sangetsu. Regarding China, the company integrated Sangetsudo Shanghai and Goodrich China. Regarding Dubai, the company's withdrawal is scheduled to be completed by the end of the year.

◎ Enhancing product design for overseas business
Koroseal has been developing products for about two years in collaboration with Stacy Garcia, a famous designer in the United States for architecture and fabrics.
In October 2021, the company started selling a new wallpaper collection called "STACY GARCIA NEW YORK By Koroseal," consisting of 82 items with six patterns.

◎ Goodrich
In November 2021, the renewed showroom in Singapore was reopened.
More than 100,000 items including wall coverings, flooring materials, and fabrics are exhibited in the 350-m2 gallery space.

② Development of the space creation business by strengthening specialized skills
When relocating Sangetsu's Kansai Branch Office, Sangetsu's Space Creation Division, together with Sungreen Co., Ltd., which handles exterior design, designed the new Kansai branch office.
The design combines the concepts of the indoors and the outdoors by using several plants in the office. A communication area has been set up in the office to welcome external staff.
The company will utilize the Kansai Branch Center Office to promote its design capabilities as a Space Creation Company.

(3) Realization of social value
① Global environment
GHG (greenhouse gas) emissions from Sangetsu itself and emissions on a consolidated basis are 6,233 t-CO2 (FY2020) and 84,595 t-CO2 (FY2016), respectively.
In addition to GHG emissions, the company is also working to recycle various products that impact the environment to make them eco-friendly, especially sample books.

The total GHG emissions in Sangetsu's business, including the supply chain, was 389,295 tons in FY2020.
The company and its suppliers are formulating a plan to reduce these emissions. On a non-consolidated basis, the company aims to lower its 6,000-ton GHG emissions and achieve zero GHG emissions in 2030, and it is currently formulating a plan to realize this goal.

② ESG external evaluation
Regarding the ratings of external evaluation bodies, the rating of MSCI is 5.3, and the rating of FTSE is 3.1. Ratings are steadily improving year by year.

4-2 Capital policy

The capital policies in the medium-term business plan are "to maintain equity capital in the range of 90 to 95 billion yen," "to achieve a total return ratio of almost 100% over the next three-years," "to make decisions about dividends and acquisition of own shares under the basic policy of stable dividend increase after assessing the impact of the COVID-19 on the business results."
Based on this, the company plans to allocate "20-26 billion yen for growth investment," "17-19 billion yen for shareholder return," and "25-30 billion yen as cash at the end of the FY March 2023."

As mentioned before, the dividend for this term is scheduled to be 70.00 yen/share, an increase of 12.00 yen/share from the previous term (11.5 yen/share increase from the initial forecast). The expected payout ratio is 91.6%.
There are three reasons for the dividend increase.
1. The company has continuously acquired treasury shares since FY 2014, but the total number of issued shares excluding treasury shares is currently below 60 million. When President Yasuda was appointed, the number of the company's treasury shares was over 80 million, but the number has decreased to less than 60 million.
2. There is a strong demand for dividends rather than share buybacks, mainly by individual shareholders.
3. There is also a demand for continuing stable dividend increases.

Based on these three points, the company did not change its target of a total return ratio of almost 100% in these three years. However, it changed the breakdown of the 100% total return ratio to increase the weight of dividends stably while flexibly continuing to acquire treasury shares.
The total shareholder return in the first half was 3.56 billion yen, including the increase in the interim dividend to 35 yen/share. The company will continue to buy back shares until the beginning of January 2022.

5. Conclusions

The progress rate of results in the first half was 47.8% (when the revenue recognition standard is applied) or 47.7% (when the revenue recognition standard is not applied) for sales, and 36.0% (when the revenue recognition standard is applied) or 35.8% (when the revenue recognition standard is not applied) for operating income. Sales were almost as usual, but operating income was slightly lower than usual. They said that the augmentation of procurement costs due to the rise in material prices from October and the additional price hike is not taken into account in the revised forecast, but we would like to pay attention to how much they will increase sales and profit from the third quarter.

Regarding the progress of the mid-term management plan, the expansion of the market share of mass-produced wallpaper is progressing as planned, and it is noteworthy. The acquisition of Wavelock Interior as a subsidiary is apparently producing good effects, and we would like to expect that it will contribute to revenues.

<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: “Space Creation Company”

Based on the company’s expertise in design, sales, 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 “net 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 “net 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 residential market (new construction and renovation) and the non-residential market (new construction) are on a plateau as a whole, and their quantitative growth cannot be expected, but the market of renewal of non-residential 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 merchandise development section of each business department, non-housing space designs in the contract design division, coordination mainly related to housing in showrooms, and a variety of space designs in the Space Creation Department. Fairtone, too, recruited designers, to increase construction works with good designs.
The sales 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 installation tradesmen 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 installation tradesmen 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 installation tradesmen, 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.
The new Kansai Logistics Center (LC) started operation in January 2021. The company has installed unprecedented unmanned and 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 67.2% in the term ended March 2021.
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-residential market, without changing the current number of sales staff members: 850 to 890, to improve the competitiveness of specifications in the non-residential market.
The company will also strive to enhance sales while utilizing the designing capability.
The contract design division, which is in charge of marketing designs targeted at non-residential clients, proposes space designs and custom-made designs mainly for non-residential facilities, while the show room, which is a foothold for marketing designs targeted at builders, residential manufacturers, and remodeling contractors, concentrates on the proposals for design coordination mainly for housing.

◎Exterior Segment
They will enhance sales 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 contract 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 Segment 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 sales.” 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 sales.

In order to visualize and streamline business operations utilizing data, conduct effective sales, and enable business transfer in each business in the future, it is necessary to obtain new data through various efforts, organize them, transform sales 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: The capital allocation, which had been undecided, will be decided in May 2021 as the three-year business outlook becomes clearer.

Capital allocation policy during the Medium-term Business Plan (2020-2022) 【 D.C. 2022 】

<Reference2: Regarding Corporate Governance>

◎Organization type and the composition of directors

◎Corporate Governance Report
Last update date: ：December 6, 2021

<Basic Concept>
Our corporate creed is “Sincerity,” and we aim to foster good relationships with all stakeholders to improve our corporate value and grow sustainably.
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 information given below is based on the Corporate Governance Code revised in June 2021 (including items related to companies listed on the Prime Market).
Our company follows all principles of the Corporate Governance Code.

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