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Message from the Director in Charge of Finance

Aggressive Fiscal Strategy Focused on Enhancing Medium-to Long-Term Corporate Value

From the Establishment of a Strong Financial Foundation to the Use of Capital Generated

Throughout the duration of the previous Medium-Term Business Plan, I am pleased to report, the successful repayment of interest-bearing debt rendered the company virtually debt-free. Moreover, since we have made significant headway in accumulating capital to serve as a buffer against risk, we have shifted our focus during the current medium-term business plan period—which began in FY2023—from the accumulation of capital for the reinforcement of our financial foundation to the application of capital to enhancing our corporate value.

Above all, we plan to focus our attention on management resources towards the main targets of decarbonization and the growth of our business. We intend to promptly implement a host of measures that will enable us to become carbon neutral within our estimated timeline. In addition, we will proactively invest funds in Specialty businesses with competitive advantages and for which market expansion is positively forecast. Our aim is to achieve Specialty business operating income in excess of ¥100 billion by FY2031.

Geopolitical risks such as Russia’s invasion of Ukraine continue to smolder, and we do not expect an easy resolution to cost-push inflation, where sudden changes in supply have driven prices upward. Amidst such circumstances, in addition to soaring material and labor costs, we have also seen cases where investment estimates eventually totaled twice the amount originally forecast.

The severity of investment profitability is on the rise, and we believe it is necessary to devise ways to reduce investment levels, such as by accomplishing specific processes in-house.

Meanwhile, having completed the strengthening of our financial foundation, we now find ourselves with more freedom regarding the scale and timing of investment decisions in terms of our ability to flexibly provide sufficient operating capital toward steadily implementing our strategies for growth and decarbonization. We intend to make the necessary investments when needed, and not allow any excessive caution which might lead us to postpone any improvement.

Analysis of FY2023 and Assessment of Current Status

During the past few years, our business environment has been favorable, leading to the company posting its highest-ever profit in FY2022. The situation has changed drastically, however, with operating income dropping by half in FY2023—including the Chlor-alkali Group posting an operating loss—due to skyrocketing raw material and fuel prices and deteriorating market conditions. The increase in working capital also led to a deficit in cash flow from our operating activities. Despite this challenging business environment, Tosoh’s financial position remains sound, with interest-bearing debt totaling ¥176.7 billion as of the end of FY2023, a net debt-to-equity ratio of only 0.08 times, and an equity ratio of 60%.

We recognize that the impact of changes in the external environment, such as the higher prices of raw materials and fuel and conditions on product markets, on our business earnings and cash flow, is an issue. While this impact is diminishing as the Specialty business grows, FY2023 served as a reminder that these changes are still a source of considerable volatility in business performance and cash flow.

Our view is that the magnitude of these fluctuations should lead to a discussion for a price book-value ratio (PBR) set below 1x. When PBR was broken down into ROE and price-earnings ratio (PER)*, we succeeded in maintaining a relatively high ROE even despite the severe business environment in FY2022. PER, however, remained below 10x as the company's performance is easily affected by the external environment, which we believe is the reason for PBR being less than 1x.

This makes the increasing profitability of the Specialty business that much more important. With the aim of boosting profits, we will allocate management resources to specialty-related companies with high investment efficiency and steadily put our growth strategy into action. In the Commodity business, our goal is to establish a sound business structure less susceptible to external factors such as market conditions. We believe that achieving our target ROE of 10% or higher and building a track record of stabilized earnings will lead to a higher market valuation and improved PER.

*PBR = ROE x PER = (net income per share/equity per share) x (share price/net income per share)

Steadily Execute Investments Centered on Growth and Decarbonization

The Medium-Term Business Plan, which began in FY2023, calls for cash flow to be created from operating activities of ¥260-320 billion over the plan’s three-year period, capital investment of ¥200 billion, and shareholder returns through dividends of ¥77 billion. Any cash surpluses will be allocated to additional investment, M&A, or share buybacks.

Despite the sharp rise in prices of raw materials and fuel and the deterioration in market conditions in FY2023, resulting in a severe impact on earnings and negative free cash flow, we have neither changed our plans concerning capital investment in decarbonization and business growth during the current medium-term business plan period, nor held back with any shareholder returns through dividends.

If free cash flow is insufficient during the current three-year Medium-Term Business Plan. In that case, we will use debt financing to cover the difference. We do not, however, anticipate this causing a significant deterioration in the net debt-to-equity ratio.

We are now focusing our management resources on future-oriented capital investment and R&D toward achieving decarbonization and the growth and expansion of our Specialty business.

To achieve this, first, we plan to invest ¥30 billion in decarbonization. We are already putting into practice initiatives for power fuel conversion, in-house manufacturing of semi-carbonized biomass fuels, CO₂ capture, and the introduction of feedstock conversion facilities. Moreover, we will allocate ¥80 billion to growth investments in our Specialty business. We have also begun working on expanding capacity for pharmaceutical separation and purification agents, sputtering targets—thin-film forming materials for the U.S. semiconductor market—and silica glass materials and fabricated quartzware for semiconductor manufacturing equipment. Furthermore, we anticipate additional increases in demand for chloroprene rubber, bromine and flame retardants, zirconia powder for use in dental materials, and separation and purification agents, respectively. As such, we will consider further additional capacity expansion whenever the opportunity arises.

For our Specialty business, we are targeting an operating income in excess of ¥100 billion by FY2031. This target will require us to expand existing businesses and launch new products. Examples include the launch and application expansion of Gallium Nitride sputtering targets and the practical application expansion of amines for CO₂ capture. We also plan to continue investing funds in research to ensure that we have quick access to resources when required.

Moreover, we continue to seek growth through M&A and are always on the lookout, with a focus on the bioscience business. If we identify a target that seems in line with our growth strategy, we will pay such an opportunity due consideration.

Major Capital Investment Projects in Current Medium-Term Business Plan (FY2023–2025)

Shareholder Returns Based on Stable Dividends

The Tosoh Group regards shareholder returns as a key capital policy and intends to pay continuous, stable dividends, targeting a dividend payout ratio of 30%. We set the year-end dividend for FY2023 at ¥40 per share, and together with the interim dividend of ¥40 per share, the annual dividend totaled ¥80 per share.

With a significant increase in working capital, and other factors resulting in negative free cash flow, the company did not repurchase any shares as additional shareholder returns. The company will instead maintain its stance regarding conducting share buybacks based on thoroughly considering future capital accumulation, investment plans, and cash on hand.

Toward Medium- and Long-Term Enhancement of Corporate Value

Tosoh will continue preparing for all and any eventualities, while comprehensively considering growth and decarbonization, enhance Specialty business profitability based on our dual management approach, and strive to maintain a solid financial foundation and implement measures that will help us to improve corporate value sustainably. As a member of the management team of Tosoh—which aims to be a corporate group that has earned the trust of all its stakeholders—I will contribute to all our objectives with the tenets of the Tosoh Spirit in mind.

We ask our stakeholders for their continued understanding and support as they watch the medium- to long-term growth of the Tosoh Group unfold.

Medium- and Long-term Management Policy

Measures Toward Vision 2030

Growth

Specialty Business

Generate operating income in excess of ¥100 billion by strengthening our earnings foundation.

• Increase capacity, expand market share in growth areas, and boost profits through new businesses and M&A activity.
• Concentrate R&D resources in the three priority fields of life sciences, electronic materials, and environment and energy.

(Specialty Business Operating Income picture)

Commodity Business

As the chemical industry is energy-intensive, Tosoh plans to invest aggressively in decarbonization to strengthen its business foundation.

Strengthen the business foundation

• Petrochemical Business

Pursue the possibility of chemically recycling petrochemical products
Seek to transform into a resource-recycling ethylene center

• Chlor-alkali Business

Invest in decarbonization and fuel conversion
Consider the acquisition of a market-oriented manufacturing base abroad

Decarbonization

Over 80% of GHG emissions are energy-based, therefore, decarbonization requires us to look at alternative power sources for our plants. To combat this challenge, Tosoh will promptly implement a host of measures toward our target of a 30% reduction in emissions by FY2031 (compared with FY2019) while also considering the Japanese government’s energy policy, technological innovation trends, and the distribution of carbon-free fuels.

Power generation facility fuel conversion (reduction rate: 22%)

• Reduce coal consumption by increasing the biomass co-firing ratio in existing boilers
• Introduce boilers capable of biomass-only combustion

Invest in energy-saving measures (reduction rate: 5%)

• Introduce state-of-the-art turbines
• Retrofit electrolyzer to save energy
• Install additional gas turbine for energy efficiency

Convert CO₂ into raw material (reduction rate: 3%)

• Convert CO₂ feedstock at carbon monoxide plant
• Synthesize urethane raw materials from power plant exhaust gas CO₂

Medium-Term Business Plan (FY2023–2025)

Medium-Term Business Plan Progress

The business environment in FY2023, the first year of the three-year Medium-Term Business Plan, was characterized by soaring raw material and fuel prices, including coal, triggered by Russia’s invasion of Ukraine. At the same time, a shrinking product demand gradually became apparent owing to global economic stagnation.

Amidst these conditions, the Specialty business—centered on functional products—has steadily reinforced its operations, securing year-on-year profit growth despite the current challenging business environment. In FY2023 and beyond, we will strive to expand sales of our mainstay products through capacity expansion and continue to invest further in growth areas to achieve the performance targets outlined in our medium-term business plan.

Our Commodity business performance deteriorated in FY2023 amidst soaring raw material and fuel prices, including coal. Although a softening of these prices is expected in FY2024, we see overseas market conditions for our products remaining sluggish for the foreseeable future as the global economy’s recovery is slow and there is a lack of momentum in demand.

We see capital investment remaining above the ¥200 billion level, which was initially planned over a three-year period. While promoting investment for growth, we have begun introducing biomass power generation facilities—an investment toward reducing CO₂ emissions—and will balance growth and decarbonization as we continue to conduct business.

Basic Management Policy

1. Focus on expanding Specialty business earnings while maintaining the dual management approach as the basis of our operations

• Commodity Business

Achieve an optimal combination of business enhancement and CO₂ emission reduction, and maintain a stable supply by implementing cost sharing and price pass-on when necessary.

• Specialty Business

1. Expand earnings foundation by investing in capacity expansion in comparatively well-positioned businesses, focusing management resources on growth areas, and cultivating new businesses.

2. Make a concerted effort to reduce CO₂ emissions and effectively utilize CO₂

Promote decarbonization in every respect and fulfill our corporate responsibility to help realize a sustainable society.

3. Invest aggressively based on sound financial positioning

The move toward decarbonization will change the business environment dramatically, so we see this as an opportunity to invest in a timely, strategic manner in preparation for the future.

4. Reinforce safety infrastructure and establish and deepen a safety culture for everyone.

Continue efforts to reinforce safety infrastructure and establish and deepen the safety culture.

Efforts Toward Decarbonization

• Implement specific measures to achieve a 30% reduction in CO₂ emissions by FY2031 (compared with FY2019)
• A thirty-percent reduction with current technology will chiefly be due to the conversion of wood-based biomass as fuel for power generation facilities; diversify fuels by introducing biomass power generation facilities with the view of fuel diversification.
• Chemical manufacturers are on a mission to convert CO₂ feedstock; they have elevated it in terms of priority, and are strengthening their efforts to encourage improvement.

 FY2023 results

• Introduce semi-carbonization facilities (increase wood-based biomass co-firing ratio)
• Undertook the construction of a new biomass power generation facility (scheduled for completion in April 2026)
• Conducted a demonstration test of CO₂ recovery and conversion to feedstock
• Participated in projects: Afforestation in a joint conservation project for the production of wood for use as wood-based biomass in Shunan City, Yamaguchi Prefecture, and in Japan’s New Energy and Industrial Technology Development Organization (NEDO) Green Innovation Fund project as a member of the Matsuri Project

Investment and Lending Plan

• FY2023–2025 three-year cumulative investment = ¥200 billion in capital investment + M&A, additional support for decarbonization
• Invest aggressively with a focus on Specialty, including capital investment of ¥30 billion for CO₂ reduction.
• M&A exploration focused on biotechnology-related businesses

FY2023 results (¥79.2 billion)

Capacity expansion investment

• Bromine production facility
• Separation and purification media production facilities
• Sputtering target production facilities
• Silica glass material and fabricated quartzware facilities

Investment in CO₂ reduction

• Biomass power generation facilities
• CO₂ recovery and raw material conversion equipment  

Normal investment

• Tokyo Research Center (Biotechnology Research Annex, Customer Support Center)

R&D

• Concentrate R&D resources in the three main priority fields of life sciences, electronic materials, and environment and energy.
• Accelerate R&D by effectively leveraging research infrastructure, using MI technology to improve the efficiency of material design, promoting open innovation, and acquiring cutting-edge technologies through means such as funds allocated by the company.

Major initiatives

Details: R&D and Intellectual Property

Safety Foundation and Culture

• Continue existing and develop new initiatives toward reinforcing the safety infrastructure and fostering a culture of safety.

Major initiatives for FY2023

• Smart Security Promotion: Applying digital transformation (DX) to operations, safety, and facility management
• Upgraded safety education: Further enhancement of simulators and other educational facilities, hands-on learning devices, and hazard simulation training.
• Construction system reinforcement: Cooperating with partner companies to strengthen the safety management structure.
• Safety technology formulation: Upgrading risk assessment and training safety technology specialists.

Shareholder Returns

• Our basic policy is to pay stable dividends, and we will also strive to use share buybacks to improve capital efficiency.
• Targeting a dividend payout ratio of 30%
• We will flexibly implement share buybacks, taking into account factors such as the level of free cash flow.

Climate Change Issue

Climate change is one of the world's most pressing societal issues. The Tosoh Group recognizes that contributing to the reduction of GHG emissions generated through its business activities is the single most important issue for the company’s medium- to long-term growth. As such, the company is promoting the reduction of CO₂ emissions through energy savings and fuel conversion and investigations into technologies so CO₂ can be managed more effectively.

In response to the Japanese government's 2050 carbon-neutral declaration, the company established a new groupwide GHG emission reduction policy in 2022. We will promptly implement a host of measures toward realizing a decarbonized society while considering Japan's energy policy trends, technological innovation, and the distribution of carbon-free fuels.

In November 2019, Tosoh declared its support for the Task Force for Climate-Related Financial Disclosures (TCFD*) recommendations. The company will continue disclosing information on Tosoh Group initiatives in line with these recommendations.

*An organization established by the Financial Stability Board to provide a framework for valuable information disclosure useful for understanding climate-related corporate risks and opportunities. In June 2017, the TCFD published recommendations related to items of information disclosure.

Yutaka Shiokawa
Vice President
General Manager, CO₂ Reduction and Utilization Strategy

Information Disclosure Based on TCFD Recommendations

Governance

Tosoh's CSR Committee has identified the response to climate change issues as critical to the CSR mission, and specific measures are being promoted mainly by the CO₂ Reduction and Utilization Promotion Committee and its Central Energy Management Committee. The CO₂ Reduction and Utilization Promotion Committee plays a pivotal role in collecting information and data on social trends, regulatory requirements, and climate change-related risk management and in sharing this information with Group companies and internally. Matters related to these activities are reported to the Board of Directors for approval when appropriate, and instructions are received when action is required.

Strategies

Conducting scenario analysis will aid the Tosoh Group in ascertaining the impact of climate change-related risks and opportunities, we can then reflect any influential results in our medium- and long-term business plans. The purpose is to formulate strategies to further promote the provision of products, technologies, and services that contribute to solving social issues to realize a sustainable society.

We conducted an analysis based on two temperature rise scenarios—the World Energy Outlook (WEO) NZE 2050 +1.5°C scenario and the Intergovernmental Panel on Climate Change’s (IPCC) SSP5-8.5 +4°C scenario—as well as qualitative and quantitative assessment of transition and physical risk and business opportunities for the 2030 and 2050 time horizons. We also considered the entire supply chain and assessed any foreseeable impact on the Tosoh Group.

In addition to the issues faced by the Tosoh Group as a whole, this year's scenario analysis focused on the Chlor-alkali Group, which accounted for 62% of total Scope 1 and Scope 2 GHG emission volume among the four groups (Petrochemical, Chlor-alkali, Specialty, and Engineering).

Transition/physical risk
Text in blue characters is related to the Chlor-alkali Group

Details: Please refer to the CSR website for more information on quantitative assessment and calculation methods
Environment (tosoh.com)

Climate Change-Related Business Opportunities
Text in blue characters is related to the Chlor-alkali Group

Details: Please refer to the CSR website for more information on quantitative assessment and calculation methods
Environment (tosoh.com)

Assessment of Tosoh Group Overall

The Tosoh Group's GHG emissions are currently among the highest in the chemical industry, and reducing these emissions is considered essential. We have already launched specific measures related to fuel conversion at our in-house thermal power generation facilities—which account for about 80% of Tosoh’s GHG emissions—and renewable energy procurement, which are vital initiatives. Meanwhile, with regard to business opportunities, we identified potential risks and opportunities spanning a broad range of business domains in both the Commodity and Specialty businesses. Approaching the climate change issue as a good opportunity, we will focus our attention on developing technologies and products for the future from a broader perspective.

Assessment of Chlor-alkali Group

In the Chlor-alkali Group, it has been reconfirmed that rising energy costs have had the single most significant impact on the manufacturing business—as it is a high power-consumption business by nature—and is dedicated to work with the Tosoh Group’s commitment for improvement. Tosoh believes it is also important to devise a mechanism to mitigate the intensity of CO₂ emissions during product manufacturing, while also managing the challenges of increases in energy costs by passing some additional cost of low-carbon product production and decarbonization on to product prices. Meanwhile, since the Chlor-alkali Group's products are primarily basic materials, the analysis conducted was not biased one way or the other at this stage, given the broad range of applications and the juxtaposition of uses which constitute either risks or opportunities related to climate change. Demand for these products is steady over the long term, and Chlor-alkali is positioned as one of the main businesses underpinning the Tosoh Group foundation.

Risk Management

Utilizing information on societal trends, and the status of consultations and discussions with the Japanese government, any potential risks posed by climate change issues are assessed through the CSR Committee by each division under its jurisdiction. The CO₂ Reduction and Utilization Promotion Committee is responsible for comprehensive risk management for the reduction of GHG emissions and the effective use of CO₂. Each division that manages business operation-related risk primarily identifies risks only associated with their own division, they assess the potential financial impact, and report their findings to the president. Risk management in day-to-day business activities is managed independently and overseen by the specific director in charge. Finally, the report is submitted to the Board of Directors for approval and further instructions. Moreover, we apply internal carbon pricing when formulating capital investment plans. Tosoh as a responsible company is careful to not only consider profitability, but also the environmental impact.

Indicators and Targets

1) GHG emission volume

In response to the October 2020 declaration by the Japanese government of carbon neutrality by 2050 and the renewed GHG emissions reduction target for FY2030, Tosoh reviewed its previous target for FY2026 (reduction of non-consolidated BAU* emissions compared with the base year of FY2014) and, in January 2022, established a new groupwide GHG emissions reduction policy.

*Business As Usual (BAU) emissions = production volume x CO₂ emission intensity in the base year of FY2014.

• Reduce Scope 1 + 2 GHG emissions by 30% in FY2031 compared with FY2019
• Address the challenge of achieving carbon neutrality by 2050

Actual GHG emissions in FY2023 (10,000 kilotons- CO₂e)

Scope 1 and Scope 2: 8.11 million kilotons- CO₂e

2) Disclosure in accordance with climate-related indicator categories

The essential items are as follows.

• Capital allocation

Tosoh  plans to allocate ¥120 billion to climate change-related investment by 2030 and ¥60 billion by FY2025 (based on approved investment amounts).

Major investments

1. Construction of the biomass power generation facility at the Nanyo Complex:

→ CO₂ emission reduction of approx. 500,000 tons

2. CO₂ recovery and raw material use at the carbon monoxide (CO) production facility at the Nanyo Complex:

→ CO₂ emission reduction of approx. 40,000 tons

• Internal carbon pricing

Tosoh applies an internal carbon pricing system (¥6,000/ton- CO₂) to promote capital investment that contributes to reducing GHG emissions. Internal carbon pricing is also applied in the aforementioned investment decision process.

Details: Please refer to the CSR website for all categories: Environment (tosoh.com)