Air Water : Management Message

expanding our carbon dioxide gas and hydrogen gas businesses. Inaddition, we established our foundations in new business fields such as chemicals and seawater.

From FY2010, we set out to achieve a major target of becoming a company with one trillion yen in sales, and accelerated our business domain expansion through M&A. In particular, we established an all-weather business portfolio that strikes a balance between industrial and lifestyle-related businesses by expanding the domain of our lifestyle-related businesses to cover the medical, agriculture, and food industries. As a result, we achieved remarkable growth, with FY2021 revenue of 888.7 billion yen (up approximately 2.1 times versus FY2009) and operating profit of 65.2 billion yen (up approximately 2.2 times). Specifically, during the three-year period from FY2019 to FY2021, we worked to expand our business in the high-growth electronics field along with our global business, while address-ing changes in the environment caused by COVID-19. At the same time, our progress in structural reforms, including the integration and reorganization of Group companies, enabled us to achieve operating profit growth at a 15% compounded annual growth rate. Although we had to postpone our target of achieving one trillion yen in sales to FY2023 due in part to the uncertain market environment, our operating profit came in substantially higher than our target of 60 billion yen, with both sales and profits reaching record highs.

No growth, no company

Aiming for sales of 1.6 trillion yen under the terrAWell30 plan

We will aim for even greater heights by combining our diverse businesses, human resources, and technologies in line with our two growth axes centered on the global environment and wellness

Created an all-weather (holistically diversified) business portfolio as the highlight of nearly 20 years of effort

FY2021 marks the culmination of nearly 20 years of expanding Air Water into a diverse range of business fields since its founding in 2000. As a result, we created an all-weather business portfolio that is less susceptible to economic cycles and enables sustainable growth, and were able to achieve record results.

In the first 10 years following our establishment, we solidified our position as an industrial gas manufacturer by vertically integrating the upstream and downstream areas of our industrial gas business through mergers, creating an innovative gas supply model leveraging our highly efficient and compact liquefied oxygen/nitrogen co-production plants (VSUs), and

I believe that growth is the most important element in managing the Air Water Group. Without growth, there is no company. My role is to continue growing the company to increase the economic and social value we provide to our stakeholders through our business activities, and to spread that value to as many people as possible. For this to happen, we must always look ahead and constantly evolve our all-weather business portfolio. This also means turning social issue solutions into business opportunities. Going forward, as sustainable societies continue to develop around the world, pursuing social value means simultaneously enhancing economic value.

Our purpose is to "meet society's needs with nature's blessings." I believe that the inher-ent value of the Air Water Group is to align with people and communities to support healthy lifestyles and quality manufacturing by leveraging the earth's resources such as air and water to provide a stable supply of essential and indispensable goods for people's daily lives.

Based on this purpose, we have set the global environment and wellness as our future growth axes in our FY2030 long-term vision terrAWell30, taking into account global social challenges and the diverse business domains of our group. "Terra" means "earth" in Latin and "well" comes from "wellness," and "terrAWell" represents our desire that Air Water (AW) connects the earth and wellness. In this new stage, we aim to maximize both economic and social value through creating new corporate value by solving social issues, and by achieving synergies generated by creatively combining the Group's diverse business portfolio, human resources, and technologies in line with the two growth axes.

In terms of economic value, we are targeting revenue of 1.6 trillion yen (20% from overseas sales) with an eye toward business expansion, and operating profit of 160 billion yen (operating profit margin of 10%) in terms of improving profitability. In addition, we are also focusing on capital efficiency to ensure that our returns consistently exceed the cost of

True related diversification is still in progress

The distinctive feature of the Group's management is that we promote related diversifi-cation, as opposed to a collection of unrelated businesses. Since the merger of Hoxan Corporation and Daido Sanso Co., Ltd. in 1993, we have always naturally gravitated toward related diversification centered on industrial gas, and we have developed each of our businesses by actively pursuing M&A opportunities. In particular, we believe that related diversification with a focus on the core technologies, areas, and business models of indus-trial gas is more likely to generate synergies among our businesses and lead to growth. Furthermore, having commonality across businesses is an important factor for management to be able to pay attention to each business and to optimize the entire business.

However, as our company scaled and our divisional company system became increasingly pronounced, our business operations became more vertically compartmentalized and our human resources more fixed, and we started to worry that we did not achieve true related diversification. As the social and economic environment was undergoing drastic changes, we wondered if we could continue doing things the way we had in the past. This is when we realized that it was not enough to just keep growing through M&A deals, but that we needed to shift to a group management system that could more easily create synergies.

business groups. In addition, the four business groups have a flatter organizational struc-ture, replacing group heads with managers in charge to make it easier to build business models that cross the boundaries between business units. On the other hand, each of the13 business units has a unit head responsible for the performance of the business unit. The unit heads serve concurrently as presidents of the core operating companies under their control to ensure there is no disconnect between the unit and the frontline. Furthermore, management human resources from Group companiesassume key positions in our main organization to form the foundation for a group management system that integrates Air Water and Group companies.

Of course, the current count of 13 business units is by no means set in stone. An increase in the number of business units indicates the creation of new businesses and progress in the reorganization of our Group companies, and we expect to see this number expand along our growth axes going forward.

In addition, we will position our three regional business companies as an organization equivalent to a business group, which will be the core driver of our business promotion in Japan. This organization will strengthen our earning power by further focusing on our existing businesses, and will help us grow our business alongside the local communities we serve. Furthermore, we are also working on transforming our administrative, technical/ engineering, and logistics functions into a group-wide organizational system.

Through this unprecedented major organizational reform, we will maximize group synergy creation by leveraging our diverse business portfolio, human resources, and technologies, as well as our community-focused business foundation.

From partial optimization to total optimization

Accordingly, we shifted from an in-house company system to a business unit system in April 2022 to transform our organization and maximize our strengths through related diversification. In line with our global environment and wellness growth axes, we funda-mentally restructured our organization, replacing our six companies and two divisions under the in-house company system into the four business groups of Digital & Industry, Energy Solutions, Health & Safety, and Agriculture & Foods, with 13 business units under the

Executing our business strategy through ambidextrous management

So how will we execute ambidextrous management, which balances exploitation aimed at boosting the competitiveness of our existing businesses and exploration to uncover and develop new business opportunities, under our new organizational system? In terms of exploitation, we will focus on reviewing assets, integrating and reorganizing group com-panies, and applying digital transformation (DX) to strengthen our earnings power. With regard to exploration, we will leverage our community-focused business foundation and diverse business domains to turn ideas into solutions. In doing so, we will concentrate on creating new businesses that solve social issues in local communities with a focus on technological development.

Our basic business strategy is to strengthen our earnings structure and create new busi-nesses in Japan, and to grow through business expansion in overseas markets. In particular, we expect the electronics-related business and the overseas industrial gas business to drive growth. In the electronics-related business, we will focus on the semiconductor manufac-turing market, which continues to expand on the back of the rapid digitization of society, and continue to transform our business structure. In our global business, we will focus on the industrial gas supply business in India and North America, and will accelerate business expansion by fully leveraging our long-standing engineering capabilities in gas supply and our strategic alliance with Mitsui & Co.

Sustain a virtuous growth and investment cycle

Without investment, there is no growth. While investment is essential for growth, we must enhance our earning power and generate capital resources in order to continue investing. Under the rapidly changing business environment, our Group has achieved great results with a rapid and effective M&A strategy. Accordingly, some may think that growth invest-ment means M&A deals for the Air Water Group. However, more importantly, we actively make capital investments aimed at strengthening the business following an M&A deal, and this is what sustains the virtuous growth and investment cycle.

In addition, we will take a more holistic view of the Group as a whole and thoroughly implement initiatives to improve management efficiency. In particular, we will focus on business reforms driven by digital transformation (DX), logistics reforms, group-wide pro-curement activities, and strengthening and streamlining the management strategy functions of our administrative divisions. As part of our digital transformation, we will revamp our business management infrastructure system and work to enhance our data management system. Logistics will be centralized across the entire Group, consolidating external ware-houses into our own warehouses, bringing outsourced logistics in-house, and reviewing appropriate inventory levels. We will also minimize procurement costs for raw materials and supplies through joint group procurement.

Promoting the success of highly diverse human resources and selecting and developing managerial talent

Needless to say, it is the growth of our human resources and their commitment to taking on challenges that creates businesses and drives the development of the Group. I believe that business strategy and human resources strategy combine to drive corporate growth. Having expanded our business domain through M&A, the Group has attracted human resources with diverse skills and experience, and currently about half of our management team is made up of people brought in from outside the company. The percentage of women in leadership and supervisory positions is also rising each year. It is clear that the key to sustainable growth lies in how we can flexibly leverage our highly diverse human resources. Accordingly, we will revamp our personnel system in parallel with our organizational reforms. First, we will implement a job grading system based on the mission agreed upon by the individual and the company to promote the selection and development of manage-ment human resources who will drive the growth of the entire Air Water Group. We will also enable employees in their 20s to be promoted to managerial positions, giving them the opportunity to take on job grades with greater challenges.

At the same time, in order to enhance the well-being of our employees, we will also review our benefit programs, especially for employees who have work restrictions related to childcare or nursing care responsibilities, and provide an environment where they can continue to develop their careers by supporting their employment in a variety of ways. In addition, as our business structure undergoes major changes, we have launched a project to promote diversity and inclusion, and will once again create an environment enabling diverse human resources to thrive. In addition, we will develop a group-wide human resources pool and promote job mobility as a framework for providing opportunities for everyone to take on new challenges.

Creating positive environmental value for society

In 2021, we established our Environmental Vision 2050 and expressed our support for the Task Force on Climate-Related Financial Disclosures (TCFD). In line with this, we are taking on company-wide initiatives to create a decarbonized society, a resource recycling society, and a society in which humanity and nature can coexist. Based on our environmental vision, we aim to achieve a 30% reduction in greenhouse gas emissions (compared to FY2020) by FY2030 and become carbon neutral by 2050 under our long-term vision terrAWell30. We will also focus on recycling resources and conserving water by setting targets such as achieving an 80% waste recycling rate and a 10% reduction in per-unit water consumption (compared to FY2021).

However, in light of the our purpose, it is important to address global environmental issues not only by reducing the negative impact of our own activities to zero as a part of our social responsibility, but also by providing positive environmental value to our customers and society, which will in turn lead to growth opportunities. In recent years, hydrogen energy particularly has been attracting attention as a means to achieve decarbonization, and we are working to establish a hydrogen supply chain business in the US by leveraging our extensive expertise and technologies in the production, storage, transportation, and use of hydrogen gas. In addition, we established Shikaoi Hydrogen Farm Co., Ltd. in Japan to produce clean hydrogen energy from biogas derived from livestock manure, aiming to simultaneously pro-mote resource recycling and new energy sources by utilizing waste generated in local com-munities. Furthermore, we began construction of the Nature's Blessing Farm Matsumoto, a facility aimed at developing a resource recycling model based on locally produced and locally consumed energy, where unused biomass resources generated in local communities are effectively utilized to generate electricity, and the heat and carbon dioxide (CO2) generated during power generation are used for land-based aquaculture and agriculture.

Steadily strengthening governance functions

With respect to corporate governance, we established a nomination and compensation committee, in which a majority of members are independent outside directors, as an advisory body to the Board of Directors. This will enhance the independence and objectivity of the functions of the Board of Directors with respect to the nomination and compensation of directors, while also enhancing accountability. We newly appointed Mr. Yoshihiro Senzai, who has a wealth of experience and deep insight as a corporate manager and engineer, as an outside director. We look forward to having Mr. Senzai provide us with an outside perspective and steer our management in the right direction. In addition, to reinforce Group governance, we will establish a functional support company that consolidates the account-ing, finance, and other administrative operations of Air Water and our Group companies, promote operational efficiency, and build business processes that enhance our internal control system functions.

Fully fulfill our role in solving social issues by providing products and services that are essential to people's daily lives and industry

The Air Water Group currently has more than 100 businesses centered on industrial gas, with 676 business sites in Japan, 200 gas production sites, and 97 logistics sites. Based on this business infrastructure, we have 273 Group companies and approximately 20,000 employees in terms of organizational and human resources, as well as technological resources consisting of 540 R&D human resources, 290 engineers, and 138 collaborative projects between industry, government, and academia. Our strength lies in our ability to leverage this diverse set of management resources to create products and services that are essential to people's daily lives and industry. Moreover, the Air Water Group's presence in many areas has grown far beyond what it was when it was founded, and I believe we are fully capable of fulfilling our role in solving many social issues, including climate change and the super-aging society. As part of terrAWell30, we will maximize synergy creation by combining our diverse business portfolio, human resources, and technologies with the aim of reaching even greater heights.

I would like to ask all of our stakeholders for their continued support as we strive for further growth.

Chief Executive Officer

• 21 Our 2030 Vision

  Vision & Strategy

• 25 New Medium-Term Management Plan COO Message

  President and Representative Director Kiyoshi Shirai

• 31 Global Strategy COO Message

  Representative Director and Executive Vice President Ryosuke Matsubayashi