Air Water : Vision & Strategy

Management MessageCEO Message

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

01 Vision & Strategy

• 02 Business

  Our 2030 Vision

• 03 ESG

Harnessing the management resources we have hitherto accumulated and seeking to maximize corporate value with an even balance of both economic and social value

2022

2030

Achievements in the second foundation period

Over a 12-year period we achieved 2.1x growth in revenue and 2.2x growth in operating profit

While we proactively executed capital investments and M&A deals leveraging stable earnings in various business domains, we also pursued business structure reforms in an effort to improve profitability

(billion yen)

(billion yen)

Revenue 2.1x 888.7

65.2

47.0

426.4

29.0

35.2

35.1

2009

2015

2018

2021 (FY)

2009

2012

2015

2018

2021

(FY)

*Net sales and ordinary profit (Japan GAAP) are shown until FY2018.

We established an "all-weather" business portfolio with an optimal balance of industrial and lifestyle-related businesses

We capitalized on M&As to expand into more lifestyle-related business domains such as medical and agriculture & food products, and we established a business portfolio largely impervious to changes in the operating environment

Medical,

Agriculture & Foods, etc.

The word "terra" in Latin means "earth," whilst "well" refers to "wellness" or in other words, a healthy life. We therefore named our vision "terrAWell30" with the hope that Air Water (AW) can bring the earth (terra) and wellness (well) together.

Medical,

Energy 24%

• (1) Increased capacity to generate cash and improvements in capital efficiency

  We reorganized our various business domains into four business groups in line with our two axes of growth: global environment and wellness. We will press ahead with Group-wide integrated business unit management wherein each business group focuses on creating synergies between their affiliated business units and the business units formulate growth strategies concerning their affiliated business firms and optimally allocate management resources.

  Global Environment

  B.U.

  Digital &IndustryWellness

  Creation of synergies

  Business firms

terrAWell30 1st Stage (FY2022-2024)

In fiscal 2021, the situation remained unpredictable, with global supply chains stagnating and resource prices soaring, while implementing COVID-19 prevention measures and engaging in socioeconomic activities at the same time became the norm. Nevertheless, we took steps to transform our business portfolio by expanding our business in the growing electronics market and in the industrial gas business in India, while also taking on initia-tives to capture changes in the market brought on in the post-COVID new normal environment. In addition, we made progress in achieving total optimization of our production and sales system by promoting business restructuring, which included the inte-gration and reorganization of Group companies in our Chemical, Medical, and Agriculture and Food Products businesses. As a result, revenue rose 10.8% year-on-year to 888.7 billion yen, and operating profit increased 27.2% year-on-year to 65.2 billion yen, marking a new record high for the Group. As a result of the three-year period under our previous Medium-Term Management Plan,NEXT-2020 Final (FY2019-2021), we increased revenue by 146.4 billion yen and operating profit by 22.4 billion yen despite a highly uncertain business environment. In particular, operating profit far surpassed our management goal of 60 billion yen, and we were able to improve our operating profit margin to 7.3%.

Starting in fiscal 2022, we established "terraAWell30" as our vision for fiscal 2030, and as the first step toward achieving this vision, we launched our new Medium-Term Management Plan, "terraAWell30 1st stage" (FY2022-2024). The basic policy of this Medium-Term Management Plan is to expand our growth areas while enhancing profitability and developing new businesses based on synergies generated through the total optimization and the creative combination of our "diverse businesses, human resources, and technologies," which are the greatest strengths of the Air Water Group. We aim to reach our target revenue of 1 trillion yen in fiscal 2022, which we postponed owing to the COVID-19 pan-demic, and then achieve 1.2 trillion yen in revenue in fiscal 2024. In terms of operating profit, we are targeting 100 billion yen in fiscal

Achievement Status of Management Goals under the Previous Medium-Term Management Plan "NEXT-2020 Final" (FY2019-2021)

(Unit: billion yen)

Revenue

Operating Profit

Operating Profit Margin

Profit attributable to owners of the parent

Overseas Revenue Ratio

742.3

5.8%

5.0%

42.8

28.8

2024, and will continue lifting our operating profit margin.

We will expand our electronics and overseas industrial gas businesses, which are expected to be highly profitable in general, while enhancing profitability by totally optimizing Group man-agement resources and creating synergies, especially in existing businesses in Japan, to drive earnings growth. In addition, we will look at social issues in local communities as business opportuni-ties amid the drastically changing social environment, and develop new businesses that will support the next stage of our growth. We plan to make aggressive capital investments and engage in M&A activities in our global and other growth areas, while also boosting our funding capabilities and capital efficiency to sustain a virtuous cycle of growth and investment.

The management goals of this Medium-Term Management Plan will be achieved not only through implementing business strategies, but after creating various synergies that go beyond

01 Vision & Strategy

• 02 Business

• 03 ESG

the boundaries of business by combining functional strategies in areas such as human resources, technology, and administrative divisions, and by promoting total optimization of Group manage-ment resources.

In terms of functional strategies, we will cross-functionally integrate the Group's R&D and engineering technology resources, and ramp up technology-centered new business creation by promoting open innovation. In addition, we will implement a management model that leverages human resources by pro-moting the Group-wide rotation and movement of management human resources through human resources system reform and developing an internal human resources pool. At the same time, we will improve profitability by having our administrative divisions take the lead across the entire Group to work on business inno-vation driven by digital transformation (DX), logistics reforms, and optimization of procurement activities.

Basic Policy

Create synergies by optimizing Group management resources to expand growth areas, strengthen profitability, and incubate new businesses

Management Goals

(Unit: billion yen)

Revenue

Operating Profit

(Operating Profit Margin)

Profit attributable to owners of the parent

Overseas Revenue Ratio

Capital Efficiency

ROE

ROIC

888.7

65.2

(7.3%)

43.2

8.6%

11.5%

6.6%

CAGR (FY2021-2024)

01 Vision & Strategy

• 02 Business

  New Medium-Term Management Plan

• 03 ESG

Growth Policy by Business Unit

As a growth policy for our diverse business portfolio, we have classified each business group/unit into the three stages of "growth drivers," "strengthening profitability (stable growth)," and "developing foundations for future growth," and will promote business strategies tailored to each of these three stages.

Our growth drivers are in two areas: the overseas industrial gas business and electronics business. For our overseas operations, we see the expansion of the industrial gas field in India and North America as our highest priority objective, and will strengthen our engineering structure, which is essential for expanding our industrial gas supply business, and aggressively make strategic capital investments and pursue M&A opportunities. In the elec-tronics business, the other growth driver, we will steadily invest in expanding gas supply plants in response to the expansion of production by semiconductor manufacturers in Japan, and also build a new business model that integrates the Group's IndustrialGas and Chemical Businesses, with a focus on the semiconduc-tor manufacturing value chain. At the same time, we will focus on strengthening our development capabilities in the field of functional materials.

In existing businesses in Japan, including Industrial Gas, Energy, Health & Safety, and Agriculture & Foods, we will expand business in growth areas as a foundation for stable growth, while working to strengthen profitability by carrying out business restructuring through integrating and reorganizing Group compa-nies and promoting digital transformation (DX).

In developing the foundations for future growth, our regional businesses, which provide a venue for exploring new businesses in line with local social issues, and our resource recycling unit, which is working to create a decarbonized society by commer-cializing clean energy supply through CO2 capture and reuse as well as locally produced and locally consumed energy, will play a central role.

Financial Strategy and Shareholder Returns

With regard to financial strategy, our basic policy is to achieve a virtuous cycle of investment and growth by boosting our funding capabilities and capital efficiency while proactively making invest-ments. In terms of capital efficiency, we have set company-wide targets with the aim of consistently achieving ROE (Profit margin attributable to owners of the parent of 10% or higher and ROIC (return on invested capital) of 7% or higher.

For investments, we carefully select and execute investments based on an IRR (internal rate of return) of 8% or more in Japan while taking country risk into account on top of IRR for overseas investments. We will maintain a sound financial position by ensuring the ratio of equity attributable to owners of the parent isbetween 36% to 40% and by setting a target range for net D/E ratio of 0.8 to 1.0 times. In addition, we will use ROIC as a man-agement indicator for existing businesses and past investments to improve capital efficiency for the entire Group. Our planned total investment for the three-year period of this Medium-Term Management Plan is 400 billion yen, approximately 1.5 times that of the previous Medium-Term Management Plan. We expect to invest 260 billion yen in facilities, including new and additional on-site gas supply facilities for the electronics sector and expan-sion of industrial gas and engineering bases in North America, as well as 140 billion yen in M&A investment. Of these amounts, we plan to invest approximately 70 billion yen overseas, which will drive future growth.

Financial Strategy and Shareholder Returns

Investment Plans (Capital Expenditures, M&A)

terrAWell30 1st stage (FY2022-2024) (Unit: billion yen)

(Ref) NEXT-2020 Final (FY2019-2021) (Unit: billion yen)

Capital Allocation Policy 3-year cumulative total: FY2022-2024 (Unit: billion yen)

Use operating cash flow for dividends and capital investments, while also incorporating borrowings to fund M&A deals

Investment Plans Total 400.0

Sources of Funds

(Cash in)Strategic investment (Growth investment)

Total 330.0

The administrative divisions will take the lead in optimizing the entire Group in terms of data management, promoting digital transformation, logistics reforms, procurement activities, stream-lining operations, and leveraging and developing human resources, with plans to generate over 5 billion yen in profits in fiscal 2024, the final year of the Medium-Term Management Plan. With respect to cash flow, we expect to generate approximately 310 billion yen in operating cash flow over the three-year period by improving the profitability of each business, carefully selecting investments and stepping up post-investment monitoring, shortening the cash conversion cycle (CCC) by 10%, and streamlining assets by consol-idating and closing offices. In terms of capital allocation, we plan to use this operating cash flow to fund capital investments and dividends, while also using borrowings to fund M&A deals.

As for shareholder returns, our target dividend payout ratio is 30% or more, and we aim to pay stable dividends in line with our business performance. In fiscal 2021, our annual dividend per share was 56 yen, an increase of more than 2.5 times over the past 10 years.

Total Investment

400.0

Total Investment

274.9

Shareholder Return Policy

Aim for a dividend payout ratio of 30% and pay stable dividends commensurate with performance in the future

Annual Dividends and Dividend Payout Ratio

(Unit: yen)

36.4%*

2011

2012

2013

2015

Japanese GAAP

Annual DividendsPayout Ratio

2016

2017

20182019

2020

2021

IFRS

(Cash out)

*Maintained stable dividend despite decrease in earnings per share following the impact of tax reform in India.

(FY)