To Our Stakeholders

Performance in the year ended March 31, 2017

Sumitomo Osaka Cement’s net sales totaled \234,062 million, which was largely unchanged from the previous year due to a decline in revenue from the Mineral Resources, Cement- Related Products and Other businesses, which offset the increase in revenue generated by the Cement business.

As for profit, ordinary income fell \1,933 million compared to the previous fiscal year to \22,627 million due to weaker profitability of the Cement and other businesses. However, profit attributable to owners of parent increased \99 million compared to the previous fiscal year to \16,210 million because we recorded gains on sales of noncurrent assets, among other factors.

seethe Financial Review and
the Business Overview.

Outlook for the year ending March 31, 2018

The full-year earnings forecast indicates net sales of \251,500 million (up 7.4% year on year), ordinary income of \23,000 million (up 1.6% year on year), and profit attributable to owners of parent of \15,500 million (down 4.4% year on year).


Operating Income

Net Income Attributable to Owners of the Parent

Our Businesses and Growth Strategy

For over 100 years since our founding in 1907, Sumitomo Osaka Cement has played an important role in public works projects and social infrastructure development through the consistent provision of cement products. Today, we have grown into a major corporate group comprising 45 subsidiaries and 12 affiliates, with a diverse business portfolio that includes mineral resources, cement-related products, photoelectric, including optoelectronics and nanoparticle materials, and battery materials.

The domestic cement market, one of the core markets of the Group, has steadily declined since peaking in the year ended March 31, 1991, and the value of this market in the year ended March 31, 2017 is now just 48% of the peak. Although growth in domestic demand for cement over the long-term is unlikely given Japan’s declining population, demand is expected to materialize over the interim due to aging infrastructure, Japan’s national resilience initiatives to prepare for future disasters as well as the 2020 Tokyo Olympic and Paralympic Games and the construction of the Chuo Shinkansen linear train line.

Given this business climate, we established a new three-year medium-term management plan spanning from fiscal 2017 to fiscal 2019 (Note) that also focuses on where society and the company will be in ten years’ time. Therefore, I would like to take this opportunity to convey to all of our shareholders and stakeholders more details about the Group’s direction and strategy.

(Note) Fiscal 2017 refers to the accounting year ending March 31, 2018. Fiscal 2019 refers to the accounting year ending March 31, 2020.

Review of the previous Medium-term Management Plan

First, I would like to look back on the previous medium-term management plan that ended as of March 31, 2017. We recorded profit attributable to owners of parent of \16.2 billion, which was 11% higher than the plan of \14.6 billion, but we fell short of our targets for net sales (\234.1 billion versus \250 billion), operating income (\21.5 billion versus \26 billion) and ordinary income (\22.6 billion versus \26 billion).

The Cement business fell short of its profit targets because of declining domestic demand. Furthermore, the assumed growth in the repair market did not materialize as quickly as believed, while overseas expansion targeting Southeast Asia had to be put on hold. However, although the Advanced Materials business fell short of its targets, we were able to build a system where growth in mainstay products helped to generate stable profits in both Optoelectronics and Advanced Materials.

 2017.3 results2017.3 planChange
Domestic demand41.780 million t48 million t-6.22 million t
Coal prices$80/t$100$/t$20/t
Sales\234.1 billion\250 billion93.6%
Operating income\21.5 billion\26 billion82.7%
Ordinary income\22.6 billion\26 billion86.9%
Profit\16.2 billion\14.6 billion111.0%
Capital expenditures
(3-year total)
\57.6 billion\53 billion+\4.6 billion
Benchmark free cash flow
(3-year total)
\42.6 billion\15.4 billion+\27.2 billion

*Ordinary income/Total assets

Fiscal 2017 - 2019 Medium-term Management Plan

Business climate

Domestic cement demand is expected to reach a peak of 44,000 thousand metric tons during the years ending March 31, 2019 and 2020, driven by the full-scale start of construction work, set to begin in the year ending March 31,2018, related to the 2020 Tokyo Olympic and Paralympic Games. During the year ending March 31, 2021 and beyond, demand should remain stable based on the Government of Japan’s national resilience plan that calls for afforestation and water conservation, and as a result, we expect demand to gradually decline instead of fall off sharply. As for other Cement-related businesses, we have completed major investments in the Mineral Resources business and have now shifted to profiting from these investments, and in the Cement-Related Products business, we anticipate steady growth in future demand for maintenance and repair work for social infrastructure, and as a result we have added capacity at our repair products plant in 2015 to prepare for this market growth.

The markets for the mainstay products of the Optoelectronics and Advanced materials businesses, both found within the High-Performance Product business, are niche markets that are expected to see continuing growth in the future, while our market share is high for both as well. Meanwhile, the Optoelectronics business is expected to continue seeing sharp growth in transmission equipment given rising transmission volumes. As a leader in LiNbO3 external optical modulators, we are building a stable earnings base while building solid relationships with customers by meeting their needs.

In the Advanced Materials business, the semiconductor market will continue to grow due to advancements in high-speed processing and increased storage capacity. As a result, demand for semiconductor manufacturing equipment is expected to increase, and consequently the market for our mainstay product of electrostatic chucks (ESC) should grow as well. We are striving to identify customer needs, produce and ship products that meet these needs in a timely manner, and expand the business.

The Battery Materials business, which turned a profit in the year ended March 31, 2017, is expected to see future growth in the global market, but many companies are entering this business, meaning intense competition will likely continue. Harnessing the excellent safety and durability of the lithium iron phosphate batteries we have developed, we are working to enter new applications while also further expanding their use in stationary and vehicle-mounted applications.

Approach for the future

Given this business climate facing our businesses, we have defined an approach to take for the next ten years within our medium-term management plan covering fiscal 2017 to fiscal 2019. Under this approach, we are aiming to become a corporate group on a steady growth trajectory, by expanding our presence in the markets of both the Cement-Related business and High-Performance Product business.

The Cement-related business, which mainly targets construction markets, and High-Performance Product Business, which mainly targets ICT infrastructure and semiconductor markets, lack mutual correlation that is affected by the external environment, and therefore, we hope to build a business portfolio that can continually grow in a stable manner across the entire Group by working to grow each of these business segments individually.

Under our philosophy, we aim to be a business group that helps preserve the global environment and contributes to the sustainment and ongoing development of a prosperous society through tireless technological innovation and wide-ranging business activities. Over the years, we have worked collectively as a Group in order to develop our businesses in a sustainable manner. By clarifying our approach for the future within our new medium-term management plan, we want to share our future vision for sustainable growth and hope to work side by side with stakeholders to achieve this growth across the entire Group.

Basic policy of the Medium-term Management Plan

Based on this approach for the future, our basic policy is to implement our growth strategy steadfastly, positioning this medium-term management plan as the best opportunity for growth. Considering the need to grow both business segments, there is a need to take action before domestic cement demand declines, and now represents the best chance, since the High-Performance Product business is now able to turn a consistent profit.

Undoubtedly, it will be difficult to achieve growth with the Cement-related business only, but we plan to open up markets by fully harnessing the synergistic effects of our experience with markets, customers, facilities and know-how. As for overseas cement markets, we consider these to form a single market and we will utilize our synergies to open up this market.

The High-Performance Product business is enjoying growth in the markets for its mainstay products. As the markets grows, we plan to add production capacity to achieve even greater growth as well as open up new businesses in peripheral domains.

Approach for the future

We are aiming to become a corporate group on a steady growth trajectory, by expanding our presence in the markets of both the Cement-related Business and High-Performance Product Business.

Approach in each business field

Business Strategy

Overseas strategy for the Cement business

The first step is to achieve a stable increase in exports. We aggressively invest in export facilities and secure markets with continuous long-term demand in order to grow the overseas cement business, which is expected to see growth compared to the domestic cement business, which is expected to gradually decline in the future. These efforts will result in a stable operating ratio for kilns and the steady acceptance of industrial waste.

The second step will involve working to expand markets from two perspectives. First, we will expand in geographic terms by penetrating peripheral regions located close to current export markets. Second, we will market related products in regions where we export cement while also promoting our environmental-related business.

Through these measures, ultimately, we will aim to establish our presence in the cement business of Southeast Asia.

Peripheral businesses in the Cement-related business segment

Although there is little growth potential in the Cement-related business on a stand-alone basis, we do expect to be able to grow the market by realizing synergies with other businesses and through cooperation.

The environmental business will play an important role in building a recycling-based society, and for this reason we plan to expand it aggressively going forward. Toward that end, we will promote recycling at our current cement plants, while also looking to roll out our industrial waste processing technologies outside of Japan, mainly in Asia, and our industrial waste treatment service without the use of kilns that will make it possible to grow our environmental business even if cement production volume declines. In other businesses, we will open up untapped markets through tie-ups within the Group or with customers to take advantage of their people, facilities and know-how.

As for the soil business, we will increase sales and marketing strengths and efficiencies of the Group to improve customer satisfaction by managing information in a unified manner. In the Cement-Related products business, we will work with affiliated companies to establish an integrated ordering process for repair work spanning from inquiry and design to materials and construction in an effort to expand the business domain.

Reinforce the business foundation of the Cement-related business segment

To implement the medium-term management plan and achieve growth, we plan on rolling out the following measures based on the understanding that enhancing the base of our Cement-related business will result in a source of profit and cash flow.

First, we will further streamline logistics. We have already streamlined logistics in various forms, but there is still room for further improvement. We will take this opportunity to review our logistics system in an effort to reduce costs related to service stations and ships. Next, we will make capital expenditures that help to create a lower cost structure. This will involve capital investments needed for the business to survive even when domestic cement demand declines in the future.

seeSpecial Feature: Highlights under the Medium-Term Management Plan

Strategy for the High-Performance Product business

As for the High-Performance Product business, we plan to scale up production of our mainstay products. LiNbO3 external optical modulators in the Optoelectronics business, electronic materials (electrostatic chucks) for semiconductor manufacturing equipment in the Advanced Material business, and lithium iron phosphate batteries in the Battery Materials business each occupy a niche market, but our technological development has managed to turn these into growth areas. These markets are expected to see additional growth, so by investing in ways to scale up production based on market growth, we will aim to obtain the top share in each of these markets. When making these investments, we will work closely with major end users in technological development to ensure investments are successful.

seeSpecial Feature: Highlights under the Medium-Term Management Plan

Development of new businesses and new products

The Group’s High-Performance Product business has grown thus far by earning the trust of users through technological development in which resources were concentrated on target markets. Looking forward, to ensure management stability and unlock further growth, we will step up research and development, including the use of outside resources, in an effort to continually grow the entire business segment. In doing so, we will avoid segments with little correlation to existing products and segments where the market is large, but with intense competition. The plan calls for expansion into peripheral domains located close to existing products. Although plain in nature, this approach will help us to ensure the continuous growth of the entire business.

seeSpecial Feature: Highlights under the Medium-Term Management Plan

Aggressive investment underpinning our growth strategy

We have committed to investing \73 billion over the three-year period of the medium-term management plan. This marks a \20 billion increase (or 38%) over the total of \53 billion spent during the previous medium-term management plan. I would like to explain the key points of these investments below.

First is investments focused on our growth strategy. As an example from the Cement-related business, we will invest \6 billion to improve export facilities at the Kochi Plant and \1.8 billion to increase silo capacity (applying for multi-purpose) at the Onahama Service Station. All told, we will spend \13 billion on investments, which is an increase of \11 billion compared to the previous medium-term management plan. For the High-Performance Product business, we will invest \6 billion in facilities for increasing production of LiNbO3 external optical modulators and electrostatic chucks (ESC), which is an increase of \3.5 billion versus the previous medium-term management plan.

Second, we will significantly increase investments for the High-Performance Product business. We spent \7 billion during the previous medium-term management plan, which will now be increased to \11 billion. We have actually already begun these investments ahead of schedule in fiscal 2016, so total spending is expected to equate to \15 billion over the four-year period from fiscal 2016 to fiscal 2019.

Third, and finally, we will enhance maintenance and upgrades to reinforce our business base. This will include a long-term renewal plan for plants, mines, service stations, and ready-mixed concrete as well as a systematic plan to replace tankers.

Returning profits to shareholders

We recognize that dividends represent the basis of shareholder returns, and with this in mind, we decided to increase the dividend payout ratio from around 25% previously to around 30% this fiscal year. We plan to allocate \75.5 billion of the \107.2 billion operating cash flow generated during the three-year period of our medium-term management plan to investments. Accordingly, free cash flow will total \31.7 billion, and if we maintain a dividend payout ratio of around 30%, the remaining cash flow will be \16.9 billion. These funds will be utilized for additional investments in growth, share buybacks, and M&A. We will closely monitor various aspects of our external environment to ensure that we make the right decisions at the right time with regard to these funds.

Numerical targets

Based on the above measures, our goal is to achieve net sales of \270 billion and ordinary income of \30 billion in the fiscal year ending March 31, 2020, which is the final year of our medium-term management plan covering fiscal 2017 to fiscal 2019. In terms of management indicators, we are targeting an increase in ROA of 2.2% compared to the fiscal year ended March 31, 2017, to 9% and increase in ROE of 1.2%, to 10%.

Targets based on the Medium-term Management Plan

Net sales


Ordinary income


(Billions of yen)
Plan for fiscal 2019Compared to fiscal 2016
Net salesCement-related Business229.9109%
Product Business
Total268.4 115%
Cement-related Business21.2116%
Product Business
Net income20.0123%

This concludes my summary of the new medium-term management plan, under which the entire Sumitomo Osaka Cement Group will collectively work to achieve the above goals starting from this fiscal year. I ask for the understanding of our stakeholders with regard to the path the Sumitomo Osaka Cement Group will follow to achieve its future vision.

July 2017

Fukuichi Sekine, President