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Q&A in Presentation Meeting on the Financial Results for FY2006

Last updated: May 11, 2007

(Benefits of M&A)
Q. To what extent have the overall effects from M&A been incorporated into the FY2007 Business Plan?
A. Only first half contributions from Daiichi Pure Chemicals Co., Ltd., which was newly consolidated during the second half of FY2006, were included. Allen Extruders, Inc., which was acquired in April 2007, is projected to add 300 million yen to operating income for the full fiscal year. However, there were almost no benefits in the first half.

(Effect from trend in raw material costs)
Q. What assumptions were made regarding trends in raw material costs for the FY2007 plans for the High Performance Plastics Company and the Urban Infrastructure & Environmental Products Company? Looking at past performance, it appears difficult to timely and sufficiently hedge against price increases when raw material costs are rising. However, based on the present state of raw material costs, is it really possible to sufficiently hedge against increases?
A. For the High Performance Plastics Company, domestically produced naphtha is planned to cost around 53 thousand yen/KL, but it could possibly rise to 56 thousand yen/KL. Therefore, it appears that petroleum products, including olefin, will rise above the planned price level. This could become one of the factors for the income to fall short of present income plan.
As for polyvinyl chloride for the Urban Infrastructure & Environmental Products Company, there have been four price hikes over the past three years, and ultimately we were able to hedge against the price increases. This time, the basic idea is to hedge against the prices increases, but since January, market conditions have deteriorated; therefore, we would like to make a final decision after having sufficient discussions with raw material producers regarding various issues including the product market.

(Breakdown of sales increases in the IT field)
Q. What is the breakdown of sales growth for the High Performance Plastics Company in the IT field, which rose from 27.0 billion yen in FY2006 to 33.0 billion yen in FY2007? In light of the market environment, what types of the products are contributing to the increase of sales?
A. Liquid crystal chemicals and optical films such as retardation film will increase sales by 6.0 billion yen.
IT market conditions deteriorated during the Jan.-March quarter, but will likely slightly improve during the April-June quarter. At the present time, a strong recovery is expected in July or later.

(Market conditions for PVC pipes)
Q. Regarding PVC pipes, although conditions have likely changed slightly since January, could you give a more detailed explanation?
A. There are two factors behind the decline in sales between January and March.
  1. Since around the end of last year, the price of naphtha has declined, and there were sentiments that product prices will remain low, and inventories were curbed at the distribution stage.
  2. During the past three years, the price has continued to rise, and not only distributors but also construction companies have built up product inventories at various locations.
While one has to look at the conditions in April and later, there are expectations at the present time that prices will likely increase in the future, and if inventory adjustments are completed, it does not appear that conditions will remain as weak as they were in Jan.-March.

(Probability of the Housing Company realizing the medium-term business plan)
Q. If the value of new orders for the second half of FY2007 increase 5% year-on-year, will it be possible to generate operating income of 30.0 billion yen for FY2008 without further reducing fixed costs?
A. In the FY2007 business plan, emphasis is being placed on increasing order backlogs for the next fiscal year. We would like to increase sales in FY2008 through an increase in the number of housing orders in FY2007.
As for the operating income plan, measures to reduce fixed costs taken since the first half will boost profit starting in the second half; therefore, this reduction will appear as a year-on-year increase in the first half of FY2008. If fixed costs are properly reduced in FY2007, it is expected the income plan can be reached simply by making minor additions to the reduction in fixed costs in FY2008.

(FY2007 housing orders plan)
Q. When setting the planned increase of 3% year on year in the number of housing orders in the FY2007 business plan, what assumptions were made regarding the external environment? What are the aims regarding your own business efforts, such as increasing referral contracts?
A. While we are not very optimistic about the external environment for various reasons such as the difficult business conditions in the third quarter of FY2006, things appear to have slightly improved.
Housing orders will increase on account of the introduction of new products and differentiation measures. For FY2006, the product "Warm Airy" was popular, and is installed in more than half of the housing starts. We have begun to make appeals based on our high quality. As for reforms to our sales system, our sales ability is gradually improving, which can be seen in the increase in contracts with visitors to our exhibition places. On account of this, the number of housing orders increased 3%.

(Thoughts on housing sales company)
Q. Is it correct that in many studies, the system of large-sized sales companies is seen as the most efficient?
A. The first measures toward becoming a large-sized sales company were introduced in 2002. There is a final form of the large-sized sales company planned; however, there is still room to reconsider the organizational structure.

(Advantages in the system of large-sized sales companies for housing)
Q. Compared to previous systems, what are the merits of adopting a system of large-sized sales companies when it comes to increasing housing orders? In the past, there was also the same type of movement towards becoming large-sized sales companies in the Kyushu, Chugoku, and Tohoku regions, but have the expected benefits been achieved?
A. The increase in housing orders due to the integration of the sales companies in Tokyo, Nagoya, and Osaka, which was not expected for FY2007, should be at least maintained on a level. By creating large-sized sales companies, it will become easier to transfer managers and shift personnel effectively. In FY2008 and later, while maintaining a balance with market conditions, we would like to increase housing orders, of course.
In addition, the large-sized sales company system was introduced in the Chugoku, Tohoku, and Kyushu regions, and over the past five years, operating income has improved by more than 2.0 billion yen. Income has improved through growth in housing orders, improvements in the profit margin, and increases in the unit costs of homes instead of reducing fixed costs. This has been very effective.

(Measures to reduce fixed costs for the housing company)
Q. Regarding a factor analysis of FY2007 operating income for the Housing Company, how exactly will fixed costs be reduced by 5.0 billion yen?
A. Regarding the housing business, we have made firm efforts centering in Tokyo, Nagoya, and Osaka to reduce fixed costs by increasing organizational efficiency, centered on establishing large-sized sales companies, reducing labor costs by reducing indirect departments and levels, and reducing sales expenses by selecting and concentrating on particular sales areas.
Regarding the Living Environment Business, although labor costs will rise on account of a shift of employees from the housing business, the increase in fixed costs will be minimized by integrating sales bases with the housing business, centering on Tokyo, Nagoya, and Osaka.

(Trends in the rate of rebuilding)
Q. Although the rate of rebuilding has fallen, what do you think will happen in FY2007 and on?
A. As for attracting customers, we see a growing demand for rebuilding houses. In the future, we expect a more active demand for this service, and we will launch an aggressive campaign to capture this demand.


This press release may contain forward-looking statements. Such forward-looking statements are based on current expectations and beliefs and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements due to changes in global economic, business, competitive market and regulatory factors.

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