Introduction and Interview with the President

To Our Shareholders, Customers and Employees

Chairman: Yoshinobu Nakamura / President and CEO: Shunsuke Betsukawa

Breaking free from stagnation, embarking on a growth track

Management has been operating in a crisis mode in response to the slump in earnings that the Company has endured over the past few years. In order to break free from stagnation and set the Company firmly on a growth track, we believe the highest priority is building a corporate structure capable of producing strong revenues, and having firmly established our footing, a clear necessity, we are committed to the task of fostering a recovery in profitability. Specifically, we have implemented strategies that include the introduction of new products in segments that fall under the category of mass-produced machinery, structural reform in the heavy machinery businesses, and measures to promote an earnings recovery at overseas facilities where there were still pending concerns.

As a result of these measures, orders in all operating segments improved year on year in fiscal 2013, with total orders surpassing the ¥650 billion level for the first time since the global financial crisis. We truly believe that we have made great strides in turning the Company back toward a growth track.

Fiscal 2013 was the last year in our previous medium-term management plan "Innovation 21," but it was also the year in which we devised our new medium-term management plan that begins in fiscal 2014. The new medium-term management plan, which we are calling "Medium-Term Management Plan 2016," sets targets and the desired direction for the Company over the next three years and factors in a re-evaluation of the state of the Group, as well as a careful analysis and evaluation of the results and strategies of the previous three years under the Innovation 21 plan. The basic thinking for the new medium-term management plan rests on three concepts: "steady growth," "return to higher levels of profitability" and "persistent efforts for operational quality improvements." We believe "globalization" and "innovation," the core goals of Innovation 21, to be essential policy components of our growth strategies, and we will continue their implementation. We will also strengthen our focus on new growth areas, including energy-related operations. At the same time, we will aspire to establish a solid management foundation and will maintain a persistent commitment to improving operational quality in order to secure safety in the workplace, improved levels of compliance, and enhanced product quality.

The Company's corporate mission is to contribute to the development of society through the provision of first-class products and services. Winning the enduring confidence of customers worldwide is key to realizing sustainable growth and enhancing corporate value, and will, in turn, enable us to better meet the expectations of each and every stakeholder, including shareholders, customers, and employees as well as the local communities in which we operate. As a general machinery manufacturer, we must learn from our customers, the market, and from other companies within the Group, and we believe it is the mission of the Group to provide the market with the best possible products.

As we work toward accomplishing our goals, we kindly request the continued support and understanding of shareholders, customers, and employees.

Yoshinobu Nakamura
Yoshinobu Nakamura

Shunsuke Betsukawa
President and CEO
Shunsuke Betsukawa

Presentation and Interview with the President

Shunsuke Betsukawa : President and CEO

Providing first-class products and services that contribute to the growth and development of society

The SHI Group's corporate mission is to contribute to the growth and development of society by providing first-class products and services. Earning the enduring trust of customers worldwide is key to realizing sustainable growth and enhancing our corporate value, and will, in turn, enable us to better meet the expectations of shareholders, customers, employees, and local communities.

Fiscal 2013 Operating Results

Orders received exceeded ¥650 billion, providing us with a stepping-stone for sustained growth.

In fiscal 2013, orders received saw a substantial increase, exceeding ¥650 billion for the first time since the global financial crisis. Looking at the factors that have underpinned this growth, Japan's economy enjoyed a positive upswing on the back of corrections to the strong yen, while overseas the North American economy remained firm. From a net sales and operating income perspective, results were also well above forecast figures announced at the beginning of the year. I am confident that the positive flow-on effect of orders received in fiscal 2013 on net sales and operating income this fiscal year and beyond will provide a solid stepping-stone for sustained growth.

Review of Previous Medium-Term Management Plan "Innovation 21"

Review of Previous Medium-Term Management Plan "Innovation 21"

Our Previous "Innovation 21" Medium-Term Management Plan

Under the plan, we implemented measures inspired by the twin goals of globalization and innovation while expanding our global network.

With a view toward firmly embracing globalization, the SHI Group invested actively to expand its overseas business base. Over the three-year period of the Innovation 21 plan, we pursued a variety of initiatives, including the construction and expansion of new and existing overseas production facilities, the optimal relocation of plants, and the acquisition of overseas companies. As of the end of the plan, we believe that we have completed a full round of essential investments. Moving forward, we will now focus on increasing the profitability of our overseas network. Regrettably, we do maintain overseas subsidiaries that have fallen into the red. It is, therefore, vital that we realize an immediate positive turnaround. In similar fashion to the way we increase profitability by generating synergy effects with those overseas companies that we have acquired, we are looking to review our global sales network and promote the joint development of competitive products. In specific terms, we will increase our global market share and profitability in the large-scale power transmission equipment business by strengthening collaborative ties with Belgium-based Hansen Industrial Transmissions NV. In the plastic injection molding machine business, we will reinforce our cooperative ties in such wide-ranging areas as global marketing and product development with the Sumitomo (SHI) Demag Plastics Machinery Group (hereafter "Demag Plastics Group"), of Germany. In this manner, we will expand our share in growth fields and regions.

Objectives of the Medium-Term Management Plan 2016

Objectives of the Medium-Term Management Plan 2016

Promoting innovation

Innovation is an absolute prerequisite to securing competitive advantage. The SHI Group has continued to engage in product innovation activities that entail injecting highly competitive and innovative products into priority markets in its bid to promote sustainable global growth and increase its earnings power. As one example, we developed equipment for use in Boron Neutron Capture Therapy (BNCT), which continues to attract attention as a next-generation cancer treatment in the medical field, and received our first order in fiscal 2012. This particular equipment draws on the cyclotron accelerator technology that we have nurtured over many years. Delivery and installation represented the world's first practical application of BNCT equipment. In addition, we brought to the market the SE-EV series, which achieves considerable energy savings in the plastic injection molding machinery field. Moreover, we completed the development of a hybrid hydraulic excavator and commenced sales in fiscal 2013.

Our New Medium-Term Management Plan 2016

Targeting net sales of ¥700 billion and an operating income margin of 7.5% in fiscal 2016, the final year of the plan

In fiscal 2016, the final year of our new Medium-Term Management Plan 2016, we will endeavor to achieve net sales of ¥700 billion, operating income of ¥52.5 billion, and an ROIC of 7% or more. These numerical targets set an absolute minimum level of performance that the SHI Group must achieve. While not quite the level of a truly high earnings company, these benchmarks provide a stepping-stone for improved growth and earnings. To achieve these numerical targets, each company within the SHI Group must definitively carry out its initiatives. From an investment perspective, we plan to allocate ¥50 billion to capital expenditure and ¥45 billion to R&D for a total of ¥95 billion over the next three years, and will take aggressive steps to investment in fields that are essential to growth.

"Medium-Term Management Plan 2016" Aiming for Steady Growth

"Medium-Term Management Plan 2016" Aiming for Steady Growth

Under the new Medium-Term Management Plan 2016, the SHI Group will pursue the three fundamental policies of "steady growth," "return to higher levels of profitability," and "persistent efforts for operational quality improvements."

Shunsuke Betsukawa : President and CEO
Steady growth

The SHI Group will pursue steady growth in its efforts to secure net sales of ¥700 billion in fiscal 2016. As a part of this growth, we will adopt the key words "globalization" or "expansion," "innovation" or "change," and "Group synergies" or "ability to connect." The principal businesses that will drive this growth are power transmission and control equipment and plastic injection molding machines, which are the mainstay segments that fall into the category of mass-produced machinery. Through these businesses, which we have earmarked for global expansion, we will continue to develop highly competitive products that can excel on the world stage while bolstering our area marketing activities based on an accurate grasp of each region's and market's specific attributes, which we recognize hold the key. In power transmission and control equipment and plastic injection molding machines, we will further reinforce collaboration with Hansen Industrial Transmissions NV and the Demag Plastics Group, respectively. The SHI Group will pay equal attention to the aftermarket business, which includes the maintenance and repairs businesses, which remain a common issue throughout the entire Group. We will also focus on energy-related markets as a new growth area that can support steady growth.

"Medium-Term Management Plan 2016" Return to Higher Levels of Profitability

"Medium-Term Management Plan 2016" Return to Higher Levels of Profitability
Return to higher levels of profitability

The SHI Group has set the goal of improving its operating income margin to 7.5% by fiscal 2016, from its current level of 5.6% in fiscal 2013. Within the Group itself, the ability to generate profits differs from business to business. This, in turn, gives rise to discrepancies in operating income margin goals between businesses. Speed reducers, plastic injection molding machines, steam turbines, cryogenic equipment, and related products will form the Group's high-earning businesses with an operating income margin target of around 10%. Turning to the energy-related field, growth in both sales and profits is anticipated in the power generation boiler business, where continued expansion is anticipated. Meanwhile, the SHI Group has set an absolute minimum operating income margin of 5% across all businesses of the Group and will work to promote a bottom-up approach as a part of efforts to lift profitability.

Persistent efforts for operational quality improvements

The SHI Group will place the utmost emphasis on improving the quality of its operations and to establish a robust operating platform as a part of efforts to ensure product quality, compliance, and on-site safety. In addition to all operating divisions taking part in activities to upgrade operating quality, the Group Head Office will bolster its support and check role and functions toward operating divisions.

What are your thoughts on the degree to which the goals of the previous mediumterm management plan was achieved?
We successfully used the period of the plan to place the Group in a position where it could enter a firm growth trajectory.

Regrettably, we were unable to achieve the goals set for fiscal 2013 under the Innovation 21 plan. Despite signs that the global economy had staged a recovery following the shock that followed the collapse of Lehman Brothers, the SHI Group was unable to secure major growth in earnings due to uncertainties that continue to linger throughout its operating markets. These uncertainties were largely attributable to the negative flow-on effects of the financial crisis in Europe and a slowdown in the rate of economic growth in China. Despite these difficult conditions, we undertook the capital and R&D investments that were considered necessary to growth and accordingly were successful in securing a substantial upswing in orders received. We are confident that all preparatory steps have been completed and that we are poised to reenter a growth trajectory.

What is the outlook for fiscal 2014?
We anticipate that conditions for orders received will remain firm especially in Japan.

Japan is expected to benefit from a period of ongoing economic recovery. This is largely attributable to correction to the strong yen that began during the previous fiscal year as well as an increase in capital investment. Overseas, indications are that the U.S. economy will remain firm. Conditions in Europe and China, however, are projected to be uncertain. Under these circumstances, the SHI Group is forecasting orders received to reach ¥650 billion, with net sales and operating income expected to come in at ¥650 billion and ¥37 billion, respectively. Results in the Construction Machinery segment are anticipated to fall owing mainly to corrections following the strong domestic demand experienced in fiscal 2013. We believe that this downturn will be offset by contributions from other segments. As a result, we are projecting overall increases in revenues and profits. While macroeconomic conditions remain unclear both in Japan and overseas, we have set the aforementioned forecasts at the minimum level that we expect the Group will achieve.

Please tell us about the Company's policy toward the return of profits to shareholders.
Under the Medium-Term Management Plan 2016, we have declared our intention to maintain a dividend payout ratio of 30%.

Under its Medium-Term Management Plan 2016, which covers the three-year period from fiscal 2014 to fiscal 2016, the Company has set a dividend payout ratio target of 30%. Taking the Group's earnings performance into consideration, the Company declared an annual dividend of ¥7 per share for a dividend payout ratio of 24%. This was ¥1 per share lower than in fiscal 2012. In fiscal 2014, we are projecting an annual dividend of ¥9 per share for a dividend payout ratio of 29.1%.

As the first year of the Medium-Term Management Plan 2016, my mission is to place the Group firmly on a growth trajectory. Management will, therefore, continue to focus on improving earnings power and cash flows with a view to returning the Group to higher levels of profitability. Against this backdrop, we will work toward securing a stable dividend payout ratio of 30%.

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