MANAGEMENT MESSAGE COO Message

As of April 1, 2023, I have been appointed President and Representative Director and COO (Chief Operating Officer) of AIR WATER INC. I am very proud to be leading the business execution at a time when the Air Water Group is entering a new stage of its history, having achieved 1-trillion-yen in group revenue as its goal set since 2010.

My role is to work with the CEO to develop and lead a growth strategy for 2030 and beyond, based on a policies of “expanding growth areas,” “creating new businesses,” and “strengthening profitability of our existing businesses.” I am willing to fulfill my responsibilities to the fullest to meet the expectations of our stakeholders.

Before discussing our business growth strategy, I need to explain our steps so far in the industrial gas business, where we started. The domestic industrial gas market peaked around 2010 and has since stagnated in line with the decline in crude steel production. Under such circumstances, we continue to achieve sustainable growth by adapting to changes in the business environment and users. The reasons for this sustainable growth include the development of technologies such as the high-purity nitrogen gas generator “V1” and gas total system, a business model based on these technologies, and a regional strategy based on the deployment of the small- and medium-sized liquefied gas plant “VSU”.

We developed the “V1” in 1980 and devised a total gas system that covers plant design and construction, gas production and supply, and related backup and maintenance. Together, we created the de facto standard model for the supply of nitrogen gas to semiconductor plants. Since then, we have continued to improve our plants by utilizing data from the field as well as develop technologies to adapt to changing needs, such as higher efficiency and larger flow rates. Those efforts laid the foundation for our electronics business, which is now one of our growth drivers.

In the past, industrial gas was produced in large concentrated volumes at industrial complexes in the Gulf Coast area and then transported to areas of demand for sale. However, we developed a decentralized supply chain by installing VSUs, small and medium sized liquefied gas plants, in the outskirts of those areas as demanded. It is expanding as an innovative community-based gas supply model that can contribute to the risk of decreasing on-site plant locations due to Japan’s changing industrial structure and supply chain troubles caused by abnormal weather conditions.

Such competitiveness as our improving technologies and a community-based foundation have also helped expand our Group’s business domains from industrial gases to medical care, food products, and other areas. We will leverage these strengths to further expand our growth areas and create new businesses moving forward.

Currently, we are expanding our overseas business (especially in North America and India) and electronics business, both of which we have designated as priority growth areas.

In North America, we were a late entrant into a mature market where industrial gas majors hold approximately 85% of the market share. Therefore, we first established a basic business
of cryogenic equipment, which is our area of expertise, with gas majors and dealers as our customers. At the same time, we have differentiated ourselves from the industrial gas majors by staying closer to the local gas dealers and users through a proposal which combines plant engineering and VSU models. Since 2022, we have acquired gas dealers in several regions and have also begun construction of an on-site plant in New York State, our first in-house manufacturing facility. In addition, entered the helium supply business, which covers the entire North American region. Going forward, we will continue to broaden our supply chain with the VSU model, as well as commercialize hydrogen and CCU*, for which new demand is expected against the backdrop of decarbonization.

In India, we have earned trust through stable and safe operations with superior operation/maintenance technologies through large-scale M&As of steel on-site bases in the eastern
and southern parts of the country, and have gained the third largest market share in the world’s fastest growing market. In addition, we have received many new inquiries for steel onsite projects, and recently received an order from SAIL, India’s government-owned steel company, to supply onsite gas to its Durgapur steel plant in the eastern India. The Group’s engineering capabilities strongly support our strategy to become an industrial gas manufacturer with a strong presence in the global market, especially in terms of “quality,” and contribute to the expansion of our growth areas. (ref. Global & Engineering)

In the Electronics business, we are currently constructing onsite plants for large-scale semiconductor factories for CMOS sensors, DRAM, NAND flash memory, and other products at several locations in Japan. In response to strong investment in new and additional semiconductor plants in Japan, we are expanding related businesses based on on-site gas supply. Concurrently, we will grow our business by developing products for the growing markets of semiconductors and the environmental field.

We are also proactively creating new businesses that start with solutions to social issues. At present, we are building a regional recycling-based clean energy supply chain in Hokkaido that utilizes biogas generated from livestock manure, and we are steadily producing results. This is exactly the kind of new business that only our Group, which has been dealing with local issues in Hokkaido, can offer.

Furthermore, as food security and food self-sufficiency become social issues, we are strengthening our “fruit and vegetable distribution and processing platform,” which crosses the value chain from procurement, processing, and sales of fruits and vegetables with logistics capabilities that link production areas and consumption areas. In February 2023, a collaborative structure was formed with VEGETECH Co.,Ltd., and DELICA FOODS HOLDINGS Co., Ltd., trading companies specializing in fruits and vegetables. In October, Marushin Seika, a middle wholesaler in Fukuoka Prefecture, joined our Group, enhancing the stable supply system and developing new production areas to diversify risks.

To date, we have evolved in the industrial gas business by growing existing businesses, diversifying into related industries, and expanding overseas while developing its core/related technologies and conducting M&As. The acquisition of a wide variety of development personnel, technologies, and other resources through this process has been a major strength of our group.

In May 2023, we reformed our organization for the technology development structure. We have established a structure that accelerates the process from development to commercialization in all business areas. Also, the new “Gas Technology Development Center” is now in place. We are focusing on gas technology development as the base for all our businesses and a source of synergy.

In our overseas business, we launched the “Global & Engineering Group” to strengthen our engineering structure, an essential technical area for the industrial gas supply, and centralized the management function of the overseas business to enhance global governance.

We will continue to upgrade our diverse technologies and provide solutions to increasingly complex social issues with our combined technological development resources, thereby creating new social value.

In existing businesses, mainly in Japan, we are pursuing several initiatives to further increase profitability. Existing businesses will become a solid earnings base if they are made more
efficient and improved. Improving the profitability of existing businesses will be a prerequisite for allocating management resources to new businesses and growth areas. Therefore, we will review our current position in each business area, or what we call a full inspection of our business at first, then take measures for the higher profitability based on possible synergies to be generated in our Group.

Toward the integrated group management, we will continue to reorganize our group companies. Through the business inspection, also ensure price management for rising
costs. Further more, we will continue to take steps to strengthen the profitability of existing businesses from various angles, including reviewing low-profit projects, optimizing personnel allocation, improving the efficiency of logistics and procurement, and the nature of our business bases, to do strengthen the profitability of our existing businesses. Along with these to enhance profitability, we also aim to improve capital efficiency by optimizing inventories and shortening the CCC (Cash Conversion Cycle).

Traditionally, the criteria for business valuation did not change from business to business, and business profit and loss was used as the main criterion for all the businesses. However,
mature businesses and growing businesses should not be evaluated on the same scale. Going forward, we will consider each business individually and, if necessary, combine multiple
indicators such as ROIC and other capital efficiency, market growth, and social contribution in a composite manner to establish evaluation indicators that match the characteristic of each
business. Given that, we strive to strengthen the profitability and improve the productivity of each individual business. The goal of these initiatives is to raise the operating profit margin of the entire business to at least 10% by FY2030.

Continuous investment is essential as well to expand our growth areas. We are planning to make vigorous capital and M&A investments, mainly in the Overseas and Electronics.

In order to maintain sufficient financial security in case of prolonged stagnation in economic activity and to concentrate management resources in growth areas, we will make future M&A investments and capital expenditures even more carefully. As part of this effort, we will thoroughly examine ROIC and enhance our investment verification function.

In fact, we started reviewing the functions of the Investment Committee this year as well as verifying our previous investment projects. The previous Investment Committee focused on checking the profitability of investments, identifying risks, and supporting solutions. However, in the new Investment Committee, I, as the president, will make a decision on whether or not to make an investment based on an evaluation of the business potential of the project by the investment planning and the head office administration divisions. The decision process includes qualitative and quantitative assessments of consistency with the company’s overall strategy, synergies with existing businesses, the probability and execution structure of the business plan, geopolitical risks, exit strategies, and other factors. We then make the most appropriate choice for the future growth of our Group.

What is important in investing in a new business is the process and story of how to sprout the “seed” of the business, nurture it, and develop it into a successful business. We believe it is important to formulate a hypothesis of that story in the planning stage and execute it after logical verification. So, in verifying new project investments, we will establish a process whereby the Investment Committee reviews the “seed” stage, followed by the verification process.

While we plan an aggressive investment strategy, we will maintain a sound financial discipline. Specifically, we have set the target range for the ratio of equity attributable to owners of the parent (to total asset) at 36-40% and the target range of net D/E ratio at 0.8-1.0 times. In terms of capital efficiency, we have set company-wide targets for ROE (return on equity attributable to owners of the parent) and ROIC (return on invested capital). Now we aim to increase them from 9.7% ROE and 5.6% ROIC as of FY2022 to more than 12% and 8%, respectively.

Our basic policy is to increase the return of profits to shareholders as one of the most important management issues, while strengthening our management base to constantly improve our corporate value, and to increase dividends by increasing our profits. Specifically, we aim for a dividend payout ratio of 30% or more as shareholder return and stable dividends that match our business performance. For FY2022, the year-end dividend was 28 yen plus a special dividend* of 4 yen per share. As a result, the annual dividend for FY2023 was 60 yen per share as a total of 28 yen for the interim, 28 yen for the year-end, and 4 yen for the special dividend, making a dividend payout ratio 33.9% on the consolidated basis. This represents a dividend increase of more than 2.5 times over the past 10 years.

The most important premise of our Group’s business activities is “to be sustainable in terms of the global environment.” All of our Group’s businesses are based on the Sustainability Vision for 2050 and Purpose. We do our business with the vision to “achieve a recycling-oriented society through coexistence with society and the earth” and the Purpose of “meeting society’s needs with nature’s blessings.” Through our business activities, we aim to realize a recycling-oriented society, zero environmental impact, and the revitalized global environment. We keep moving forward to become a corporate group that continues to be chosen by local communities and customers, and that realizes the well-being of our employees.

In particular, we have reflected our response to climate change in our business strategy as one of our Pillars to Success (Materiality). We are committed to carbon neutrality in terms of both our “responsibility” to reduce GHG emissions and our “contribution” to a decarbonized society through our products and business. As an example of how we are contributing to GHG reduction through our business, we are using gas control technologies, such as refining, separation, and storage, developed in our industrial gas business, to supply biogas, methane, hydrogen, and other gases, and to develop carbon neutral technologies that contribute to low carbon and decarbonization such as CO2 capture and utilization. To reduce our GHG emissions, we are also prioritizing energy conservation activities such as low-carbonization of energy used in our production processes and investment in energy-saving equipment. We will also work to expand the use of renewable energy in stages and build a low-carbon logistics business.

The Air Water Group has a diverse range of businesses, human resources, and technologies. We have an “All-Weather” management base that is resilient to changes in the business environment, a foothold for further growth, and enough connections with local communities, customers, local governments, and business partners. I am convinced that if we can maximize the potential of these management resources, we can grow even higher and create more values.

In order to enhance our corporate value from both social and economic perspectives, and to grow our Group into an “essential” member of our society, I will fulfill my role by implementing our strategies, sometimes cautiously, sometimes boldly.