IR/To Our Stakeholders

Company

Overview

Operations

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Taiyo Nippon Sanso Group
Code of Conduct

Corporate Governance

Financial Information

Annual Reports

Message

To Our Stakeholders

Performance Highlights

In fiscal 2007, the first year of our current medium-term business plan, we focused on further expanding our business and improving management efficiency. We also undertook strategic mergers and acquisitions, forward-looking capital investment and other measures aimed at developing new businesses. As a consequence, we surpassed the targets set for our current medium-term business plan Global 5000: Stage 1 (consolidated net sales of ¥450,000 million and net income of ¥20,000 million in fiscal 2009) a full two years ahead of schedule. On behalf of the new management team that took the reins of Taiyo Nippon Sanso in fiscal 2006, we are proud to report this achievement and confident that it demonstrates the essential soundness of our approach.
In fiscal 2007, firm demand for high-grade steel materials from the automobile and shipbuilding industries continued to underscore robust conditions in the global steel industry. The chemical industry also saw steady growth in demand for high-performance resins from the automobile and consumer electronics sectors, while sales of general-purpose resins were also firm, led by exports. Conditions in the electronics sector were also brisk overall as demand for memory and other semiconductor devices continued to flourish, despite the drawn-out impact of production adjustments for certain products.
With the aim of contributing to the growth of our customers, we made steady progress in improving our competitiveness and productivity during the period under review. Owing to such efforts, a strong performance by our mainstay gas business both in Japan and overseas—coupled with robust results in our plant and gas equipment business—resulted in a rise in consolidated net sales of 15.4%, to ¥458,587 million. Operating profit climbed 36.2%, to ¥36,488 million, owing to improved capacity utilization rates at our gas production facilities, which helped to lower costs, and the penetration of price increases implemented in response to rising raw materials prices. Net income advanced 39.1%, to ¥20,094 million, as a special gain—namely, a gain on sale of property, plant and equipment generated through the sale of rental real estate—was partially offset by a special loss resulting from the sale of idle land.

The Next Stage

In fiscal 2007, Taiyo Nippon Sanso succeeded in raising its performance to a new level. Taking advantage of the opportunity presented by this achievement, we identified several challenges we must address to earn the status of a global player in the industrial gas business, which we define as an operator with ¥500,000 million in annual net sales.
First, we must grow and expand our core industrial gas-related businesses. To this end, we must strive to build value throughout the business cycle, cultivating new demand by ensuring our ability to understand and anticipate our customers’ everyday needs. We also recognize the need to further enhance efficiency through decisive, forward-looking capital investment. It is also necessary for us to further strengthen and foster the development of businesses that we have acquired.
Second, we must reinforce our global network. Essentially, this means drawing on technologies accumulated in the Japanese market, principally gas utilization, production and supply technologies, making related investments and allocating resources to link our operations worldwide. Recognizing that this effort also demands measures to foster employee development, we have declared fiscal 2008 “Human Resources Development Year” and are implementing ongoing, globally oriented training programs primarily for mid-level managers who exhibit business administration skills.
Third, we must improve management efficiency. Three years have passed since the merger that created Taiyo Nippon Sanso, and we have been more successful than initially anticipated in maximizing the benefits of the merger. Nonetheless, there is still work to be done that will enable us to further reduce costs and generate higher profits. Accordingly, we continue to take steps to, among others, rationalize logistics operations Companywide.
Finally, we must improve our efforts to address environmental issues and enhance compliance—the two most important challenges we face in ensuring the ongoing viability of our businesses. On the environmental front, we are taking steps to restrain the use of energy for the production and transportation of gas. We are also enhancing social responsibility. In terms of observing socially acceptable practices, we recognize that ensuring an incident- and disaster-free work environment, as well as product safety security, is a component of our costs. In addition, we are pursuing ongoing, long-term initiatives at building corporate value, in line with our codes of conduct, which are intended as strategic blueprints defining guidelines for employees of all Taiyo Nippon Sanso Group companies.

Reinforcing Corporate Governance

Taiyo Nippon Sanso strives continuously to enhance transparency and fulfill its responsibility to provide adequate explanations to shareholders and investors and to otherwise ensure superior corporate governance.
Our management team consists of the Board of Directors, which has 16 members, and the Board of Auditors, comprising four standing corporate auditors. Two of the directors are non-executive directors. One of these directors and two of the auditors are external. To ensure proper financial compliance regulations, management accepts responsibility for the financial reporting process, including the preparation of financial statements and creation of an internal control framework. The Board of Auditors oversees our independent accountants. To ensure the independence of the independent accountants from the directors, the Board of Auditors obtain audit plans in advance and convenes regularly to hear results of the independent accountants’ audits. Ernst & Young ShinNihon, who we have engaged as our independent accountants, is obliged to express an opinion on the legitimacy of our financial statements.
As one of the key components of our internal control framework, we have identified four categories of risks that we, as a company primarily engaged in the provision of high-pressure gases, must manage— security, safety, quality and the environment—and have established the Technology Risk Management Committee. Administrative responsibility for the committee lies with the Technological Affairs Division. The Committee is responsible for reviewing tasks set by individual committees for each of the aforementioned four risk categories, identifying necessary improvements to be made based on related management regulations, and using methods outlined in JISQ 2001 guidelines for the development and implementation of risk management systems, as well as for issuing instructions and requests for amendments.

Outlook

In June 2007, a proposal by the Board of Directors to increase annual cash dividends by ¥2.00, to ¥12.00 per share, was approved at the annual meeting of shareholders. For fiscal 2008, we project consolidated net sales of ¥485,000 million, operating profit of ¥38,300 million and net income of ¥20,500 million.
With the aim of confronting issues with the potential to hamper the ongoing viability of the businesses of the Taiyo Nippon Sanso Group, we have positioned fiscal 2008 as the year in which we will focus on strengthening our fundamental ability to address the many challenges we face, thereby reinforcing our footing and preparing us for the next stage of our evolution. To this end, we believe that it is essential to reinforce efforts Companywide to implement best current practices if we are to achieve our vision of becoming the first Asian-born industrial gas provider to break into the top ranks globally.
In closing, on behalf of the Board of Directors we thank our stakeholders for continuing to demonstrate their confidence in Taiyo Nippon Sanso. We hope that this annual report will enhance your understanding of our efforts to achieve our corporate vision by observing the guidelines for conduct implied in our corporate philosophy and striving to build corporate value and, in so doing, create value for our customers, shareholders and communities.

June 28, 2007
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