Message from the President

In the previous fiscal year, the year ended March 31, 2007, we achieved all-time records for both net sales and income, yet in the year ended March 31, 2008, sales and income declined. Net sales decreased by 1.8% year on year to Y1,103.8 billion. Operating income fell by 37.3% to Y35.7 billion. Recurring profit declined by 44.1% to Y37.7 billion, and net income dropped by 49.7% to Y17.7 billion.

The major factor behind these results was the steep decline in housing starts, due to the impact of the revision of the Building Standard Law in June 2007. In the previous fiscal year, the total number of new housing starts came to 1.285 million units, whereas in the year under review, it was just 1.036 million units, a large 19.4% decline. A detailed look shows owner-occupied housing starts fell by 12.3%, and subdivision housing starts fell by 26.1%.

As of May 2008, new starts of owner-occupied and subdivision housing had returned to pre-revision levels, but large properties such as condominiums had not yet recovered. Specifically, condominium construction starts fell dramatically during the year ended March 31, 2008, ending 34.0% lower. The impact is expected to continue into the new fiscal year, the year ending March 31, 2009.

Prices continued to soar for raw materials, including the aluminum we use in our flagship housing window sash business and the copper that goes into our faucet fittings, squeezing our business results. Moreover, with the fall in share prices since summer 2007, retirement allowance costs increased due to the erosion of pension assets at the end of the period under review, reducing income by Y10.0 billion.

In the year under review we continued to improve profitability at our existing businesses and aggressively develop new businesses. Firstly, we continued to launch new products and implement model changes to make our products as functional and attractive as possible. Tostem and Inax jointly developed the Kururinpoi drain, which uses the flow of the draining bathwater to collect waste inside the drain trap for easier disposal. TV commercials for our bathrooms featuring this drain were well received, and the product remained a hit during the year under review. We are proud of the fact that the Kururinpoi drain is a product that resolves a difficulty faced by our customers, making it highly appealing to them.

To strengthen cost competitiveness, we increased capacity at our overseas plants and restructured our plants in Japan. In the previous fiscal year, we closed three Tostem plants.

The home center business, which we positioned as a new business, opened five new stores, largely to plan. Profit margins improved, and business results were good.

We continued to target the renovation market because we foresee that it will be the key to expanding net sales and profit in the future. In the year under review, the market was sluggish but the major factors behind this were the worsening economy and a decline in consumer confidence. However, I recognize that additional countermeasures remain for manufacturers in the Group. The first challenge is to develop products that are attractive to customers. We can further upgrade the delivery system, for example by shipping directly to each house, and also improve the installation of renovation-related products with simpler and speedier construction procedures. As of the end of March 2008, the JS Group has 146 showrooms but it is important for us to strengthen the capabilities of these showrooms to develop new demand for renovations. As an experimental new approach, the JS Group has started Internet sales to supply products directly to customers.

We have also set up renovation corners in the large-scale outlets of the home center business operated by Tostem Viva to create direct points of contact with our consumers, and we are hoping these corners will contribute to a growth in sales.

The year ended March 31, 2008 was the final year of the previous medium-term management plan. Unfortunately, the market environment changed dramatically in the three years following the creation of the plan, so neither net sales nor income reached the targets we set forth. Over the three years, the factor that had the biggest impact was the rise in raw material prices. On many occasions, we had reason to believe prices had reached their peak, but each time, we were disappointed. We did not expect such a significant impact to materialize when we came up with our previous three-year medium term management plan three years ago

The prices of raw materials have been rising continuously over the last four years and have exceeded the level that our major subsidiaries Tostem and Inax can cover with selfeffort, so over the past two years we have attempted to alleviate the impact of rising costs by adjusting our prices. However, these adjustments have only covered half of the additional costs. Then, like a killer blow, the revision of the Building Standard Law caused a decline in housing starts, and we were unable to fully compensate for this new turn of business.

Amid all this, one of our brightest achievements in the last three years has been the drastic cost savings achieved by eliminating redundant parts of our organization by, for example, reducing staff at Tostem and restructuring our plants. Our new businesses have also achieved major successes. Our home centers have developed into drivers of growth for the Group and Toyo Exterior has expanded its market share of the housing exterior business by enhancing the appeal of its products.

Under the new medium-term management vision, broadly speaking, we will create scenarios and begin working to achieve them in the first year, then generate profit and reap the benefits in the second and third years. Regarding the business environment, the vision assumes that the number of housing starts will remain at about the level of 1.15 million units per annum and that the cost of materials will continue to rise.

The priority policies in the medium-term management vision that are related to our growth strategy include development of our housing solution businesses (the housing franchise business and insurance business for housing defect warranties) with the objective of increasing per-house net sales, expansion of local sales overseas, an area in which we are lagging behind our competitors, expansion of the home center business which brings with it an improved profit margin, and further development of the renovation business.

On the other hand, the vision sets forth measures to enhance cost competitiveness, such as strengthening group collaboration to create synergy, and improving the productivity at our production plants and indirect divisions. We forecast that severe business conditions will hasten industry restructuring, so, given these conditions, our intent is to make the JS Group stronger through aggressive strategic investment, including M&A.

Our medium-term environmental policies include evolving into a recycling-oriented company and challenging ourselves to creative technological innovation. The JS Group will continue to challenge itself to develop innovative technologies that alleviate the environmental impact of all company processes from development and production to recycling and disposal.

We forecast that in the first year of the new medium-term management vision, the year ending March 31, 2009, housing starts will return to the normal level of 1.15 million starts, but because the period between housing starts and sales varies for each product, we expect the impact of reduced housing starts to linger, especially in the commercial building-related business. Moreover, I am concerned that prices of raw materials other than aluminum and copper will rise steeply, and the business environment will be unfavorable.

However, we will be able to increase sales even in a business environment such as this, due to a recovery in the housing materials business related to detached houses and the housing franchise business, both of which declined substantially last year. The benefits from the opening of new home centers will also contribute. We will also achieve an increase in income through the launch of new products, thorough cost reductions, price adjustments, etc. A decline in the retirement allowance costs from the level in the year under review will be another positive factor.

There is no change to our policy of a dividend payout ratio of more than 30% on a consolidated basis. In future, we will continue to aim for a higher ROE, and to that end, we will improve profit (the numerator) and reduce shareholders' equity (the denominator) to maintain a good balance, including flexibly buying back and canceling company shares, as necessary. In the current fiscal year, after obtaining approval in the shareholders' meeting held on June 19, we shifted the portion of additional paid-in capital higher than the 25% of capital stipulated in the Corporate Law to the other capital surplus account so that we would be able to respond with more flexible capital measures.

The United States is in the midst of a subprime problem, so the housing market appears to be slowing down temporarily, but this sector in the U.S. has much more potential than the market in Japan in terms of actual demand. The second-hand market is also developing there, so unlike in Japan, there is a wealth-building component to housing. Japan's housing market is a mature industry, and therefore growth is not strong. However, more growth and new business opportunities can be created in this sector, depending on government measures and the like.

Housing starts are expected to decline in Japan as the population declines, but I am not so pessimistic. On the contrary, this situation just makes me even more determined to push ahead with the creation of innovative technologies for housing facilities and equipment and the development of energy-conserving products and services. As a company providing a comprehensive range of housing equipment, there is still much we can do to provide people with good quality living environments and living spaces. We will continue to expend all our efforts to contribute to innovative lifestyles with our innovative technologies, increase our corporate value, and become a corporate group that appeals to all of its stakeholders.

I hope that our shareholders and investors will appreciate these policies and continue to support the JS Group.

Masahiro Sugino
President and Chief Operating Officer