Message from the President

President, Atsushi Hirochi President, Atsushi Hirochi

In the second phase of the CAN 20 plan, we will proactively implement initiatives to achieve our goals at an accelerated pace

Reviewing economic conditions during the fiscal year ended March 31, 2018, the Japanese economy as a whole showed signs of mild recovery, with ongoing improvements in corporate performance and the employment situation. However, the GUNZE Group's management environment continued to face uncertainty due to several factors. These include political risks in the U.S. and Europe, as well as geopolitical risks in Asia. Other factors include rising resource prices, uncertainty regarding emerging economies, and fluctuations in the stock and foreign exchange markets.

Faced with this situation, the GUNZE Group's medium-term management plan, called "CAN 20," has entered the initial year of its second phase (fiscal 2017 through fiscal 2020). With the key concept of "Focus and Concentration," the GUNZE Group promoted three pivotal strategies: implementation of segment-specific business strategies, creation of new businesses, and reinforcement of the management foundation.

The GUNZE Group's functional solutions business suffered a decline in electronic component sales due to business downsizing. However, plastic film and engineering plastics performed strongly. The apparel business remained firm thanks to expanded sales of differentiated products, and stronger efforts made toward high-growth sales channels.

Consequently, the GUNZE Group's consolidated net sales for the fiscal year under review amounted to \140,521 million (a year-over-year increase of 2.9%). Consolidated operating income amounted to \6,239 million (a year-over-year increase of 48.3%). Consolidated ordinary income was \6,446 million (a year-over-year increase of 38.0%). As a result, GUNZE posted a consolidated net income attributable to owners of the parent amounting to \3,486 million (a year-over-year increase of 12.4%).

Our results by business segment are as follows:
In the functional solutions business, the plastic film category's mainstay shrink films enjoyed robust sales in Japan as well as solid exports. Plastic film sales for flexible packaging and industrial applications were also strong. Engineering plastics recorded healthy performance driven by strong sales of semiconductor-related products and recovery in sales for office equipment applications. In medical materials, bioabsorbable reinforcement felt destined for China and the new product Dura Wave performed strongly. However, the increase in expenses incurred for strengthening the sales system, and inventory adjustment by main clients, adversely impacted the overall performance of this category. Consequently, the functional solutions business posted net sales of \50,828 million (a year-over-year increase of 1.3%) and operating income of \5,381 million (a year-over-year increase of 55.2%).

In the apparel business, innerwear sales were robust thanks to expanded sales of women's innerwear centering on completely seamless items, as well as differentiated brands such as CUT OFF and sports category products. Other contributors included increased sales through high-growth channels such as EC and SPA. In legwear, tights and cold weather items showed robust performance, but sales of stockings and socks, both of which are year-round products, were sluggish. Consequently, the apparel business posted net sales of \74,012 million (a year-over-year increase of 3.3%) and operating income of \2,628 million (a year-over-year increase of 4.9%).

As for the lifestyle creation business, the shopping center business in the real estate category remained firm thanks to local community-based operations. Revenues from new properties contributed to the healthy performance of the rental property business. The sports club business offset the negative impact of initial expenses incurred for newly opened clubs by revitalizing existing clubs and implementing cost-cutting measures. Consequently, the lifestyle creation business recorded net sales of \16,122 million (a year-over-year increase of 6.3%) and operating income of \1,386 million (a year-over-year increase of 4.8%).

As for the future outlook, the Japanese economy is projected to continuously enjoy a strong positive mindset among businesses, with expanding capital investment in equipment resulting from robust corporate performance. Still, these are concerns of a downturn in the economy due to unstable international situations and soaring raw material prices. While consumers will remain strongly budget-minded, resulting in a slowdown in personal consumption, labor shortages are causing labor costs to rise. These factors are expected to cause the business environment surrounding the GUNZE Group to remain unpredictable.

Presently, the economic conditions mainly in the manufacturing industry are facing a turn of the tide. In this situation, GUNZE's high value-added products that draw on its differentiating technologies mainly in the plastic film and innerwear fields are highly acclaimed in the marketplace for their competitive advantage. GUNZE will continue to unite the concerted efforts of the Group to enhance the development of differentiated products and expand their sales, while improving profitability through production innovation.

In the functional solutions business, with its plastic film business enjoying expansion, GUNZE will promote the development of new markets and products and strengthen the global production system. In engineering plastics, efforts will be concentrated on expanding mainstay products targeting the office equipment market and those employing GUNZE's fiber technology, such as products related to semiconductors. In electronic components, GUNZE will seek to yield profits by pursuing synergy with other internal film-related business fields. In medical materials, GUNZE will strive to strengthen and expand its global business operation system covering new factories as well, while also launching a new sales system in Japan to promote further growth.

In the apparel business, GUNZE will aim to further expand sales of its mainstay brands in the innerwear category by leveraging its proprietary differentiating technologies. Moreover, GUNZE will strengthen the high-growth EC and SPA channels and sales outside Japan. In legwear, GUNZE will strive to develop new markets and products by anticipating and meeting potential consumer needs and market trends.

In the lifestyle creation business, GUNZE will seek to improve the profitability of its real estate business by promoting the new rental properties business and revising its commercial facility operation system. In the sports club category, GUNZE will also strive to expand sales and enable more efficient operation through aggressive multi-club chain expansion inside and outside Japan.

Fiscal 2018 marks the second year of the second phase of the GUNZE medium-term management plan, "CAN 20." As such, GUNZE will clarify key strategic challenges for each business segment, and strive to proactively move forward with initiatives to address these challenges, while working toward the achievement of the company's specified goals.

Your continued support and guidance will be greatly appreciated.

May 2018

President
GUNZE LIMITED
President, Atsushi Hirochi