Message from the President

Seeking to further strengthen our managementfoundation as a manufacturer aiming for global
growthAlthough the Industrial Systems segment havebeen influenced by capital investment restraint, theTransportation Systems segment and Information
Equipment Systems segment are expected to show
growth both in Japan and overseas.
With regard to consolidated financial results for the fiscal year
ended May 31, 2016, net sales remained at nearly the same level
as the previous fiscal year, and we maintained a positive growthin operating income. However, due to exchange losses resultingfrom the appreciation of the yen, ordinary income and net income
attributable to owners of the parent decreased.
In the Transportation Systems segment, increase in orders
continued in Japan, and orders increased outside Japan as well,mainly for Chinese projects. However, net sales fell from the previous fiscal year due to a decrease in overseas deliveries. Profits
declined due to an increase in design costs from new projects.
The maintenance business for electrical equipment for railroads
in Beijing, China, which was launched in the previous fiscal year,became fully operational.
In the Industrial Systems segment, reflecting the more cautious
investment approach of Japanese corporations and the sluggish
emerging economies, the situation for order-taking has become
more severe. As a result, orders for testing equipment for automobile development, production facilities such as processing
equipment, and social infrastructure decreased. Net sales andPresident

Kenzo Terashima

5profits were both higher than the previous fiscal year, but did notreach the target figures as planned.
In the Information Equipment Systems segment, due to demand
for upgrades of in-train ticket issuing machines and new acquisitionof orders of composite ticket vending machines, orders increased,
but were not reflected in the recording of sales for the current fiscalyear. As a result, the segment posted a decrease in sales. Profits
turned positive from the slump of the previous fiscal year.
Looking at the future business environment, there is a growing
uncertainty about the economic outlook due to factors such as
the slowdown in economic growth in emerging countries and theprogressive appreciation of the yen. However, in the Transportation Systems segment, investments in railway infrastructure areprojected to remain at a high level in China and ASEAN countries,
and increase in rail vehicles that responds to increase in numberof foreign tourists and demand ahead of the Olympic Games isexpected to continue in Japan as well. Furthermore, in the Industrial Systems segment, although there are concerns about further
decline in capital expenditures, new initiatives such as orders received for small-scale hydropower generators using agricultural
water are producing positive results.
Under these circumstances, based on the revisions to the medium-term management plan described below, we are committed toincrease earnings potential, while ensuring further growth potential.

We have reformulated the two-year medium-term
management plan “Ver. 2.” We will work to solve
the issues on business earnings structure andproduction system.
Under the three-year medium-term management plan “Next 100:
Beyond 100 years” launched in the previous fiscal year, we havebeen working to expand overseas net sales and strengthen themanagement foundation by restructuring production system inanticipation of the year of our 100th anniversary of founding in2018 and beyond. However, after its announcement, new issues
came to the fore in relation to our business earnings structure
and production system. In particular, boosting the efficiency ofdesign operations and promoting the productivity reform are required in order to increase earnings potential in the Transportation
Systems segment. In addition, to expand the Industrial Systems
segment and stabilize earnings structure, we need to expand production items in our lineup and specification zones.
To address these issues, we have formulated “Next 100:

Beyond 100 years, Ver. 2” to reset the period of the plan and forecast the numerical targets, while maintaining the fundamental
policy of the previous medium-term management plan. The plan
“Ver. 2” covers the two-year period from fiscal 2016 to fiscal
2017. We will promote “building a stable business earnings structure” and “restructuring production system” as key strategies inan aim to achieve numerical targets including net sales of 46.0
billion yen and operating income of 2.4 billion yen (operating income ratio of 5.2%).
In the first half of 2018, a new factory in the Shiga, Ryuoh region, where production of the Industrial Systems segment is to beconsolidated, will start operations, thereby forming a production
system with two bases including the Yokohama Plant which is responsible for production of the Transportation Systems segment.
We will advance measures as we aim to address the issues completely under the plan “Ver. 2” in two years by this time.

In addition to utilizing diverse human resources
and implementing diverse work-style, we willcontinue to enhance corporate governance.
The Act on Promotion of Women’s Participation and Advancementin the Workplace has come into force in April 2016, and we tookit as our duty to formulate action plans, etc. We consider the utilization of diverse human resources and implementation of diverse
work-style as key requirements for sustainable growth, and haveproduced results in measures of promoting acquisition of childcare leave, return to work, etc. Female employees currently account for 7.2% of permanent employees which goes to show thatthe number of our female employees in the workplace is not high.
As our point of focus for the future, in the new factory in theRyuoh region, we will work to create a better working environment
for women and promote opportunities for women.
On the other hand, in the development and design divisions,skilled employees start to retire, and our challenge is in how totransfer their expertise and skills. Hence, we will create a workplace
which enables more effective utilization of human resource capabilities in order to increase technological capability of the entire organization by sharing, standardizing and systematizing the know-how.
In addition to Mr. Hirokazu Chinone who assumed office as
Outside Director, Mr. Takashi Yamagishi who served as Vice President and Advisor of TEIJIN LIMITED was newly appointed as Outside Director. This brought the number of Outside Directors totwo. We expect Mr. Yamagishi, who has been engaged in management of manufacturing companies for many years, to provide
advice on various technical issues based on his extensive experience and technical insight.
We will continue to enhance corporate governance, and establish a solid management foundation as a manufacturer aiming for
global growth by consistently implementing the medium-term
management plan “Ver. 2” described above. We would like to fulfill even more significant social contribution and live up to the expectations of stakeholders.

Medium-term management plan“NEXT 100: Beyond 100 years, Ver. 2”
Fundamental Policy

Numerical Targets (Consolidated)
NEXT 100

1

2

Build a stablebusiness earnings
structure

3

Restructure
productionsystem

Ver. 1

Strengtheninternational
competitivenessFiscal 2014 Fiscal 2015 Fiscal 2016 Fiscal 2017

Train humanresources to support
global development

NEXT100

Fundamental Policy

5

Establish newbusinesses

4

Promotedevelopment oftechnology

Ver. 2(Actual Results for(Actual Results)
the First Year)

6

Medium-TermManagement Plan(Unit: Billion yen)

(Forecast)(Forecast for theFinal Year)Net sales

39.61

39.74

43.00

46.00

Operatingincome

1.59

1.63

1.90

2.40

(Operatingincome ratio)(4.0%)(4.1%)(4.3%)(5.2%)

Ordinary
income

2.05

1.49

1.80

2.50

Net income

1.10

0.88

1.20

1.70

Overseas net
sales

15.06

12.65

—

23.00

(38.0%)(32.0%)—(50.0%)(Overseas net
sales ratio)

Toyo Denki Seizo Report 20166