HOKUETSU GROUP

Corporate Report
2018

HOKUETSU GROUP
Corporate Report 2018 Editorial Policy
The objective of this Corporate Report is to deepen communication with all of our stakeholders byproviding an integrated report that summarizes not only financial information, such as our businessresults, business outlook, and progress of our Medium-Term Management Plan, but also non-financial
information, such as ESG information pertaining to the environment, society, and governance.
It is our hope that this Corporate Report will deepen the understanding of our stakeholders of the
HOKUETSU GROUP, which is striving to increase corporate value through all aspects of the paper andpulp industry. We have also published even further detailed information on our company website and
we encourage you to refer to this resource as well.

Contents
A New Start as the Hokuetsu Corporation

4

Aims of the HOKUETSU GROUP
A History of Value Creation

6

Message to our Stakeholders

8Companies covered by this report:
HOKUETSU GROUP (Hokuetsu Corporation and main affiliated subsidiaries, etc.)“V-DRIVE” Medium-Term Management Plan

12

Period covered by the Report:
April 1, 2017 - March 31, 2018 (Some activities that took place after the end of this term are also reported.)

Foundations for Value Creation

Issued:December 2018

CSR Activities

16

Compliance System

17

Publisher:
Sekio Kishimoto, President and CEO

Environmental Preservation Initiatives

18

Environment-Related Data

20

For further information, contact:
General Affairs Department
Hokuetsu Corporation
3-2-2, Nihonbashihongoku-cho, Chuo-ku, Tokyo 103-0021 Japan
TEL +81-3-3245-4500
FAX +81-3-3245-4511
Website www.hokuetsucorp.com/en

Action Guidelines for Procurement of Raw Materials

22

Research & Development and Quality Control

24

Production and Supply Initiatives

25

HR Management

26

Coexistence with Local Communities

27

Corporate Governance28

Commitment to Sustainable Development Goals
The 2030 Agenda for Sustainable Development (SDGs) was adopted by all 195 member countries at the UN
General Assembly in 2015. SDGs are the 169 targets in 17 goals (including poverty, inequality, education, andenvironment) that all countries and regions aim for to realize a better international society.
The HOKUETSU GROUP supports these goals, and develops its business activities with the aim of realizing themthrough practices of the Group Corporate Philosophy and the Group Code of Conduct.

Value Creation Achievements
Business Overview (1): Paper Business

32

Business Overview (2): White Paperboard Business

34

Business Overview (3): Specialty Paper Business

36

Business Overview (4): Paper Processing Business38

Business Overview (5): Pulp Business

40

Executive Officers

42

Financial Information
Consolidated Financial Highlights

44

Managementʼs Discussion and Analysis

46

Consolidated Financial Statements:

Nagano profit-sharing tree farm (Nagano Prefecture), Hokuetsu Corporation

Consolidated Balance Sheets48

Consolidated Statements of Income

50

Consolidated Statements of Comprehensive Income

50

Consolidated Statements of Cash Flows

51

Consolidated Statements of Changes in Net Assets

52

Notes to Consolidated Financial Statements

54

Independent Auditorʼs Report81

Affiliated Group Companies

82

Equity Data

83

Corporate Data

84

3

Hokuetsu Kishu Paper evolved into
Hokuetsu Corporationfrom July 2018
Transforming ourselves and going ahead towards a new future
In 2018, we established a new company name and group symbol, and have accordingly
renovated our Group Corporate Philosophy and Group Code of Conduct.
Our aim for the future is sustainable growth as a global corporate group.
The new HOKUETSU GROUP centered on Hokuetsu Corporation will meet your expectations
better than ever.

Group Code of Conduct
As of April 1, 2018

Relation to
SDGs

The Group hereby sets forth “Group Code of Conduct” to signify the basic rules to be observed by all of its officers and employees in all activities they
engage in toward realizing the Groupʼs Corporate Philosophy.
1．
We Shall Comply with Laws and Regulations, and Act in a Responsible Manner in Line with the Social Norms(1) Compliance with Laws and Regulations−We shall comply with all laws and regulations applicable in the countries and regions in which we operate, international norms and internal rules, andshall act in a responsible manner in accordance with the social norms.
(2) Prohibition of Any Involvement with Antisocial Forces−We shall have absolutely no relationship with any antisocial forces (all crime organizations, groups, and individuals).
If we receive unreasonable demands from antisocial forces, we shall take a resolute attitude as an organization and provide no favors whatsoever to them.
２．
We Shall Strive for Environmental Conservation and Seek Harmonious Coexistence with Society and Local Communities(1) Environmental Conservation−We shall continually seek to mitigate environmental load and strive for environmental conservation in order to contribute to realizing a sustainable society,guided by the concept of “minimum impact” to keep all impacts on the natural environment to the minimum at each stage from the procurement of raw
materials to the manufacture of end products.
(2) Harmonious Coexistence with Society and Local Communities−We shall seek harmonious coexistence with society and local communities through communication with local communities and social contribution activities.
３．
We Shall Respect Human Rights and Strive to Secure a Safe, Hygienic and Pleasant Workplace Environment(1) Appreciation of Diversity−We shall respect cultures, religions, and customs of countries and regions in which we operate, and shall strive to act by appreciating diversity in values.
(2) Respect for Human Rights and Prohibition of Harassment−We shall respect human rights and shall refrain from any violation there of including, but not limited to, discrimination against anyone on the basis of race,color, creed, religion, gender, national origin, age, disability or other factors, forced labor and child labor. And we shall prohibit any kind of harassment.
(3) Safety and Hygiene of Workplace−We shall give the highest priority to safety. We shall comply with laws and regulations as well as internal rules concerning labor safety and hygiene in orderto prevent accidents and workplace injuries and shall also strive to secure a safe, hygienic and pleasant workplace environment.

Our wish for the design of the symbolThis symbol is in the shape of the letter “h,” the initial letter in “HOKUETSU GROUP,” and represents the paper and pulp industry as awhole, the business field of our corporate group, symbolizing the paper machine.
It also means that we will connect “people,” “environment,” “technology,” “monozukuri (manufacturing technology),” and “future,” thekey concepts in our Group Corporate Philosophy that we simultaneously established.

New company name
As of July 1, 2018

Hokuetsu Corporation
New group name
As of July 1, 2018

HOKUETSU GROUP
Group Corporate Philosophy
As of April 1, 2018

As a people-focused business group, we work to improve society globally,by providing socially and environmentally responsible products throughinnovative manufacturing on a global scale.
“People-focused business group” is the expression of our vision for the future, what we want to become, our goal.
● A business group that values its connection to its stakeholders and the relationship of trust with them.
● A business group that pursues the happiness of its employees.

● A business group that respects diversity and empowers its people.

“Socially and environmentally responsible” means to create a sustainable society in harmonious coexistence withnature, guided by the concept of “minimum impact” to keep all impact on the natural environment to the minimum ateach stage from the procurement of raw materials to the manufacture of end products.
“Products through innovative manufacturing on a global scale” means to pursue innovation, to aim at delivering thegreatest satisfaction to our customers by enhancing our technological capabilities.
“Socially and environmentally responsible”, “products through innovative manufacturing on a global scale”: these are
the values, the philosophy, that we uphold. It is the mission of our corporate group, the foundation of our existence, to“work to improve society globally” through these values.
4４．
We Shall Conduct Business with Integrity and Fairness(1) Safety of Products and Services−We shall build up the relationship of trust with our customers by providing products and services with excellent quality and safety.
(2) Fair Advertising Activities−We shall not engage in false, misleading or defamation advertising.
(3) Fair Competition−We shall comply with all laws and regulations concerning fair competition and transactions applicable in the countries and regions in which we conductbusiness and internal rules, and we shall never engage in any misconduct that stifles fair competition, such as bid-rigging and cartels.
We shall not unilaterally change the terms and conditions of transactions by taking advantage of a superior bargaining position.
(4) Prohibition of Bribery−We shall comply with laws and regulations and internal rules, etc., concerning the prevention of bribery, and shall not take any action that may be taken as
bribery to government officials or those in positions equivalent to them.
−We shall comply with relevant laws and regulations and internal rules regarding entertainment and gifts to officers and employees of customers andbusiness partners, shall provide them to the extent deemed adequate by conventional wisdom, and shall not receive excessive entertainment or gifts
beyond the scope of social courtesies−We shall not engage in acts of providing favors to specific customers and business partners and in return receiving entertainment or gifts from them.
(5) Stance toward Political Contributions and Donations−We shall maintain sound and fair relations with political office, administrative agency and related parties, including business partners, and we shall makepolitical contributions and donations in an appropriate manner after thoroughly considering their necessity and propriety.
(6) Timely and Appropriate Disclosure of Information−We shall disclose corporate information, including the Groupʼs management policy and financial information in a timely and appropriate manner in order toenhance management transparency and fulfill accountability to society.
(7) Proper Accounting−We shall perform proper accounting in order to ensure the accuracy and credibility of financial information and accounting.
(8) Prohibition of Insider Trading−We shall not sell or buy shares (insider trading) by taking advantage of undisclosed information that could give material influence on share prices (insider
information). We shall not engage in acts that may induce insider trading by any third party, such as provision of information that may become insider
information.
５．
We Shall Appropriately Manage Corporate Assets and Information(1) Timely and Accurate Recording and Reporting of Information−We shall manage all business records and reports, including but not limited to accounting books and other financial records in a timely and accurate manner,and shall refrain from preparing or reporting false or misleading records.
(2) Strict Management of Information−We shall strictly manage confidential information (including confidential information obtained from outside) without leaking, shall not disclose it without
going through internal rules and other procedures, and shall refrain from making unauthorized or unfair use of it not only while employed but also after
retirement.
(3) Protection of Personal Information−We shall respect privacy of officers and employees of customers and business partners as well as of officers and employees of the Group, and shall handle thecollection, utilization, provision, storage and disposal of personal information with the greatest care not to leak it.
(4) Respect for Intellectual Property−We shall strive to appropriately utilize and secure our intellectual property rights, and shall respect intellectual property rights of others.
−We shall not obtain trade secrets of others by fraudulent or unlawful means. We shall not make use of trade secrets of others that were obtained orsuspected to have been obtained by fraudulent or unlawful means.
(5) Protection of Corporate Assets−We shall efficiently utilize and protect our tangible and intangible assets and shall refrain from actions that prejudice their value by unauthorized use or
private use.
(6) Personal Conflicts of Interest−We shall refrain from acts that may bring loss to us for personal gains, including the use of our assets or expenses for personal purposes and theunauthorized use of the internal information system.

5

Aims of the HOKUETSU GROUP

A History of Value Creation

Making further strides by expanding
business and restructuring ourbusiness portfolio
Since the 100th anniversary of our founding in 2007, we haveproactively promoted initiatives to globalize our business, expanded
as a Group, and restructured our business portfolio.
Our aim is to make further strides toward consolidated net sales of¥300 billion as stated in the 2020 goals of “Vision 2020.”

2020 goal 3,000

2,691

2,623
2,468

2,305

2,284

2,238

2,170

Other

2,082

North
America
Europe1,939
North America

1,827

Japan

1,727

Consolidated net sales

Asia

Other

Asia

(hundred million yen)Overseas

Other

France: Acquisition of Bernard Dumas(September 2012)

Japan

Expand overseas sales(Consolidated net sales
by country/region)

Japan
Pulp business
Paper
processing
business
Pulp business

Other

Paper processing
business

Restructure businessportfolio(Consolidated net sales
by business)

Specialty
paperbusinessWhite
paperboard
business

Specialty
paperbusinessWhite
paperboard
businessPaperbusinessWhite
paperboard
businessPaperbusiness

China: Start of commercial operation at
Jiangmen Xinghui Paper Mill (January 2015)

China: Shanghai Toh Tech,
Jiangmen Xinghui Paper Mill, etc.
France: Bernard Dumas

China: Shanghai Toh Tech,
Jiangmen Xinghui Paper Mill, etc.

Change in compositionof employees(Consolidated number of
employees by country)

6

Japan

Canada:Alberta-Pacific
ForestIndustries

Japan

Japan

Acquisition of Kishu Paper(October 2009)2007 2008

2009

2010

2011

Paper
business

Paper processing
business

Specialty
paperbusiness

N9 Start of operation(September 2008)

Pulp business

Other

2012

Canada: Acquisition of Alberta-Pacific
Forest Industries (February 2015)

2013

2014

2015

2016

2017

7

Aims of the HOKUETSU GROUP

Message to our Stakeholders

Towards a true global business group

Realizing further
sustainable growth as
the new
Hokuetsu Corporation

On July 1, 2018, we changed the name of the company (trade name) from Hokuetsu Kishu Paper Co.,
Ltd. to Hokuetsu Corporation. In changing our trade name, we have further advanced andbroadened our business portfolio and broadly declared to Japan and the rest of the world that theGroup has evolved into a global business group that will achieve sustainable growth.
In April 2018, prior to changing the company name, we established our Group Corporate Philosophy,
Group Code of Conduct, and Group symbol shared by the Group. The new Group Corporate
Philosophy of “As a people-focused business group, we work to improve society globally, by
providing socially and environmentally responsible products through innovative manufacturing on a
global scale.” defines the Groupʼs mission and values, and we believe that it will boost the
momentum of the Group and be the driving force for our development.

Record consolidated net sales for the fiscal year ended March 2018
From April 2017 to March 2018, the Japanese economy continued its moderately upward trend withimprovements in corporate earnings and the employment environment underpinned by steady
growth in overseas economies and improvements in capital investment worldwide. Nonetheless, thepulp and paper industry in Japan finds itself in a more severe business environment due to theimpact of reduced demand for printing and writing paper, sluggish retail prices, and soaring fuelprices.
It was in such a business environment that the Group launched its “V-DRIVE” Medium-Term
Management Plan in April 2017, and steadily implemented its management strategy to achieve its
goals. As a result, consolidated net sales for the fiscal year ended March 31, 2018 increased by 2.6%
from the previous fiscal year to a record high ¥269.1 billion.
Although business in Japan is facing challenges due to a structural recession from factors such as
lower demand for printing and writing paper, the Group has been actively advancing businessabroad. For example, the pulp business of Alberta-Pacific Forest Industries (Al-Pac) in Canada, thewhite paperboard business of Jiangmen Xinghui Paper Mill in China, and the specialty paper
business of Bernard Dumas in France have all performed strongly, and the Groupʼs overseas sales
have increased significantly to 33% of its overall sales.

Steadily implementing “V-DRIVE” for further growth

Sekio Kishimoto
President and CEO

The Group is strengthening sales in order to achieve the goals of consolidated net sales of over ¥300
billion and an overseas sales ratio of 25% in 2020 according to the “Vision 2020” Long-Term
Management Plan. Sales in Japan should increase with further heightened environmental demand
from the Tokyo Olympics and Paralympics, and we have made efforts to increase sales by adding
FSC® certified products to our lineup in our core businesses of paper, white paperboard, andspecialty paper.
In the paper business, the texture of our paper received acclaim, and was used to print a best-sellingseries of books that exceeded two million copies. We will continue to strive to expand products thatmeet the needs of our customers. With exports, we are pushing forward to expand sales in the North
American market and develop markets in Vietnam and India with a target of 360,000 tons a year.
Furthermore, we have taken steps to bolster the competitiveness of our entire paper business as wellas to maximize profits by establishing the Profit Center within the Paper Business Division on April 1,2018 to promote the centralized management of resource materials, production, and sales, alongwith a “Logistics Improvement Project Team” targeting the Niigata mill to reduce logistics costs
through logistics reform.
(Hokuetsu Corporation FSC license code: FSC-C005497)

8

9

Aims of the HOKUETSU GROUP

Message to our Stakeholders

In the white paperboard business, packaging areas such as food, medicine, and high-end cosmetics
remained strong. Jiangmen Xinghui Paper Mill in China is contributing to the Groupʼs performance,
achieving profitability for the full business year. Currently, higher domestic product prices in China
are steadily penetrating in response to strong demand and soaring prices for used paper. Moreover,
the Chinese government has further strengthened environmental regulations, and the efforts of
Jiangmen Xinghui Paper Mill ahead of those stronger environmental regulations may prove to beeven more advantageous. The Group will continue to consider expanding its business in China,
including plans for expanding mills.
In the specialty paper business, sales are growing, especially in performance paper, due to continued
growth in the chip carrier base paper for transporting electronic components in thanks to growing
demand for smartphones and automotive electronic components. Air filter media and otherproducts are also strong. In addition, starting from 2017, sales have steadily increased in the Chinese
market for polyester wet-laid nonwoven fabric using synthetic fiber papermaking technology.
The production and sale of automotive battery separators, manufactured by Bernard Dumas inFrance, continues to be strong, with record high production, sales, and profits.
We are moving forward with plans to further increase production capacity and establish new
overseas production plants, as well as further expand the scale of our business through mutual OEMs
between the Nagaoka Mill and Bernard Dumas.
In the paper processing business, we have been aiming for new orders and sales expansion of liquid
package cartons and packaging and containers for food and confectioneries primarily in the
packaging and containers area. Hokuetsu Package obtained the FSSC 22000 Food Safety System
Certification, and has
promoted a businessstrategy as a memberof the food chain that
manufactures andsells food containers,
and entered into an
exclusive distributionagreement at the endof 2017 with a major
Italian beverage fillingmachinemanufacturer for theJapanese market.
Currently, we arepromoting the sale ofcontainers and fillingmachines for dairy
manufacturers andfood and beverage
manufacturers inJapan, and willcontinue to promotefurther growth inearnings in the paper
processing business.
10

The pulp business, positioned as the fifth core business of the Group, is operated by Al-Pac in Canada,
which we acquired in 2015, and owns the largest FSC® certified pulp mill in North America. By
optimizing its periodic repair interval, Al-Pac was able to register record high production. It also hasmade a significant contribution to increasing the Groupʼs earnings due to the rise in sales prices.
In the future, we will adopt freight car to transport major chemicals for lower transportation costs andstrengthen sales of pulp to North America, China, Japan, and South Korea.
(Hokuetsu Corporation FSC license code: FSC-C005497)(Alberta-Pacific Forest Industries Inc. FSC license code: FSC-C022642)

Proactively advancing ESG and SDG initiatives
To improve our sustainable corporate value, the Group has been actively promoting ESG initiatives
pertaining to Environmental, Social, and Governance criteria.
We have been implementing industry-leading environmental measures with a fundamental policy of“minimum impact” that minimizes any impact on the environment, and in fiscal year ended March
2018, we implemented environmental measures to construct pulp green liquor facilities and awastewater clarifier at the Niigata Mill. Thanks to these efforts, we have won first place in the pulp andpaper industry for the second year in a row in the 21st Environmental Management Survey conductedby Nikkei Inc. in 2017.
Regarding our relationship with society, in Japan, we have conducted various activities including milltours and outreach lessons, and accepted internships from technical colleges. Overseas, in connection
with our afforestation project in South Africa, we have continued cooperation on food aid for thechildren of the Kingdom of eSwatini (formerly known as Swaziland) adjacent to South Africa, throughthe procurement of wood chips.
With governance, in order to build and strengthen a Group corporate management system in
response to the rapid expansion of our overseas business, we newly established a Group Governance
Department in April 2017. We also held an overseas COO and governance conference in China in
December of that year, and established the Global Strategy Planning Department in January 2018. In
addition, we established basic rules on competition laws and anti-bribery for all Group companies,
including overseas subsidiaries, and conducted training on them.
Furthermore, the Group is continuing its efforts to improve corporate value by closely linking
management to the “Vision 2020” Long-Term Management Plan, the “V-DRIVE” Medium-Term
Management Plan, and CSR activities with the Priority CSR Activities Implementation Target incompliance with ISO 26000. We also support The 2030 Agenda for Sustainable Development (SDGs)
adopted by the UN General Assembly in 2015.

Evolution and growth for the next generation
To promote R&D, we established the Novel Materials Development Office in April 2017 andstrengthened efforts in the development and application of new functional materials, such as
cellulose nanofibers (CNF), in our specialty paper products and nanocarbon material applications.
Since fiscal year 2018, we have been engaged in joint research with the Industrial Research Institute of
Niigata Prefecture to develop surface coating agents using CNF. In addition, the Group will further
enhance its competitiveness by leveraging technical innovation from new knowledge andtechnologies, such as cellulose nanocrystals (CNC) being researched and developed by Al-Pac in
Canada, not only for existing products but also for new products.
The Group will continue to evolve and grow with a view to the next generation based on the trust of
all our stakeholders. We truly appreciate your continued support and encouragement.
11

Aims of the HOKUETSU GROUP“V-DRIVE” Medium-Term Management Plan

Making steady progress in “V-DRIVE” withthe aim of achieving “Vision 2020”
The HOKUETSU GROUP and announced the “Vision 2020” Long-Term Management Plan in April 2011.
We are currently making steady progress in the “V-DRIVE” Medium-Term Management Plan with theaim of achieving “Vision 2020.”
We are working to restructure our business portfolio in order to realize the corporate image describedin “Vision 2020.”

Basic policy and main strategy of “V-DRIVE” Medium-Term Management Plan

1.

Expand the overseas business● Restructure business portfolio to reinforce earnings base
● Grow white paperboard business in China(p. 34‒35)● Increase profitability of pulp business in Canada

Vision 2020: HOKUETSU GROUPʼs Corporate Vision for 2020 (announced April 2011)● Be environmentally conscious in all corporate activities and promote environmental management● Offer attractive products with excellent quality and competitiveness using advanced technology● Work with passion and seek steady growth and ever greater challenges● Overseas sales ratio of 32.6% for the fiscal year ended

March 2018
Aim for reaching 40% after having already achieved the“Vision 2020” target of 25%● Planned total of ¥50 billion of strategic investment in● Sales target: ¥300 billion or above (overseas sales ratio: 25%)

overseas M&As and other investments

2.

Refortify the competitivenessof mills

Vision 2020

● Promote the rationalization of logistics such as

the improvement of the mill direct delivery rate andinventory reduction● Increase the export volume to 360,000 tons

Overview of V-DRIVE management plan
Period of the Plan
From April 1, 2017, throughMarch 31, 2020 (three years)
Consolidated management indicators
Net sales: ¥300 billion
Operating income: ¥15 billion
Net sales operating income ratio:
5.0% or above
ROE: 6.0% or above
EBITDA: ¥40 billion
Net debt-equity ratio: 0.6 or less(hundred million yen)
1,200
Overseas sales(267,000 tons exported in the fiscal year ended March
2018)

V-DRIVE● Build an optimal production and sales system

according to market trends

Variation
Value
Victory

40.0%

Overseas sales ratio

1,100

32.6%

1,000
900

36.6%

1,200

30.00%

827

700

40.00%
35.00%

1,005

27.6%

800

25.00%

724

600

20.00%

500

19.1%

400

471

15.00%
10.00%

300
200

5.00%

100
0

V-DRIVE Medium-Term Management Plan
Variation: Promote the creation of new fields andthe reform of the business structure
Value:
Enhance the corporate value
Victory: Ride to victory by achieving Vision 2020
DRIVE:
Accelerate corporate activities forthese three “V”s(p. 40‒41)

Changes in overseas sales/Overseas sales ratio

2016/3Results

2017/3Results

2018/3Results

2019/3
Forecast

2020/3
Target0.00%

Change in export sales（t）400,000

360,000

300,000

255,112

267,467

219,264
200,000

100,000● Aggressive preservation measures for our superiorboilers and paper machines● Stable reinvestment using an abundant cash flow

C-nextChange Challenge Create

G -1stGreen Global Grow Up Glowing0

2016/3Results

2017/3Results

2018/3Results

2019/3
Forecast

3.

Strengthen the base of theconsolidated management system● Promote strengthening of governance in consolidated

subsidiaries

Variation

Value

Medium-Term Management Plan

12

Victory

V- DRIVE

・Established new Group Corporate Philosophy and Group
Code of Conduct (April 2018) (p. 4‒5)・Established Group Governance Department (April 2017)
Created “Management Book” for strengthening
corporate management system of overseas andJapanese Group companies
・Held regular overseas COO and governance conference(December 2017)
・Established Global Strategy Planning Department(January 2018)13

Nagano profit-sharing tree farm (Nagano Prefecture), Hokuetsu Corporation

Foundations for Value Creation

We report on the
E (Environment),
S (Social), and
G (Governance)
initiatives to achieve sustainable growth.

Foundations for Value Creation

CSR Activities

Foundations for Value Creation

Relation to
SDGs

Compliance System

Promoting CSR activities as one of the driversof management throughout the entire Group

Continuing to strengthen the compliancesystem as a global corporate group

The Group pursues a relationship of trust with employees, customers, business partners, suppliers,
consumers, shareholders, local communities and all stakeholders. Together with our supporting
the SDGs adopted by the UN General Assembly and improving corporate value by pursuing sustainable
development, we have adopted specific activity goals in compliance with the International Organizationfor Standardization (ISO 26000), and are promoting sustained and highly effective CSR activities.

On April 1, 2018, the Group formulated its Group Corporate Philosophy (p. 4) to fulfill its
responsibilities as a global corporate group and its Group Code of Conduct (p. 5) as the set of rules
to achieve its philosophy. The Group continues to implement various measures to establish aneffective compliance system that is practiced by all executives and employees of the Group in
Japan and overseas.

The Groupʼs approach
to CSR activities

Uniform compliance training
conducted in Japan and overseas

Group
Corporate
Philosophy(p. 4)
Group Code of Conduct(p. 5)“Vision 2020” Long-Term
Management Plan
“V-DRIVE” Medium-Term
Management Plan
(p. 12‒13)

Linked Group management

Specific targets
for growth

Seven core
subjects for companies
to fulfill CSR activity
implementation targets
in compliance with ISO 26000

For the Group to realize theGroup Corporate
Philosophy, we aim to
improve corporate value
with each of our employees
keenly aware of the Group
Code of Conduct while inpursuit of their daily work,
together with specifictargets for growth and CSR
activities as the drivers ofmanagement.

(1) Organizational governance(2) Human rights(3) Labor practices(4) Environment(5) Fair business practices(6) Consumer issues(7) Participation in communityand development ofcommunity

Inspections for FY2017 CSR activity goals(1) Strengthening of Group compliance system
An inspection of the Group compliance system is described on p. 17.

of environmental claims, and the delivery of environment-oriented
information
Our environmental initiatives are described on p. 18‒21 of this report.

(2) Strengthening of safety activities
Since the establishment of the Safety Management Department in(5) Steady implementation of “V-DRIVE” Medium-Term Management
January 2016, group-wide efforts were made to eradicate accidents.
Plan
We reduced the occurrence of accidents across the Group with
Details are described in the “Message to our Stakeholders” and the main
proactive initiatives to prevent accidents, such as safety audits andbusiness segments and their business overviews.
follow-ups with the aim of raising the effectiveness of safety activities, (6) Coexistence with the local community
information sharing and horizontal deployment to Group companies,
We cooperated with outreach lessons and other events at universities
and mutual exchanges with safety personnel through monthly TV
and high schools, participated in a gender equality project promoted
meetings.
by Niigata Prefecture, accepting internships from National Institute of(3) Sustained implementation of BCP to maintain and improve trustTechnology, Nagaoka College and participating in explanatoryfrom stakeholders
meetings in Nagaoka (including the Central Research Laboratory), sent
We conducted BCP (business continuity plan) role playing at each
guest lectures for the lifelong learning project in Nagaoka City,
office, mill and key Group companies simulating a major earthquake.
conducted mill tours, carried out clean-up activities around mills, andAt our head office, we also formulated a BCP for communicablesponsored and cooperated in various other events and activities. We
diseases such as the Pandemic Influenza (Novel Influenza).
also held an FSC® field tour overseas at Al-Pac (p. 41).
(4) Compliance with environmental laws and regulations, eradication(Alberta-Pacific Forest Industries Inc. FSC license code: FSC-C022642)

Priority CSR Activity Goals for FY2018
No. Classiﬁcation
1
2
3
4
5
6
7

16

Organizational governance (governance)

Activity goals for FY2018

Promote the creation of an organization to maximize the corporate value of the Group.
Respect the rights given to all people and maintain an appropriate working environment.
Human rights (respect the rights given to all people)
Promote work-life balance and improve productivity through innovative and improved
Labor practices (work style)work styles.
Environment (promotion of environmental management) Reduce environmental impact, aim for eradicating environmental claims, and realizea “Minimum Impact Mill”.
Fair business practices (strict compliance)
Strengthen the Group compliance system through sustained education and training.
Consumer issues (responsibility to customers)
Fulfill responsibility to customers by aiming to eradicate various complaints.
Participation in community and development
Seek coexistence with local communities through communication with local
communities and social contribution activities.
of community (Coexistence with local community)

Around the time our Group Code of Conduct wasformulated and implemented, we conducted training
for executives and employees in Japan and abroadconcerning compliance with competition laws (theAntimonopoly Act in Japan) and anti-bribery, which
are the most important themes in compliance for a
global corporate group.
In Japan, our in-house lawyer visited head office andeach sales office (including consolidated subsidiaries)
to give lectures based on case studies on the weight of
the responsibility the Group has toward society andstakeholders, and the magnitude of damage the Groupsuffers when a problem occurs.
Overseas, we used online educational tools(e-learning) to conduct advanced and uniform training
for consolidated subsidiaries in Canada, France, andChina efficiently.
Going forward, the Group will continue its training andeducation on important compliance themes and will
endeavor to improve knowledge and awareness ofcompliance among all executives and employees, bothin Japan and overseas.

Overseas COOs Governance Meeting
In December 2017, the Group held its Overseas COOs
Governance Meeting for the first time at Jiangmen
Xinghui Paper Mill in China. The Hokuetsu
Corporationʼs CEO, legal advisor, outside corporate
auditor, and COOs (Chief Operating Officer) from four
overseas consolidated subsidiaries gathered together
for vigorous discussions on the Groupʼs governanceand internal control.
The group discussed compliance with competition
laws and anti-bribery based on the advice of the legal
advisor in attendance, and reaffirmed that the Group
unite to strengthen its compliance system together.
The Overseas COOs Governance Meeting will be a
regular event (basically once a year) as part ofmeasures to strengthen the Groupʼs governance andcompliance system, with the Global Strategy
Planning Department, established in January 2018, as
the organization to support it.

President and CEO
Compliance Officer
Meeting
Chief Compliance Officer
Group Governance
Administration Department
Compliance Officerof each division

The Overseas COOs Governance Meeting(each department, mill, andaffiliated company)

Report,consultation

Supervisor

Compliance Hotline
Internal(GroupGovernance
Administration
Department)

Report,Report,consultation consultation

External(Lawyer)

Report,consultation

HOKUETSU GROUP employee

17

Foundations for Value Creation

Relation to
SDGs

Environmental Preservation Initiatives

Environmental initiatives are carried out in a systemicGroup-wide manner in line with the Environmental Charter

Group environmental preservation topics

We carry out a wide variety of different Group-wide environmental preservation initiatives, based on
our Environmental Charter.

1. Implementation of environmental auditing

Environmental Charter
Hokuetsu Corporation declares its commitment to realizing the fundamental principles of the Charteras the core of its corporate activities through the concerted efforts of labor and management.

Fundamental Principles
To pursue environment-friendly corporate activities in order to become a corporate group of good standing,and contribute to the realization of a society capable of sustainable growth, thereby contributing toward
preserving a rich global environment.

Fundamental Policies

Action Guidelines- Protection and nurturing of forest
resources● Enhancement of environment-friendly production technology- Minimizing the environmental
impact of our business activities- Promoting efficient utilization of
resources and energy saving● Protection and nurturing of forest resources● Promotion of energy saving● Promotion of reuse and recycling of used paper● Reduction and effective utilization of waste materials● Societal contribution and in-house education● Appropriate response in emergencies

Environmental Policy Committee is at the center of our environmental initiatives
The environmental preservation promotion structure is centered on the Environmental Policy Committee with support fromenvironmental policy committees and the ISO promotion committee at each mill. Important environment-related matters are
confirmed and voted on at Environmental Policy Committee meetings held at half-yearly intervals. The role of committee chair istaken by a chief environmental officer, and the role of deputy chair is taken by the president of the labor union. Environment-related
management issues are checked from the perspective of both labor and management and proposals are made.

Structure for Promoting Environmental Management
President andCEO

General Supervisor
for theEnvironment(ChiefEnvironmental
Officer)

Environmental Policy
Committee Chair:Chief Environmental Officer
Deputy Chair: President of thelabor union
Environmental Management
Department

Environment Subcommittee
Energy Subcommittee
Environmental policy
committees at each mill
ISO 14001 promotion
committees at each mill

Each Organization and their Initiatives● Environmental Management Department

The Environmental Management Department coordinates Group-wide environmental activities. In addition to informing theenvironmental management office at each mill and each company about revisions to environmental laws and related trends, thedepartment aims at enhancing the entire Groupʼs response to environmental issues by ascertaining local conditions and providing
guidance through environmental auditing.

● Environmental Subcommittee and Energy Subcommittee

The Environmental Subcommittee and the Energy Subcommittee have been created as a subordinate body to the Groupʼsenvironmental policy committee. The members of the subcommittees are relevant employees from each mill, who work using across-functional bottom-up approach to exchange practical information and provide advice to each other. An expanded
Environmental Subcommittee meeting including members from Group companies is held whenever it is necessary to share
information Group-wide about significant revisions to environment-related legislation, etc.

● Environmental policy committees at each mill and the environmental management office

In order to further enhance environmental preservation activities at mills, environmental policy committee meetings are held every
month to confirm atmosphere- and water quality-related measurements and to deliberate on environmental issues.
Each mill has an environmental management office or a safety and environment management office, which carry out work relating
to environmental preservation. Work relating to the environment is based on an ISO14001 with implementation of a PDCA cycle.

18

Environmental auditing of the Group is implemented
by the Environmental Management Department andmembers of the aforementioned environmental
subcommittees. The auditing was carried out at allmills and research laboratories of Hokuetsu
Corporation and 5 Group companies in FY2017.
Environmental auditing entails checking compliancewith environment-related laws, but we also see it as aprecious opportunity to observe actual onsite
conditions and provide advice to relevant staff
members. In particular, it provides a good
opportunity to engage in communication withenvironment-related staff members at Group
companies, and contributes to the creation of aGroup management system that provides a sense ofunity.

2. Promotion of environmental education
The Environmental Management Department andthe Environmental Subcommittee are taking the leadin conducting environmental positioning training
sessions that bring together different mills. For
FY2017, an external lecturer gave a lecture on initial
responses for when trouble occurs, and had
enthusiastic discussions among environment-related
staff members on topics such as case studies oftrouble from each mill and case studies of adopting
environmental instruments.
We also continue to hold waste management
training for managers from all workplaces in theGroup. From FY2017, we changed the name of the
training to “Waste Compliance Training” (from theformer name of “waste disposal law and practicaltraining”), which included basic content that thoseengaged in waste management and everyone as an
employee of the Group should know.

3. Environmental preservation efforts at overseas Group companies

Voices from leaders
Freewheel Trade & Invest 7 (Pty) Ltd.
I have been assigned to Pietermaritzburg in the
Republic of South Africa since April 2016.
From an office in the city, I operate and manage four
afforested areas (2,400 ha) around KwaZulu-Natal
Province. We plant acacias and eucalyptus trees in
the afforested areas and harvest them in 10 years,
repeating the cycle to provide a sustainable source ofraw materials.
The Republic of South Africa is developing tree
species for certain areas and to combat disease andpest damage, and plants various species according to
the land. Our principle for creating an afforested area
is “the right tree for the right land,” and we plant newtrees using the latest information on thedevelopment of new tree species from our local
partners. It makes me happy when I check and seethat the trees are growing well.

Takeshi Hida, Managing Director

19Foundations for Value Creation

Environment-Related Data
HOKUETSU GROUP employs a minimum environmental impact policy at all of our production bases
as a participant in the global challenge of reducing CO2 emissions.
Our per-unit emission level is one of the best in the industry, through use of CO2 zero-count natural
gas with competitively low emissions

Greenhouse Gas Emissions Across the Corporate Value-Chain

Hokuetsu Corporationʼsenergy composition ratio (results for FY2017)

Estimates of greenhouse gas emissions across the entire corporate value-chain of the HOKUETSU GROUP(results for FY2017)

Waste plastic fuel,etc.:
5.6%

Coal: 1.2％

(CO2 kg/ton of paper)

Purchased electricity,etc.:
4.8%

1,200

Fos

sil

fu

erg

733
629

600

Scope1+
Scope2Category 4
Upstream transportationand distribution
17％

632
441

400

392

387

402

425

Category 10
Processing of sold products
21％

398

targetope-coBlack liquor: 49.2%

un

t

en

erg

0

y: 68

Category 1
Purchased goods and services
29％

200

%

1990

2000 2005

Hokuetsu Corporation

2013

2014

2015

2016

2017

3

72%

2018

Scope of calculations: Hokuetsu Corporation
Target period: April 1, 2017 - March 31, 2018
Monetary unit: Millions of yen

Environmental Preservation Cost

Pulp and paper industry average

Major activities and their results

1. Business area costs: Environmental preservation costs to control
environmental impact that results from key business operations within the business area

Scope: Hokuetsu Corporation results for FY2016

Composition (1) Pollution control costa. Air pollution
b. Water pollution

Input

Outputc. Noise, vibration, and odor
(2) Global environmental preservation cost

Fossil energy input

11,580,000 GJ

CO2699,000ｔ

Wastewater BOD *1

363 t

a. Prevention of global warming

Non-fossil energy input

24,939,000 GJ

SOx

543ｔ

Wastewater COD *1

829ｔ

b. Energy preservation

Input of water resources

95,411,000 m3

NOx

2,388 tWastewater SS

459 t

Raw material Wood chips
consumption
Purchased pulp

1,876,000 t

Used paper

77,000 t
266,000ｔ

Soot and dust

113 tChemical substances
Discharge 1.5 t
subject to the PRTR law
Transported 0 t

c. Tree farms in Japand. Aﬀorestation activity overseas

288,000 t

Industrial waste generated
Industrial waste final disposal volume(3) Resource circulation cost

7,000ｔPaper/paperboard production volume 1,642,000 t

a. Eﬃcient utilization of resources
b. Reduction, recycling, treatment, disposal, etc., of industrial waste
2. Upstream/downstream costs: Environmental preservation costs to control
environmental impact that results from key business operations upstream and downstream
Composition (1) Purchase of materials, etc., with smaller environmental impact(2) Recycling and collection of containers and packaging

Changes in Environmental Performance

3. Administrative costs: Environmental preservation costs stemming from administrative activities
Composition (1) Environmental training of employees, etc.

Unit

FY2013

FY2014FY2015FY2016FY2017FY2018 target

Global warming

CO2

kg/ton of paper

441

392

387

402

425 *2

398

Air

SOx

kg/ton of paper

0.18

0.13

0.14

0.21

0.33

0.20

NOx

kg/ton of paper

1.34

1.28

1.32

1.36

1.45

1.39

Soot and dust

kg/ton of paper

0.08

0.07

0.07

0.06

0.07

0.07

Water consumption

m3/ton of paper

53.1

55.4

56.4

57.3

58.1

57.7

Wastewater BOD *1

kg/ton of paper

0.29

0.25

0.28

0.25

0.26

0.27

Wastewater COD *1

kg/ton of paper

5.16

5.55

3.97

3.33

3.54

4.42

Wastewater SS

kg/ton of paper

0.41

0.41

0.35

0.28

0.28

0.36

Chemical substances

Volume of chemicals subject to the
PRTR law discharged/transported

g/ton of paper

1.36

2.49

1.73

1.45

0.91

1.64

Industrial waste

Final disposal

kg/ton of paper

5.2

5.2

4.1

5.7

4.5

4.0

Water quality*1 Mills that discharge wastewater to rivers use BOD, while mills that discharge wastewater to the sea use COD to management wastewater quality.
*2 Biomass boiler repair period has been extended from FY2016, and restoration construction is being carried out for stable operation in the future.
During this period, CO2 emissions have increased due to the operation of an alternate fossil fuel boiler.

20

28%

Emissions from internal corporate
value-chain and sources other than
Scope 1 and 2

Category

Material Balance (results for FY2017)

Energy-derived indirect emissions

Scope 3:Scy : 3 2%

C O2 zero

Gas: 16.0%

Direct emissions

Scope 2:800

en

Heavy oil:9.7%

Scope 1:

Other
5％

1,000

el

Wood-derived
fuels/
Paper sludge/
etc.: 13.5%

Hokuetsu Corporationʼs
per-unit CO2 emission trend

We believe it is important to ascertain and manage greenhouse gas emission levels across the entire product lifecycle, from raw
materials procurement to product usage and disposal, and estimate the indirect greenhouse gas emissions across the entire corporate
value-chain (Scope 3 emissions), not just during our own production stages, as part of efforts to effectively reduce greenhouse gas
emissions. From FY2017, we have been working toward effectively reducing greenhouse gas emissions as a Group, in addition to
expanding our scope to overseas Group companies.

(2) Building, implementation, and obtaining certiﬁcation for an environmental management system(3) Monitoring and measuring environmental impact(4) Running costs for an environmental preservation system, etc.
4. R&D costs: Environmental preservation costs stemming from R&D activities
Composition (1) R&D to develop products that contribute to environmental preservation(2) R&D and planning to curtail environmental impact at the manufacturing stage, etc.
5. Social activity costs: Environmental preservation costs stemming from social activities
Composition (1) Planting of greenery, beautiﬁcation, etc.
(2) Support, etc., of environmental preservation activities by the local community(3) Support for environmental groups(4) Disclosure of environmental information and related advertisements
6. Environmental remediation costs: Costs incurred from dealing with environmental degradation

Total

Examples of Environmental Conservation Beneﬁts
Classiﬁcation by relationship with business activities

Examples of beneﬁts

Environmental preservation beneﬁt related to resources input into business activities

Energy-saving effectInvestment

Cost

1,839

6,176

649
66
563
19
776
649
43
83
413
311
102

2,702
460
2,155
86
990
979
(Included in manufacturing cost)

5
5
2,483
(Included in manufacturing cost)

2,483

-

540

6
6
1,845

34
505
247
3
8
80
154
150
35
114
66
34
3
14
14
90
7,270

Monetary unit (millions of yen)

Performance

135

21

Foundations for Value Creation

Relation to
SDGs

Action Guidelines for Procurement of Raw Materials

We procure woodchips which are confirmed on legality
In accordance with the “Fundamental Policy for Raw Materials Procurement” established in
2005, we promote legal woodchip procurement at our Niigata and Kishu Mills so that we areable to provide products to customers that they can feel confident using.

Procurement of Woodchips in FY2017
Vietnam

Vung Ang, Hà Tĩnh Province
Phú Mỹ, Bà Rịa-Vũng Tàu Province
Cai Lan, Quảng Ninh Province

Japan Satoyama (Managed coppice)
Akita Pref.
Yamagata Pref.
Miyagi Pref.

AcaciaOak

Fukushima Pref.
Ibaraki Pref.
Niigata Pref.

BrazilKyoto Pref.
Mie Pref.
Wakayama Pref.

Rio Grande do Sul
Rio Grande

Acaciaetc.

Fundamental Policy for Raw Materials Procurement
Hokuetsu Corporation pursues raw material procurement in which value is placed on partnerships with
suppliers based on the fundamental philosophy of our Environmental Charter to provide products that
customers can use with assurance.

1. Prioritize the environment● With the Environmental Charter as the basis for raw materials procurement, we will purchase raw materials

that our customers can use with a sense of reassurance.
● Our woodchips are supplied by timber farms located overseas. We are also proceeding with the expansion of

our timber farming business overseas to procure raw material from our own resources. Regarding domestic
woodchip procurement, we promote the afforestation of the coppice forest “Satoyama” through the effective
use of unused timber.

South Africa

Australia

Chile

Acacia

Eucalyptus

Eucalyptus

KwaZulu-NatalRichards Bay / Durban

Western Australia
Bunbury / Albany

Eucalyptus

Concepcion, VIII Region
Puerto Montt, X Region● We promote the procurement of wood materials in consideration of biodiversity preservation and worker

health and safety.

2. Open and fair trade● We open our doors to all suppliers and engage in fair and open trade.
Country

3. Legal compliance and disclosure of information● We procure raw materials that are in compliance with relevant laws.
● We take steps to confirm that the wood materials procured from overseas suppliers are produced at

appropriately managed forests through overseas investment in the timber farming business and direct tradingwith suppliers, and we disclose information regarding our woodchip sources.

4. Mutual trust and prosperity● We build history and trust with business partners, and pursue the best procurement practices in considerationof the environment, safety, quality, and cost dimensions under a spirit of co-existence and co-prosperity.

Only Properly-Managed Wood Used

96% of the woodchips we utilize as a raw material for
pulp are sourced from overseas timber farms, with theremaining 4% being sourced domestically from
Satoyama. From the perspectives of legality, forest
sustainability and biodiversity preservation, we procure
only wood materials that originate from properly
managed forests as is our obligation as a Group thatenjoys the blessings of nature. We pay meticulous care

BrazilAcaciaChile

Eucalyptus

South Africa

Acacia
Eucalyptus

Australia

Eucalyptus

Vietnam

AcaciaJapan

Oak, etc.

Forest type

Afforestation Managed
coppiceMeans of verifying legality
Traceability
reportDeclaration on Forest certification
legality of timber
System* We carried out a risk assessment of domestically produced chips based onJapanʼs National Risk Assessment (NRA), approved in August 2014; and we
subsequently received approval to handle the chips as controlled woodchips.

( )

*

Total

Overseas / Domestic
wood chips
Quantity procured(1,000 BDt)

Percentage

1,804

96%

72

4%

1,876

100%

Strict Checks Based on Third-Party Audits andInternal Auditing
to all our woodchips to determine whether they are
made from timber grown in properly managed forests,
and to ensure the legality of related transactions.
Specifically, the Group defines woodchips that do not
originate from the following five sources as woodchips
obtained through legal methods, and only procures
woodchips of said nature.

1. Illegally harvested wood
2. Wood harvested in violation of traditional and civil rights
3. Wood harvested in forests where high preservation values are threatened by management activities
4. Wood harvested in forests being converted to afforestation or non-forest use
5. Wood from forests in which genetically modified trees are planted
22

Tree species

We currently consume (1) FSC® certified woodchips and (2) controlled woodchips
in the Niigata Mill and Kishu Mill. FSC-certified woodchips originate from timbergrown in FSC-certified forests and meet a variety of criteria including legality,
sustainability, and biodiversity preservation.
“Controlled woodchips” originate from timber that has been approved as properly
managed timber based on a risk assessment to determine if the timber meets FSC
Controlled Wood standards and after undergoing audits conducted by third-party
organizations. These woodchips are permitted to mix with FSC-certified woodchips.
We have also established our own traceability system* and periodically verify
information relating to woodchips consumed at the two mills, and regularly verify
items such as legality, sustainability, and biodiversity preservation status, etc. In
addition, we also submit our procurement activities to external audits conductedby the Japan Paper Association, an industry organization, and SGS Japan Inc., athird-party organization, as part of our efforts to enhance the verification accuracyof this system.
(Hokuetsu Corporation FSC license code: FSC-C005497)* Traceability system: A method of tracking information related to production and distribution history.
It could be described as a system for keeping tabs on production and distribution information.

SGS Japan Inc. verified that we obtained
traceability reports from suppliers properly andin accordance with our wood material
procurement procedure, and verified thefollowing check items were appropriate.

23

Foundations for Value Creation

Research & Development and Quality Control

Relation to
SDGs

Developing and applying new functional materials
supported by strict quality control
Our research and development is built around the laboratories of the Technical & Development
Division and the Technical & Development Department. The Novel Materials Development Office,established in the Technical & Development Division in April 2017, cooperates with the Technical &Development Department and Sales Department to promote the use and practical application ofcellulose nanofibers (CNF), while the quality management office acts an independent body thatstrictly checks compliance with various standards and regulations concerning product quality.

Research & Development

Working to enhance competitiveness by developing andapplying new functional materials

Joint development of a CNF surface
coating agent

In April 2018, the Novel Materials Development Officeand Industrial Research Institute of Niigata Prefecture
began joint research to develop a surface coating agent
using CNF. In addition to CNF, the Group is also
leveraging new knowledge and technologies, such as thecellulose nanocrystals (CNC) being researched anddeveloped by Al-Pac in Canada, not only for existingproducts but also for new development to further
enhance our competitiveness.

CNF research wins Japan TAPPI award

The HOKUETSU GROUP was awarded a prize by the Japan
Technical Association of the Pulp and Paper Industry(Japan TAPPI) for the paper “Improvement of Air Filters by
Nanocelluloses” co-authored with the University of Tokyo.
The award is given to outstanding academic papers
published in the Japan TAPPI Journal. The paper wasrecognized for using CNF to create a high performance
filter with greater performance than current filters.

Foundations for Value Creation

Production and Supply Initiatives

We will provide products that take into accountthe environment and society to maintain anddevelop healthy relationships with our customers.
We have established an operational framework that takes tremendous consideration in reducing
the environmental load from the production and supply of the Group. We use all means oftransportation, such as ships, railways, and trucks, effectively from woodchips, the raw material for
paper, to finished products.

1. Afforestation cycle

We plant trees around the world to produce woodchip
material, the main raw material for paper. Forests growby absorbing CO2, and grow into a forest suitable forchip material in about seven to 10 years. The productionof woodchip materials as a renewable resources helps
reduce CO2.

New concept CNF reinforced material

We are currently studying the development of an
all-cellulose reinforced material that uses CNF as a basematerial instead of reinforced materials that use
conventional resin as a base material. Recent studies haverevealed that the CNF gel produced during manufacturingis the key to the strength of this reinforced material.
Afforested area in South Africa

2. Raw material supply system
supporting mill productionMore than 90% of the woodchips supporting the
production of paper used in Japan are imported fromabroad. Half of the woodchips are used as pulp, the raw
material for paper, while the other half is used as boiler
fuel, which is used effectively as an energy source topower mills. We also promote the procurement of raw
materials and other inputs in compliance with ourFundamental Policy for Raw Materials Procurement.

Enlarged photo of high-performance air filter media that uses a
spider web of CNF in the gaps between the glass fibers

Quality Control

Strict quality control initiatives and providing correct information

Independent body tasked withauditing quality

Based on the Groupʼs Basic Principles related to the
Quality Control of Products, we are careful to ensure
the safety of products and at the same time we makeefforts to supply attractive products that fulfill theneeds of our customers.
Our internal quality auditor carries out regular checks
on the safety of raw materials, the compliance within-house standards of products to be used as foodcontainers and wrapping, the proportion of recycled
paper included in pulp, and the regulatory complianceof each production department, etc. An independent
body (quality management office) has been createdwithin the Technical & Development Division to carryout the auditing.
24

Basic Principles Related to
the Quality Control of Products
1. In order to provide attractive products, we promote
product improvement and new product development
based on customersʼ requests.
2. We manufacture products of stable quality that are safe
and that customers can use with confidence, while
obeying all relevant laws and regulations.
3. In order to improve our cost competitiveness andmoreover in order to maintain our relative superiority inrelation to other companies, we promote control ofintellectual property.
4. We respond sincerely to any complaints about our
products and strive to provide a speedy and appropriate
response in such cases.
Further, through implementing measures to prevent
recurrence, we promote quality improvement and obtainthe trust of our customers.

Relation to
SDGs

3. Paper production

At each mill, the Sales Department, mill, and theTechnical & Development Department jointly andregularly visit users, and strive to produce paper
according to customer requests. We have acquired theISO 9001 and ISO 14001 certifications for quality control
in each mill, and are building a thorough quality andenvironment
management
system.
We are pursuinghigh-quality,
high-efficiency
production thatmakes full use of
our on-coater
technology forour coated paper,
together withpromotingenvironmentallyfriendly paper
making(minimum impact
mills) that
produce low CO2
emissions per tonof paper.
No. 8 recovery boiler at the Niigata Mill

4. From our mills to our customers

Products produced at our mills are delivered tocustomers all across Japan via dedicated railroads andtrucks. In particular, we are helping to reduce CO2
emissions by promoting rail transport from our main
Niigata Mill to the Tokyo metropolitan area (Kanto
region).
We deliver to our overseas customers worldwide
mainly via Niigata East Port, close to the Niigata Mill.

Chip yard in Niigata East Port

Our Product Export System
Our overseas exports have increased in recent years, with
exports from the Niigata Mill exceeding 236,000 tons
annually in 2017. We have typically used the ports ofTokyo and Yokohama for the majority of our exports, but
now that we have a system to supply products to theworld with the aim of 360,000 tons a year, Niigata East
Port is currently our main terminal for all of our exports
just as it was previously for woodchips. Major export
destinations include North America, Hong Kong, Taiwan,
Vietnam, Thailand, China, India, Malaysia, and Pakistan.

Train transport using a dedicated line from the Niigata Mill25

Foundations for Value Creation

Foundations for Value Creation

Relation to
SDGs

HR Management

Relation to
SDGs

Coexistence with Local Communities

A united Group striving to create a safe and secure
workplace where employees can work with purpose
and vigor

More than 100,000 of canned bread has beendelivered to eSwatini in past 4 years by using ourwoodchip carriers

The HOKUETSU GROUP is striving to establish a workplace where employees can work safely andsecurely with purpose and vigor. In recent years, the number of employees in our overseas
subsidiaries has grown, and the Group is developing a safe workplace where human resources thatare both adapted to globalization and diverse, can work together.

As a part of social contribution activities, we are actively promoting exchanges with local
communities. In addition to mill tours, clean-up activities, internships and hands-on learning forstudents, we have been contributing to support the “Kyu-Can-Cho Project” that delivers emergency
canned bread rations to school kids in Kingdom of eSwatini (formerly known as Swaziland) since 2014.

Actively improving the work environment and developing human resources

Supporting to the “Kyu-Can-Cho Peoject” activity of Pan Akimoto Co., Ltd.

● Small group activities
Since 1983, we have been conducting “small
group activities” with the ultimate goal ofdeveloping human resources.
Each day, employees contribute the wisdomfrom their respective positions to identify andsolve problems in the workplace throughinventive ideas. Through these activities, we aim
for the personal growth of employees andimproved problem-solving skills in the workplace.
Once every year, the Group comes together tohold presentations (SG conference) byrepresentative circles. It was held at the Ichikawa
City Cultural Hall in Chiba Prefecture in 2017.
Subsidiaries from China and Canada gave
presentations, and the event functioned
effectively as an opportunity for everyone tomingle within the Group.
2017 SG conference

The “Kyu-Can-Cho Project” is an activity in which Pan
Akimoto collects ever fresh canned bread prior to 1 year of
its expiration date and delivers the collected canned breadto disaster-affected areas and people who face foodshortages. We started assistance activities of the“Kyu-Can-Cho Project” in 2014 and are working with Pan
Akimoto Co., Ltd. ,total coordinator, to deliver canned
bread to elementary schools in eSwatini. Our woodchip
carriers make around 20 voyages annually between Niigata
and South Africa to transport woodchips as a raw materialof paper products. As our woodchip carriers do not loadcargo on the outward voyage to South Africa, we studied
whether we could use empty space of cargo hold totransport canned bread and, in fact, this was possible. The
canned bread is delivered to South Africa and is offloaded

from the woodchip carriers. After, it is transported to
eSwatini by land transportation. The canned breadcollected by Pan Akimoto Co., Ltd is delivered toelementary schools through an arrangement by
Hokuetsu Corporation and the whole process is
supported by cooperation from stevedoring company,
shipping company, woodchip mill in South Africa,
Baphalali Swaziland Red Cross and the Governor of the
district. A staff, who engages in woodchip
procurement, says “All of my concern goes away when
I see wonderful smiles of kids and teachers I met there”.
As of March 2018, canned bread delivered by ourwoodchip carriers exceeded 100,000 units so far. We
will continue to support the “Kyu-Can-Cho Project” asour one of our sustainable social contribution activity.

● Employment of retirees and persons with disabilities
We started a re-employment system from 2006 for employees who have retired. We later changed the systemfollowing revision of the law and have endeavored to expand the system.
The re-employment system not only stabilizes the lives of employees, but as securing labor becomes increasingly
difficult as the population continues to age and the birthrate declines, this system allows the transfer of expert skills
and is very beneficial for both labor and management. From April 2018, in place of the re-employment system, we
expanded the employment system by raising the employee age of retirement to 65 years old prior to the planned
increase in the pension age.
We also have a workplace where employees who are disabled due to occupational accidents, personal injury orillness can continue to be employed, and can make a contribution depending on the condition of their disability. In
particular, we actively hire people with disabilities as security guards at mills.
● Establishment of the Work Style Reform Committee
Based on the Group Corporate Philosophy, we decided to fully engage in work style reform, in which thegovernment has enacted laws and ordinances, and advocates creating a more meaningful work environment as a“people-focused business.” In promoting this initiative, we established the Work Style Reform Promotion
Committee chaired by two managing directors who supervise technology and personnel, along with managers ofeach division and mill as committee members, who formulate measures promptly with a focus on key issues.

Change in average age and average years of employment
Average age

Average years of employment
2016

2017

2018

Male

43.2

43.1

42.8

Female39.0

38.8

Average

43.0

42.8

(Hokuetsu Corporation, non-consolidated)

26

2 016

2 017

2 018

Male

19.8

18.5

18.6

39.8

Female

13.6

11.9

11.3

42.6

Average

19.4

18.1

18.1

(Hokuetsu Corporation, non-consolidated)

Relationship between
Hokuetsu Corporation and eSwatini

The Kingdom of eSwatini is a small country (slightly smaller than
Shikoku Island of Japan) located next to South Africa. The agriculture
and forestry business is one of the major economic activity ineSwatini. An afforestation activity is being conducted in eSwatiniand eucalyptus and acacia are planted as raw material for paper
products. The woodchips which Hokuetsu Corporation procuresfrom South Africa, contain timber planted in eSwatini.
eSwatini provides state education, however, due to the severe
financial situation of the government, it cannot provide enoughnutrition for growing children though its school lunches. We willcontinuously support the “Kyu-Can-Cho Project” and increase thenumber of children with smiling faces in eSwatini.

Kingdom of eSwatini(formerly known as Swaziland)

Republic of South Africa

27

Foundations for Value Creation

Corporate Governance

Aiming for transparent, fair, prompt and decisivedecision making in accordance with Japanʼs
Corporate Governance Code

Basic Policy on Corporate Governance (excerpts)
Article 2: Basic Philosophy of Corporate GovernanceWe formulated the Group Corporate Philosophy in April 2018 under the key concepts of “people,”“environment,” “technology,” “mono zukuri (manufacturing technology),” and “future.” Our aim isto enhance stable, long-term corporate value and work to realize the best corporate governanceso that we may continue to be a trusted company by all stakeholders.

Organizational Structure of
Corporate Governance

FY2017 Results

Shareholders Meeting
Appointment

Dismissal

Appointment

Cooperation

Dismissal

Board ofCorporate Auditors
Corporate auditors
Outsidecorporate auditors

Appointment

ReportAccounting Auditor

Audit(Execution ofBusiness)
Submission of
Selection Monitoring Importantmatters

Accounting
Audit

Group Governance
Administration
Department
Audit

Control andsupport

Number of
directors

11

Cooperation(Management/
Monitoring)

Cooperation

Company with a Board of Directors
and Board of Corporate Auditors

Audit

Board of Directors
Directors
Outside directors

ReportNumber ofcorporate
auditors

Number of
independent
directors/
auditors

4

4(2 outside directors
included)(2 outside corporate
auditors included)

Business Divisions and Affiliated Companies(2) We recognize the importance of corporate social responsibility and will strive to collaborate appropriately
with shareholders and other stakeholders in order to develop a corporate culture in which business isconducted with self-discipline in a sound manner.

Number of
Board ofDirectors
meetings

Number of
Board ofCorporate
Auditors

13

11

Attendance rate ofoutside directors at
Board ofDirectors meetings

Attendance rate ofoutside corporate
auditors at
Board of Corporate
Auditors meetings

100%

95%

(4) We will strive to secure the effectiveness of the Board of Directors based on our fiduciary responsibilities
and accountability to our shareholders.
We will also enhance the strategic, decision-making, and supervisory functions of the Board of Directors
through its analysis and assessment.
(5) We will actively and constructively engage in dialogue with our shareholders based on a basic policy
established separately to support the enhancement of our stable, long-term corporate value.
2. The Board of Directors shall establish and disclose the Group Code of Conduct to be shared by all employees
and executive officers of our corporate group.

Article 3: Role of the Board of Directors
The Board of Directors strives to enhance the common interest of our shareholders and achieve appropriate
corporate governance, in order to enhance stable, long-term corporate value.
2. The Board of Directors performs a supervisory function over all management, including the execution of theduties of the corporate management team and decides important matters as prescribed by laws andregulations, our articles of incorporation, and our Rules for the Board of Directors.

President and CEO

Management
Execution Meeting(1) We respect the rights of our shareholders and will strive to establish an environment in which shareholders
can exercise their rights appropriately and to secure equality between shareholders.

(3) We will ensure transparency and fairness in our decision-making by establishing an executory system fortimely disclosure and by conducting the timely and appropriate disclosure of non-financial information
beyond the requirements mandated by laws and regulations.

Organization design
Dismissal

The Group endeavors to enhance corporate governance in accordance with the following basic policy.

FinancialauditorKPMG
AZSA LLC

3. The Board of Directors delegates the decision-making for business matters other than those listed above tocorporate management in order to enhance the mobility of the business and management vitality, while also
exercising oversight of the status of the execution by the corporate management.
4. Outside directors give advice from a neutral position independent from management for enhancing ourstable, give long-term corporate value, and play a significant role in the decision-making for the importantmanagement issues of our company. They also supervise conflicts of interest between our company andmanagement.
5. The Board of Directors establishes the institutional systems for internal discipline, and cooperates with therelevant departments to supervise and ensure that they are operating effectively.

Assessment of the Effectiveness of the Board of Directors (FY2017 inspection)
Supplementary principle 4-11-3 Overview of analysis and assessment results of overall effectiveness of theBoard of Directors
In order to improve the function of the Board of Directors, we assessed the effectiveness (including functions suchas strategy development, decision-making and supervision) of the Board of Directors by all directors and auditors
including outside, and discussed the results at the Board of Directors meeting.
As a result, since the members of the Board of Directors had constructive discussions on the knowledge,
experience, and skills, etc. needed to effectively fulfill their roles and responsibilities and had the appropriate
supervisory functions, the effectiveness of the Board of Directors has been confirmed in its entirety. We willcontinue to deepen discussions with the aim of further improving the effectiveness of the Board of Directors.
The Board of Directors continues to be the focus of initiatives for some issues that have been recognized, such as
the allocation of time for matters put to the Board and the efficient provision of documents, and has been making
constant improvements to the management of the Board of Directors.
Going forward, we will continue to work on improving the environment to deepen discussions among directors
concerning our medium and long-term management strategies.

Article 7: The Role of Corporate Auditors and the Board of Corporate Auditors
Our corporate auditors and our Board of Corporate Auditors conduct operational audits and accounting
audits from an independent and objective perspective on the basis of their fiduciary duties towards ourshareholders. Our corporate auditors also audit the execution of the duties of each director, and express theirappropriate opinions at the Board of Directorsʼ meetings on the basis of their aforementioned fiduciary duties.
2. Our corporate auditors and our Board of Corporate Auditors enhance their effectiveness by organicallycombining the robust independence of the outside corporate auditors and the high information gathering
capacity of the standing corporate auditors.
3. Our Board of Corporate Auditors evaluates the outside accounting auditors on the basis of their duties toshareholders and investors by confirming the independence and the institutional business operations for
quality control, both of which are required of an outside accounting auditor.
The Basic Policy on Corporate Governance is published on our website.

28

29

The state-of-the-art Snow Camellia chip transport ship

Value Creation Achievements

We provide a summaryof the achievements of our
five core businesses
in FY2017.

Value Creation Achievements

Business Overview (1): Paper BusinessBusiness Topics

Boldly promoting measures to strengthen
competitiveness in a global market

Business Overview

The main product of the Paper Business is printing andcommunication paper used for books, magazines,
catalogs, and brochures. Within the product line-up,
coated paper is our key product, and its production
volume in 2017 had the second highest share in thedomestic industry. Furthermore, our colored wood-free
paper with its tradition and rich product line-up havemaintained a share of over 65% of the domestic market,
which shows our brand is favored by a wide range ofcustomers.

Performance Highlights

Total domestic shipments for printing andcommunication paper manufacturers in 2017 havefallen for four consecutive years since 2014. The
demand for paper continues to decline due to thecontinuing digitalization of media from the spread ofsmartphones and tablets, lower budgets for advertisingon paper media, and the declining birthrate. In thisenvironment, we will work to recover demand bycombining the respective benefits of paper and digital
mediums, and taking advantage of the functionality of
paper that cannot be replaced digitally. We willcontinue to maintain our price, further pursue optimum
production and efficiency improvements, and stably
provide high quality products.
We exported 236,000 metric tons of paper from the
Niigata Mill in 2017. We exported approximately 35,000
tons of coated paper to our key market in North
America. Exports to Hong Kong increased and reachednearly the same amount, approximately 34,000 tons.
Other major export destinations are in neighboring
countries in Asia. We export more than 100,000 tons in
total to Taiwan, Vietnam, South Korea, Thailand, andMalaysia, that includes wood-free paper for notebooks
and books; and coated paper for flyer leaflets, calendars,
and study reference books.
In 2018, we will strive to further expand exports,
strengthen our competitiveness in overseas markets as
domestic demand declines, and develop new
customers.

Start of sales of FSC® certified products

Future Issues and Initiatives

With the second year of the “V-DRIVE” Medium-Term
Management Plan in the final step of “Vision 2020,” thePaper Business Division will ensure the Niigata Mill, Kishu
Mill, and the Sales Department are aligned in the same
direction working together, and engaged in full-fledged
efforts to enhance our competitiveness. To respond to
rapid changes in the external environment, we will strive
to improve our domestic market share. In exports, wewill build a production system that can compete in the
global market, and take bold measures to strengthen thecompetitiveness of the Paper Business Division as
detailed in “V-DRIVE.” Specifically, we will focus on thefollowing:

Production(1) Thoroughly pursue optimum production and lower
costs at the Niigata and Kishu mills, while ensuring
stable operations and supply.

We began selling FSC-certified products for some ofour coated paper products (A2 gloss μ Coat Neos-F
sheet style from production in April 2017 and A2
matte μ Matte-F sheet style from December 2017
production).
The Tokyo Organising Committee of the Olympic andParalympic Games announced the basic principles of
its Sustainable Sourcing Code, which includes
consideration of: the environment, human rights,
labor throughout the entire supply chain, ensuring
traceability, and using resources effectively forservices, etc. procured by the Tokyo Olympics andParalympics.
Companies reacted instantly to this development, andthey began to use raw materials with FSC® certification
for their own final products, delivery materials,
buildings, and so on.
We are also adding
FSC-certified products
to our lineup, aiming
for products that are
actively selected byusers.

Further expansion of paper exports

The Group has been exporting and expanding mainly
printing and communication paper since 2008, andhas continued to supply it without being affected byfluctuations in foreign exchange rates. As a result, therelationship of trust we have developed withcustomers through these efforts has led to the recent
expansion of sales volumes.
In 2017, exports from the Niigata Mill decreased dueto the large-scale maintenance of equipment,
resulting in sales of 236,000 tons.
In 2018, our plan is for over 300,000 tons of paper
exports from Niigata Mill, and we are making progressin expanding sales. Consequently, at the Niigata Mill,
we are steadily expanding production volume bydeveloping new types of coated papers intended foroverseas use, and developing sales channels to India
and China. The Kishu Mill is also expanding exports,
and the sales volume for wood-free processed paper
is increasing in South Korea, China, India, andelsewhere.
We will continue to aim to achieve our planned sales
volume by expanding both regions and paper
varieties.

(2) Improve the reliability of quality and strengthen therelationships of trust we have with our users.
(3) Reduce the environmental impact of our production
operations through the effective use of resources.

Sales(1) Improve sales share through development ofcompetitive new products based on our coated andwood-free paper, and further advance new uses forcolored wood-free paper.

Exports and destination of production of Niigata Mill products (2017)(2) Conduct regular visits of our users by staff at our mills
to strengthen relationships and ensure reliable
quality and sales.
(3) Accurately grasp overseas market trends, maintainand strengthen relationships with existing customers
while further strengthening export sales.

Asia

181,644t
EuropePaper production by productNorth America

4,528t(Thousands of tons)

35,529t

1,500
1,200
900
600

Africa1,565t

300
0

2013

2014

2015

Coated and lightly-coated printing paper
Communication paper (PPC only)

32

2016

Oceania

13,035t

2017

Uncoated printing paper
Colored wood-free paper(Hokuetsu Corporation FSC license code: FSC-C005497)

33

Value Creation Achievements

Business Overview (2): White Paperboard Business

Accurately understanding changes in demand
structure and accelerating production and sales
efforts in growth areas
Business Overview

Our departmentʼs main products are premium white
paperboard, special white paperboard, coated duplex
board (with gray back), cast-coated paper, etc. We
feature a wide range of products in order to meet ourcustomersʼ diverse needs. The major usage for our
products is in commercial printing, which include
packages, catalogs, POP advertising, and postcards andthe covers of publications. Our products are used in awide range of fields.
Production sites in Japan are at the Niigata Mill andKanto Mill (Ichikawa and Katsuta). Overseas, we had
started operation of Jiangmen Xinghui Paper Mill,located in Jiangmen, Guangdong Province in China
from January 2015. With HOKUETSU GROUPʼs technicalstrength for top quality, high efficiency and lessenvironmental impact which is cultivated over thecourse of many years, we will further strengthen our
profit base by selling attractive products.

Performance Highlights(White paperboard business in Japan)
In the year 2017, total domestic shipment of white
paper board manufacturers is approx. 1.35 million tons
and our groupʼs figure is about 280 thousand tons
which equal to 21% of the domestic market share.
Domestic demand for white paperboard is facing a
gradual decline due to structural factors accompaniedby the aging population and declining birthrate. In
addition, strict cost-cutting measures by users has
resulted in miniaturizing packages in scale and shifting
to soft packaging. In the publishing sector, coverapplications are also gradually decreasing due to lessprinted copies.
On the other hand, for the pharmaceuticals andcosmetics sector, we are maintaining shipments due tothe continuing inbound effect and rising demand forsophisticated products arising from healthconsciousness. In the food product sector, the numberof retort food pouches has increased due to thetendency toward eating ready-made meals as a result of
increasing numbers of nuclear families and propensity
to save. Confectioneries, such as chocolate, remained
strong.
To respond to changes in the demand structure of ourcustomers, we have pursued total optimization bybuilding a production system that fully leverages thecharacteristics of the three mills in Niigata, Katsuta, andIchikawa. We are also working on initiatives in thefunctional paper sector in cooperation with theSpecialty Paper Business Division and expect it to growin the future.

Future Issues and Initiatives

Important Issues(1) Continue environmental management andadherence to compliance, and work with partnercompanies to achieve zero industrial accidents bybuilding a culture of safety and putting it into
practice.
(2) Develop new products, enhance our relationshipwith users, and promote efficient logistics reform.
(3) Achieve stable operations by implementing
preventive measures for operational problems,
increasing overall technical capabilities throughemployee training and implementing preventive
maintenance for equipment.
(4) Formulate and carry out plans to improve theprofitability of white paperboard operations in China
by cooperating with the White Paperboard Business
Division and other relevant departments.

Business returns to profitability on
an operating income basis

Jiangmen Xinghui Paper Mill Co., Ltd. had started
production from January 2015 and the mill is entering
fourth year of operation.
In 2017, despite sharp fluctuations in selling prices
due to the changing price of used paper in China,
sales increased significantly due to the impact of thestrong white paperboard market that began in 2016.
As a result, the mill was profitable on an operating
income basis.
Users have steadily increased since sales began, andthe reputation of Jiangmen Xinghui Paper Millʼs
products has also grown. They are not only growing
sales in Guangdong Province, where Jiangmen islocated, but also over a broad area from Dalian in thenorth to Hainan Island in the south. Supporters of
Jiangmen Xinghui Paper Mill have also increased, and
it is building a presence within the Group in China.
In February 2018 the mill introduced a shaking
machine to improve texture and strengthen rigidity.
By improving facilities, it aims to further boost sales
by promoting continuous improvements in qualityand development of new products.

Consulate-General of China in Niigata
visits Niigata MillSpecific Initiatives
We will proceed with developing demand for primary
food containers as a growth area and advance thedevelopment of quality including in new products.
While we are anticipating greater demand for
eco-friendly products with the hosting the Olympic andParalympic Games Tokyo 2020, we are expanding salesof our Maricoat and NEW-DV flagship white paperboard
while working to have them FSC® certified.

White paperboard production by type

Proactively promoting
environmental measures(Japan + China operations)(Thousands of tons)

550
500
450
400
350
300
250
200
150
100
50
0

2013

2014

2015

2016

2017

Electronic bulletin board installed at the front entrance with alive display of environmental values

Roof installed on the used paper yard(5) Strengthen cooperation with the Paper Processing
Business Division to enhance overall Group
competitiveness.

White paperboard
Coated duplex board
Jiangmen (coated duplex board)

34

Business Topics (White paperboard business in China/Jiangmen Xinghui Paper Mill)

China further strengthened its environmental
protection management in 2017. In July of that year,
the Ministry of Environmental Protection conducted asurvey of businesses producing products using solid
waste (including used paper) as a raw material. Thatsame month, China notified the World Trade
Organization (WTO) that it would prohibit theimportation of so-called mixed waste paper from2018. Since then, the circumstances surrounding
imported waste paper, the main material in the paper
Jiangmen Xinghui Paper Mill produces, have become
increasingly strict. In order to continue production incompliance with Chinaʼs environmental protection
policy, we will continue to improve our production
technology and promote environmental measures,
and also work to reduce costs.

The Consulate-General of the Peopleʼs Republic of China in
Niigata visited our Niigata Mill in June 2018.
During the visit, we explained the companyʼs history ofover 100 years of development, our management
philosophy, and also toured the millʼs production line,
wastewater treatment, and power generation facilities.
Consul General Sun Dagang commented that he wasdeeply moved by the advanced manufacturing technology
and environmental conservation efforts of the Niigata Mill,and that Japan and China would continue to support their
growth and development as much as possible throughexchanges and cooperation. Through our white
paperboard business in China, we will act appropriately inresponse to Chinaʼs environmental policy based on the
superior knowledge and technology cultivated in Japan
regarding environmental conservation.

A commemorative photo in front of the Niigata Mill
(Hokuetsu Corporation FSC license code: FSC-C005497)

35

Value Creation Achievements

Business Overview (3): Specialty Paper Business

Focusing on strengthening and expanding ourearnings base to further enhance our advantage
in growth markets
Business Overview

The main products of the Specialty Paper Business
Division are premium printing paper, fancy paper,communication paper, paper for industrial use, specialty
processed products, specialty fiber boards, functional
paper, and more. Among these, products such as
abrasive-coated base paper, adhesive postcard paper,and chip carrier tape boast a large share of the domestic
market. Going forward, we will further solidify ourdomestic base while strengthening our competitivenessand revenue-earning capability in the global market.

Performance Highlights

Total shipments by the Specialty Paper Business Division in2017 totaled 103% compared to the previous year. In thespecialty paper market overall, despite an environmentthat lacked vitality due to reduced demand for pamphlets
and a switch to regular paper, we aggressively rolled out
sales efforts for publishing and other industries.
In the communication paper sector, report form paper and
OCR paper continue to slowly decline, but we advanced
the development of processing applications both in Japanand overseas. In addition, due to local governments
adopting adhesive postcard paper and our efforts todevelop inkjet paper, shipments were in line with levels of
the previous year. In the functional paper sector,
shipments exceeded those of the previous year. Bolsteredby vigorous demand from the electronic components
industry, chip carrier tape base paper was strong. In
addition, shipments of abrasive-coated base paper andfilter material were strong due to robust demand forconstruction and building materials, and demand for filter
materials in semiconductor investment. Exports increased
to 113% of shipments for the previous year. This was due
to an increase in sales of processed paper for Shanghai Toh
Tech in China, where strong sales continue. We willcontinue to expand the scale of our operations in overseas
markets.

Production of specialty paper by product type
(Thousands of tons)

In the Specialty Paper Business Division, the company
is working closely with five strategic businesses andsubsidiaries (Hokuetsu Toyo Fiber, Nikkan, Shanghai
Toh Tech, Bernard Dumas, and HK Paper (USA)) andhave promoted the expansion of our business area byshrinking the distance between end users on a global
scale and linking latent needs to commercialization.
This effort has steadily gotten on track and has beenable to expand our business area. The effect ofcooperating with head office has even improved the
profitability of each strategic business and subsidiary.
Significant results are emerging in the overall Specialty
Paper Business, such as profits that double the sales
ratio and an operating profit margin in excess of 10%.
In FY2018, we are facing a severe headwind of adrastic rise in the price of raw materials and fuel, butwill steadily advance “V-DRIVE” by strengthening ourearnings base.

Specialty Paper and Communication Paper
The specialty and communication paper sector isstruggling with the decline in demand for fancy paper,
but we will work to expand sales related to the latentpotential of premium printing paper and create
demand for waterproof and oil-resistant paper.
With communication paper, although both form andOCR paper face declining demand due to digitizationand other factors, we are working to develop
processed base paper applications and expand salesof adhesive postcard base paper.
Functional Paper
The functional paper sector is dominated bymanufacturing and industrial applications, and is afield where the Group specializes in offering productsthat are truly unique or have a top share of the market.
We will strengthen cooperation with each strategic
business and subsidiary, and aim for global growthunder the following initiatives.
・Establish a system to increase the production of chip
carrier tape base paper

Fancy & Media Paper Sales Dept.

In the specialty paper sector, we are actively involvedin exhibiting and sponsoring user exhibitions toenhance the overall presence of the Group, in addition
to developing new products and activities to expand
sales. Specifically, we co-sponsored the Kawade Shobo
Shinsha “coloring for adults” contest, and used thecontest to engage in PR at various exhibitions with thecoloring events. The coloring classes at EcoPro 2017,
Japanʼs largest event on the environment, is one
example.
The “coloring for adults” contest attracts 6,000 to 8,000
entries every year from events held by Kawade Shobo
Shinsha, Sakura Color Products, and the Yomiuri
newspaper. We have been a co-sponsor from 2017
since the Groupʼs general specialty paper products areused in almost all coloring books published by Kawade
Shobo Shinsha.

Performance Materials Paper Sales Dept.
In the functional paper sector, collaboration isunderway with two overseas subsidiaries, Bernard
Dumas in France and Shanghai Toh Tech in China.
Dumas, which became a wholly owned subsidiary in
2012, is a functional materials and specialty paper
manufacturer established in 1924 that boasts the top
share in Europe of glass fiber battery separators. With
the company becoming a subsidiary, we have become
the worldʼs second largest glass fiber sheet
manufacturer.
We are developing products while sharing technicalknow-how in our glass fiber business with them.
Demand for automotive battery separators is rapidly
increasing as they an important component that
supports the reliability of vehicles that stop idling incompliance with exhaust gas regulations. We are
therefore working to strengthen the production
system for battery separators.

Coloring class at EcoPro 2017

In the communication paper sector, we are focusing on
expanding the sales of products compatible withhigh-speed inkjet printers for adhesive postcard paper
where there is relatively strong demand. The shift fromsealed to adhesive postcards continues as users cut
costs in response to their needs, and initiatives for
those needs is a pressing issue. As one of the initiatives,
we are collaborating with printing equipment
manufacturers to jointly improve quality, such as thecoloring of printed text printing, bleeding, and stabilityof adhesion. We are also working to launch new
products.
We will also take advantage of the stability ofdimensions and workability of communication paper
to similarly advance development of adhesive postcard
base paper and other base paper for processing.

Shanghai Toh Tech is a manufacturer of paper chip
carrier tape established in 2002. Carrier tape is tape forcarrying electronic components such as capacitors andresistors. The company manufactures high quality
paper carrier tape using our specialized paper for
carrier tape.
Demand for electronic components is expected toincrease due to the higher functionality ofsmartphones and the popularization of assisted
driving systems for automobiles. Shipments in 2017
were more than 10% higher compared to the previous
year. We will continue to actively investment toincrease in production capacity and quality
improvement.

Adhesive postcard paper

Shanghai Toh Tech factory

Bernard Dumas factory

・Establish a production base in the United States forbattery separators
Establish an optimal production system for global
markets from production bases in Japan, Europe,and the United States

100
80
60

・Plan to expand sales in the Chinese and Japanesemarket for RO (water treatment) membrane backing
for the water treatment sector to supply safe water

40
20
0

Future Issues and Initiatives

Business Topics

2013

2014

2015

2016

2017

・Collaborate with laboratories to commercialize
cellulose nanofiber (CNF) technology

Miscellaneous types of paper for industrial use
Other specialty printing paper

3637Value Creation Achievements

Business Overview (4): Paper Processing BusinessSupplying high quality products by integrated
production from the development of base paper
and paper materials to processing
Business Overview

In the Paper Processing Business, our consolidated
subsidiary, Hokuetsu Package Co., Ltd. (which changed
its name from BF and Package Co., Ltd. on July 1, 2018), isdeveloping its business by leveraging the strengths of its
integrated production from the development of basepaper and materials to processed products.
Its major business fields are: 1) paper containers, foodcontainers, and confectionery boxes used byconvenience stores and supermarkets, 2) processed
paper such as Lami Board (the generic name fordecorative paper) used in cosmetics and medical
products packaging, 3) Tohei Pak brand milk and drink
cartons, 4) adhesive postcard paper used for invoices,
answer sheet paper, data processing of personal
information, and printing and communication media,
etc. requiring advanced technology such as RFID* tags.
We are striving to deliver high quality products tocustomers in each field.
The Katsuta Engineering Department of the Kanto Mill at
Hokuetsu Package, which produces milk and drink
cartons and primary food containers, has acquired the
FSSC 22000 Food Safety System Certification, theinternational food safety management standard, and iscommitted to health and safety management. The
Tokorozawa Production Department, which produces
printing and communication media products, has
acquired ISMS Information Security Management System
certification, and is implementing strict security
management.
Hokuetsu Package is also actively promoting
environmental management in accordance with theGroupʼ s minimum impact basic policy. They haveacquired FSC® certification to promote sustainable forest
management and Programme for the Endorsement ofForest Certification Schemes (PEFC) Chain of Custody(CoC) certification (certification of products). They arealso manufacturing products with clean energy from oneof the largest biomass power generations in Japan which
is at our Kanto Mill (Katsuta).

Future Issues and Initiatives(1) Improve safety awarenessBy making danger visible, we will raise the safety
awareness of each employee and implement
systematic occupational health and safety
education to create a safe and healthy workplace.
(2) Enhance governance system
We will continue to strengthen our risk
management and maintain and deepen internal
control.

Partnering with IPI to sell newpaper beverage containers

In order to enter the new drink carton market,
Hokuetsu Package entered into an exclusive sales
agreement in Japan with Mitsubishi Shoji Packaging
Corporation and IPI of Italy for sterile filled drink
cartons and aseptic filling machines. We beganmarketing of IPI aseptic filling systems (fillingmachines and drink cartons) for dairy, food, andbeverage manufacturers. The biggest feature of thedrink carton is that it is a long-term storable aseptic*
container with high convenience (easy to open, easy
to pour, easy to drink) with a large cap in the centerof the top. We have a lineup of several shapes
according to the application, and the Caliz type witha glass motif, in particular, has a unique body with agentle curve that is easy to hold.
The NSA-EVO aseptic filling machine that creates
these shapes has a simple and compact design, andis a filling machine that realizes a high quality levelwith simple operation. Capacities can be set from
100 ml to 1,000 ml, with the ability to handle 6,000
containers per hour for 125 ml to 250 ml containers.

About 50 companies in the dairy, food, and beverageindustries were invited to an exhibition held in spring
this year, which was a success.
*Aseptic is a technology that sterilizes food and beverages, andpackaging materials separately, and fills and packages foodand beverages in a sterile environment to ensure long-term
storage.

Providing environmentally-friendly
products with two FSC-certified
papersHokuetsu Package acquired PEFC certification in July
2017, and provides milk and drink cartons made fromtwo types of certified paper that includes the FSC®
certification it already has. In response to the growing
need for environmental protection, they are also
working toward giving certification marks to paper
containers and processed paper.
We will continue to contribute to the creation of asustainable society by providing
environmentally-friendly products and reducing our
impact on the environment.

Protecting information assets with
the ISMS international standard(3) Pursue high quality and high efficiency
Each division will clarify their quality issues,
formulate remedial measures, build a quality
management system to verify its effect, andpromote the introduction of new systems to
improve operational efficiency.

The Tokorozawa Production Department conducts
data processing services (DPS) and retains personal
information from customers. As such, we protect
information assets from information security threatsin accordance with the ISO 27001 Information
Security Management System (ISMS). For example,
we strictly control room entrance according tosecurity permissions by personal identification using
IC cards, and handle the information securely andproperly as we conduct business.

(4) Rapid response to changes in the businessenvironment
・Anticipate changes in the market environmentand cooperate with other business divisions toaccurately respond to user needs.
・In collaboration with Italian IPI S.r.l. (IPI), we
began selling new drink cartons and fillingmachines. We will also promote new businesses
and plan and develop new products that meetmarket needs.
・Strengthen our response capability to minimize
negative impacts such as foreign exchange risk
and higher prices for raw materials.
IPI aseptic filling machine (NSA-EVO/ASEPTIC)

Sales by business* RFID: Radio frequency identifier
A contactless system that uses radio waves to read and write theembedded ID information of an RF tag.

(Hundreds of millions of yen)200

Performance Highlights

150

The processed paper sector saw increased sales
supported by strong demand for decorative paper andpaper with processing variations. In the packaging
materials sector, in spite of the shortening of productlifecycles, including the demand for convenience store
product materials, sales were stable owing to acquiringother product materials.
In the liquid container sector, on the other hand, sales
declined due to the effect of the change in shape of drink
cartons and reduction in structural demand in the38

printing and communications media sector. As these
two areas account for approximately 70% of sales, wewill aggressively make capital investments in businessfields where demand is expected to grow in the
future, and will change the sales ratio in the medium
term.

Business Topics

100

50

0

2015

Liquid paper containers
Packaging

2016

2017

Printing and communication media
Processed paper

IPI aseptic drink cartons for filling(Hokuetsu Package FSC license code: FSC-C105145)

39

Value Creation Achievements

Business Overview (5): Pulp BusinessBusiness Topics

Further improving corporate value based on highadded value forest management

Business Overview

Canadian subsidiary, Alberta-Pacific Forest Industries
Inc. (Al-Pac) is responsible for the upstream sector of the
HOKUETSU GROUP, and is the heart of our pulp
business. Al-Pac operates the largest pulp mill in North
America, boasting an annual output of 560,000 tons ofleaf bleached kraft pulp (LBKP) and 100,000 tons ofneedle bleached kraft pulp (NBKP).
Al-Pac is entrusted with managing 6.4 million hectaresof forest land (an area that is larger than Kyushu andShikoku combined) from the government of Alberta,
and uses this resource for raw pulp material.
Al-Pac produces and sells high quality pulp with highpurity and a high uniformity of fiber which comes fromthe forest resources managed by Al-Pac and the
production technology of the mill. Thanks to the praise
for their high quality, environmental measures, andaccurate response to customer needs, we have secured
a stable customer base in North America, China, Japan,
and South Korea.

Start of operation of chemical andfreight car receiving facility

Future Issues and Initiatives

In order for Al-Pac to maintain its FSC certification, it
must manage its vast forests in a manner that is“Ecologically, Economically, and Socially” suitable for theenvironment.
In addition, FSC credits have typically been managed
separately for hardwoods and softwoods. However,since there is only one forest, a new recognition that theway the forest is managed is shared, and not by tree
type, was established, and the logs Al-Pac harvests were
uniformly certified. As a result, it became possible tosignificantly increase the amount of pulp that can besupplied as FSC-certified pulp.
By leveraging the high market valuation of FSC
certification, we aim to build and thoroughly develop an
ecological value chain from logs to the final product andits users, and deploy this laterally to differentiate thecompanyʼs products. We intend to realize sustainable,
improved, corporate value by strengthening our sales
system so that it is not influenced by market conditions.

As a new investment, we installed an approximately 1 kmlong side track connecting to the existing railway line andbuilt a new chemical receiving facility in order to receive
the chemicals necessary for pulp production which had
been transported by truck in the past. Construction wascompleted as planned in December 2017 and operation
started in January 2018.
This strategic investment significantly improved chemicaltransportation costs and expanded our supplier options,which made favorable procurement of chemicals andstable, long-term procurement possible. It has alreadycontributed to strengthening Al-Pacʼs costcompetitiveness.

Performance Highlights

In 2017, the Pulp Business contributed to the profits ofthe entire Group, with significant results that exceeded2016 totals backed by higher sales prices due to therecovery in market conditions, increased sales as a resultof higher production, and lower manufacturing indirect
costs.
Production-wise, we strive to stabilize and improve our
day-to-day output, and are working to maximize
production by considering optimization of the periodic
maintenance interval.
As demand for printing and writing paper continues todecline, we are aggressively working on technicalsupport for household paper, such as tissue paper, andspecialty paper manufacturers to diversify our pulp
sales. Furthermore, we will do our utmost to havecustomers appreciate the quality and value of Al-Pac
products by offering FSC ® (Forest Stewardship Council)
certified products etc. and diversifying our sales
customers, leading to growth.

Chemical cars on the side track

Change in production(Thousands of tons)

（t）

700

662
615

600

603

583

1,857

500

601

1,973

2,100

1,950

1,894

1,861

1,800

1,837

400

1,650

300

2013

2014

2015

2016

2017

1,500

Annual production
Daily production (LBKB)

Packaging paper 4%

Packaging paper 9%

Specialty paper
11%

Printing andwriting paper
79%40Household
paper
20%

2007

Al-Pac has worked with its partners in Canada to put into
practical use technology to extract and purify only
methanol from gas generated in the pulp manufacturing
process.
The technology is innovative and has been subsidized by
the Canadian government and the Government of theprovince of Alberta. Al-Pac built manufacturing facilities
that include distillation towers and concentrating towers,
and has worked with its partners to put the technology
into production and improve quality. There are prospects
for its practical application, and sustained continuous
operation has become possible. Product quality has also
improved, and customers have expressed their approvalof plant-derived biomethanol.

FSC® field tour

Sales ratio of Al-Pac pulp by usage
Household paper 6%

Manufacture and sale of biomethanol

Specialty
paper
19%

Printing
andwritingpaper
52%

Packaging paper 7%

Printing
andwriting
paper
40%
Specialty
paper
20%

Household
paper
33%

2017

2018 (planned)

As one of the pre-tours of the FSC Annual Meeting held in
October 2017, Al-Pac hosted a field tour that was
attended by members of four countries mainly from FSC
Canada and WWF Russia, and introduced examples offorest management in Canada. The tour covered
examples of protection of the natural environment
through forest management from tree harvesting to
product (pulp) production, and the social role of thecompany.
Participants included those involved in the companyʼs
production and forest management (representatives ofindigenous peoples, local employees, forest management
researchers, etc.) where they learned about building abalanced and sustainable coexistence with all
stakeholders. The tour ended on a high note withparticipants commenting that it was an operation that set
an example for all countries

Optimizing periodic maintenanceintervals

Since starting operations in 1992, Al-Pac has consistently
strived to develop and implement a systematic andappropriate facility maintenance plan. As a result, it has
been able to keep its facilities in good shape order 25
years after the start of operations. Up to now, it has been
performing long-term periodic maintenance (facility
inspection, repairs) about every 12 months, and while
everything has been maintained, it has tried to extend thisperiodic maintenance interval to increase production andlower maintenance costs.
To do this requires that facilities be operated safely andefficiently over a long period. Based on their facilities
management and operating results to date, they received
approval from the relevant agencies, including theprovincial government, and insurance companies, andpostponed the scheduled periodic maintenance in 2017,and have been operating continuously for about 19
months. As a result of this effort, they achieved theirhighest production ever in 2017 when they did not
perform long-term maintenance. It contributed to higher
sales with a rising market, and significantly contributed toboosting profits. Al-Pac will continue to maintain andmanage the facilities appropriately while considering the
optimization of the interval for long-term periodic
maintenance to ensure continuous operation.
(Alberta-Pacific Forest Industries Inc. FSC license code: FSC-C022642)

41

Executive Officers

Financial Information
Sekio Kishimoto

Hiroshi Suzuki

President and CEO

Yoshinori Kawashima

Managing Director

Managing Director

Morinobu Obata
Managing Director

Consolidated Financial Highlights

44

Managementʼs Discussion and Analysis

46

Consolidated Financial Statements:

Mitsushige Yamamoto
Director

Shuji Sekimoto

Kimio Uchiyama

Director

Director

Yasuyuki Kondo
Director

Consolidated Balance Sheets48

Consolidated Statements of Income

50

Consolidated Statements of Comprehensive Income

50

Consolidated Statements of Cash Flows

51

Consolidated Statements of Changes in Net Assets

52

Notes to Consolidated Financial Statements

54

Independent Auditorʼs Report

Shigeharu Tachibana

Director

Junichi Horikawa

Standing Corporate Auditor

Mitsuyasu Iwata

Kazuo Nakase

Outside Director

Outside Director

Kaoru Mashima

Jun Itoigawa

Standing Corporate Auditor

81

Outside Corporate Auditor

Keiji Watanabe

Outside Corporate Auditor

Corporate Officers

Kisao Taniguchi

Makoto Yanagisawa

Osamu Terao

Haruichi Shimizu

Shimpei Kusaka

Shinobu Ogata

Shigeru Wakamoto

Hiroyuki Otsuka

Masayuki Kuribayashi

Shoji Suzuki(As of June 27, 2018)42

43

Consolidated Financial Highlights

Jump-100

Value up-10

G -1stC-next

V-DRIVE
Millions of yen

Financial data

Year ending
March 31, 2007

Year ending
March 31, 2008

Year ending
Year ending
March 31, 2009 March 31, 2010

Thousands of
U.S. dollars (Note 1)

Year ending
March 31, 2011

Year ending
March 31, 2012

Year ending
March 31, 2013

Year ending
March 31, 2014

Year ending
March 31, 2015

Year ending
March 31, 2016

Year ending
March 31, 2017

Year ending
March 31, 2018Year ending
2017年
March
31,3月期2018¥158,992¥172,709¥182,782¥193,952¥217,013¥230,570¥208,280¥223,865¥228,400¥246,849¥262,398¥269,100$2,532,229

Operating income

9,050

8,330

8,122

9,888

8,742

10,823

3,658

3,308

6,140

9,236

12,90011,414

107,406

Ordinary income

9,220

7,891

6,593

9,436

10,14813,781

10,516

8,481

11,463

10,58814,056

13,908130,874

Net sales

Net income attributable to owners of parent company

4,395

4,074

1,750

7,106

5,296

12,673

8,169

6,105

8,359

7,477

10,381

10,327

97,177

EBITDA (Note 3)

20,516

21,456

25,69531,58032,33635,28325,53826,97430,582

31,12533,93833,871

318,726

Capital expenditures

43,022

37,72531,376

6,286

8,635

7,977

12,16023,91911,128

9,425

12,751

14,710138,421

Total assets

269,124

292,726

313,378

340,944322,233

332,979

343,114350,808

351,033

363,658

362,205367,2443,455,764

Net assets

143,439

140,184

135,029

138,173

137,870

150,628

158,794

158,824

168,573

169,529

181,035

191,977

1,806,502

Interest-bearing debt

77,291

101,025

137,060

136,640

121,157

117,144

129,137

136,387

123,724

129,586

116,754

108,240

1,018,538

Cash ﬂows from operating activities

14,907

12,2959,620

36,48425,71928,953

21,203

18,67627,85820,94428,91819,742

185,772

Cash ﬂows from investing activities

43,78035,411-34,804-6,209-9,565-3,628-13,649-14,158-133,227

Cash ﬂows-10,637-25,127-22,805-16,261

Per share data (Yen/U.S. dollars)
Earnings per share (EPS)

22.75

19.19

8.25

33.75

25.55

62.09

40.08

30.54

44.39

39.69

55.09

54.68

0.52

Book value per share (BPS)

672.37656.96632.42658.61670.49727.66770.02

834.44888.16894.74956.63

1,011.58

9.52

Dividends per share

12.00

14.00

12.00

12.00

12.00

12.00

12.00

12.00

12.00

12.00

12.00

12.00

0.11

EBITDA/Net sales (%)

12.9%

12.4%

14.1%

16.3%

14.9%

15.3%

12.3%

12.0%

13.4%

12.6%

12.9%

12.6%

Operating income ratio (%)

5.7%

4.8%

4.4%

5.1%

4.0%

4.7%

1.8%

1.5%

2.7%

3.7%

4.9%

4.2%

Key ratios

Net income ratio (%)

2.8%

2.4%

1.0%

3.7%

2.4%

5.5%

3.9%

2.7%

3.7%

3.0%

4.0%

3.8%

Equity ratio (%)

53.0%

47.6%

42.8%

40.3%

42.6%

44.7%

45.6%

44.8%

47.7%

46.4%

49.8%

52.1%

ROA (%) (Note 4)

3.7%

2.8%

2.2%

2.9%

3.1%

4.2%

3.1%

2.4%

3.3%

3.0%

3.9%

3.8%

ROE (%)

3.4%

2.9%

1.3%

5.2%

3.9%

8.9%

5.4%

3.9%

5.2%

4.5%

6.0%

5.6%

Debt equity ratio (times)

0.54

0.72

1.02

0.99

0.88

0.79

0.82

0.87

0.74

0.77

0.65

0.57

Notes
1. Amounts in US dollars were converted at ¥106.27 to one dollar, the currency exchange rate prevailing in the Tokyo Foreign Exchange Market as of March 31, 2018.
2. EBITDA = Ordinary income + interest expenses + depreciation and amortization costs + depreciation of goodwill - depreciation of negative goodwill
3. ROA = Ordinary income ÷ average total assets at the beginning and end of the fiscal year × 100

Operating Income /Operating Income Ratio

Net Sales / EBITDA(Millions of yen)
Net Sales(Millions of yen)
EBITDA

300,000

269,100

45,000(Millions of yen)
Operating Income
15,000

6.0

Millions of yen(Millions of yen)
Total Assets（%）
ROA
367,244 8.0

400,000

Millions of yen

11,414

Millionsof yen33,871Millionsof yen30,000200,000

Total Assets / ROA（%）
Operating Income Ratio

4.2％

10,000300,000

6.0

4.0

4.0

200,000

15,000100,000

3.8%

2.0

5,000

2.0

100,000

02013 2014 2015 2016 2017 2018

(Fiscal year ending March 31)

Net sales

44

EBITDA00

2013 2014 2015 2016 2017 2018

0.0

(Fiscal year ending March 31)

Operating Income

Operating Income Ratio02013 2014 2015 2016 2017 2018

0.0

(Fiscal year ending March 31)

Total Assets

ROA

45

Managementʼs Discussion and Analysis
Business Environment and Results
During fiscal 2017, ending March 31, 2018, although
the Japanese economy is gradually recovering due toimprovements in corporate earnings and theemployment environment, accompanied by steadyeconomic growth abroad and favorable capital
expenditure, the business environment in the pulp
and paper industry has become even more severe dueto the shrinking demand for printing andcommunication paper, sluggish selling prices, rising
raw material and fuel prices, and other factors.
For the HOKUETSU GROUP, income increased due tofavorable sales at overseas subsidiaries, but profits
declined due to soaring raw material and fuel prices.
The Groupʼs results for this period were as follows.
Millions of yen
Net sales:
Operating income:Ordinary income:Net income
attributable toowners ofparent company:¥269,100¥11,414¥13,908¥10,327

Change+2.6%‒11.5%
‒1.1%

‒0.5%

Business Results by Segment
1. Paper and Pulp Segment
For the Paper and Pulp segment, income increased
due to strong sales at overseas subsidiaries.
On the earnings front, profits fell due to soaring raw
material and fuel prices.
By product type, sales of paper declined due to the
influence of the digitization of advertising media andmail order catalogs, and the decrease in the number ofpublications printed.
Regarding white paperboard, coated duplex board
remained strong in food products such asconfectionery and retort pouches. With premium
white paperboard, sales promotional products andstorefront POP use related to convenience storeslanguished, with sales somewhat lower than theprevious year. Also, specialty white paperboard sales
remained steady for confectionery and souvenir
packaging applications.
As for specialty paper, sales of chip carrier tape basepaper for transporting electronic components
increased in the functional paper field due toincreased demand for smartphones and automotive
electronic components. In addition, sales ofautomotive battery separators and filters for air
purification were also firm. At the same time, despite adecline in demand for fancy paper in general as adown shift to general paper continues, premium
printing paper has been strong. With communication
paper, sales of adhesive postcard paper for
notifications exceeded the previous year, but
communication paper overall continued to see asevere sales situation as the use of forms decreases
and the shift to digital media continues.

46

With pulp, sales at Alberta-Pacific Forest Industries Inc.
were healthy due to rising pulp market conditions,etc., resulting in sales exceeding the previous year.
In view of the above, the results in the Paper and Pulp
segment were as follows.
Millions of yen
Net sales:
Operating income:¥242,082¥8,809Change+3.2%‒14.7%

2. Packaging and Paper Processing Segment
In the Packaging and Paper Processing segment,
orders declined due to changes in the shape of liquidcontainers by some users, resulting in lower income
and profits.
The results for the Packaging and Paper Processing
Segment were as follows.
Millions of yen
Net sales:
Operating income:¥19,428¥1,128Change‒3.6%‒10.5%

Fiscal 2018 Outlook

The balance of cash and cash equivalents as of March
31, 2018 decreased by ¥5,003 million from theprevious year to ¥14,282 million.

The Japanese economy is gradually recovering and in
the next period, due to continuing improvements incorporate earnings and the employment environment,
it is expected to continue this gradual recovery.
However, there is fear of risk due to the impact of
uncertainty in overseas economies resulting fromfactors such as the economic policies of thegovernment of the United States and the future of
emerging economies, including China.

Cash flows from operating activities
Funds gained from operating activities totaled ¥19,742
million (37.1% decrease year-on-year).
The main sources of cash were ¥13,521 million inincome before income taxes and minority interestsand ¥19,065 million in depreciation and amortization.
The main components of cash used were returns frominvestment through the equity method of ¥1,844
million, an increase of receivables of ¥6,649 million, an
increase of inventories of ¥3,707 million, and amountof corporate tax paid of ¥2,155 million.
Cash flows from investing activities
Net cash used in investing activities totaled ¥14,158
million (3.7% increase year-on-year).
The main components of cash used were ¥13,705
million for purchase of tangible fixed assets.
Cash flows from financing activities

3. Others
In the Others segment (encompassing wood products,
construction, transportation, warehousing and otherbusinesses), orders declined and income decreased inconstruction. On the earnings front, earnings rose dueto the effect of various cost-cutting measures.
In view of the above, the results in the Others segment
were as follows.
Millions of yen
Net sales:
Operating income:Cash Flows¥7,590¥815

Change‒1.1%+30.8%

Financial Position
Total assets as of the end of fiscal 2017 (March 31,2018) increased ¥5,039 million from the previous yearto ¥367,244 million. This increase was mainly due tonotes and accounts receivable-trade increasing ¥5,028
million, electronically recorded monetary claims
increasing ¥2,095 million, merchandise and finishedgoods increasing ¥2,990 million, investment securities
increasing ¥2,818 million as a result of the rise of ourshare price on one hand, accompanied by a cash anddeposits decreasing ¥5,178 million and tangible fixed
assets decreasing ¥4,408 million due to depreciation
expenses.
Total liabilities as of March 31, 2018 decreased by¥5,903 million to ¥175,267 million from a year ago. The
main reason was a decrease of ¥8,513 million ininterest-bearing debt.
Net assets as of March 31, 2018 increased by ¥10,942
million from the previous year to ¥191,977 million. The
increase in net assets was brought about mainly by anincrease in retained earnings from net profit
belonging to shareholders of the parent company etc.
of ¥ 8,063 million.

Net cash used for financing activities totaled ¥10,645
million (26.3% decrease year-on-year).
The main components of the cash used were a ¥1,365
million decrease of short-term loans, ¥10,538 million
repayment of long-term loans, and ¥2,274 million for
payment of dividends. The main contributors to cash
were ¥3,871 million in proceeds from long-term loans.

Under these circumstances, the business environment
for the pulp and paper industry is expected to remain
uncertain going forward as a result of factors such as
decline in domestic demand for printing andcommunication paper and the rise in raw material andfuel prices. The Group will endeavor to strengthen ourearnings structure and continue initiatives toexhaustively cut costs, along with continuing tochange our business structure.
Millions of yen
Net sales:
Operating income:Ordinary income:Net income
attributable toowners ofparent company:¥275,000¥10,000¥13,000

Change+2.2%‒12.4%‒6.5%¥8,500‒17.7%

Major Business Risks
Basic Policies Regarding Earnings
Distribution and Dividend Payments for
Fiscal 2017 and Fiscal 2018
In order to continue growth investment for the
improvement of long-term and stable corporate value,
Hokuetsu Corporation implements capital policy inlight of a balance of financial soundness, capitalefficiency and returns to shareholders, and considers
providing stable and continuous dividends as its“fundamental policy regarding capital measures.” Thedividend is distributed twice a year with an interim
dividend and a year-end dividend, and thedecision-making bodies for the company with respect
to interim dividends and year-end dividends are, incompliance with the provisions of the Articles of
Association, the Board of Directors and the General
Meeting of Shareholders respectively.

The HOKUETSU GROUP currently considers thefollowing to be its principal areas of business risk.
・Fluctuations in product demand and prices
・Fluctuations in raw material and fuel market prices
・Foreign exchange rate fluctuations
・Overseas political and economic circumstances
・Interest rate fluctuations
・Legal regulations and litigation
・Natural and other disasters
・Capital investment
・Alliance-type contracts with other companies
・Mergers and acquisitions among other capitaltransactions

Based on this fundamental policy, the company
decided to distribute a year-end dividend of ¥6 pershare in fiscal 2017, ending March 31, 2018. Combinedwith the interim dividend of ¥6, the annual dividend
was maintained at ¥12 per share.
For fiscal 2018, ending March 31, 2019, the company
currently plans to maintain ¥6 per share for both theinterim and year-end dividends and the annual
dividend at ¥12 per share.

47

Consolidated Balance Sheets
Hokuetsu Corporation and Consolidated Subsidiaries
As of March 31, 2018 and 2017

ASSETS

2018

Millions of yen

Thousands of
U.S. dollars(Note 1)

2017

2018

CURRENT ASSETS:
Cash and deposits (Notes 3, 4 & 8)

Unconsolidated subsidiaries and aﬃliates

2018

2017

2018

Short-term loans (Notes 4 & 9)

¥15,525¥17,159$146,090

Commercial paper (Note 4 & 9)

11,00011,000103,510

Current maturities of long-term debt (Notes 4 & 9)

16,489

9,897

155,161Trade27,751

26,685

261,137

Unconsolidated subsidiaries and aﬃliates

1,208

1,202

11,367

LIABILITIES AND NET ASSETSCURRENT LIABILITIES:¥14,316¥19,494$134,713

Notes and accounts receivable (Note 4)
TradeMillions of yen

Thousands of
U.S. dollars(Note 1)

74,37067,201

699,821

763

808

7,180

Notes and accounts payable (Note 4 & 8)

(83)

(48)

(781)

Inventories (Note 6)

49,19144,889462,887

Deferred income taxes (Note 12)

1,397

1,780

13,146

Income taxes payable (Note 12)

1,335

6,033

5,474

56,771

1,802

16,957

Prepaid expenses and otherAccrued expenses

8,913

139,598

1,373,737

91,587TOTAL CURRENT ASSETS

145,987

9,733

Other

7,324

7,373

68,92090,832

83,564

854,729

Long-term debt (Notes 4 & 9), less current maturities

65,226

78,698613,776

Deferred income taxes (Note 12)

Allowance for doubtful accounts

TOTAL CURRENT LIABILITIESPROPERTY, PLANT AND EQUIPMENT:Land and timberland

25,89726,368

243,691

Buildings and structures

82,09880,361

772,542

Machinery and equipment

418,924

410,774

3,942,072

832

1,700

7,829

4,392

2,844

41,328532,143

522,047

5,007,462(392,170)(377,665)(3,690,317)

139,973

144,382

1,317,145

Leased assets
Construction in progress
Less accumulated depreciation
NET PROPERTY, PLANT AND EQUIPMENT

LONG-TERM LIABILITIES:
2,832

1,749

26,649Accrued environmental expenditures

298

45

2,804

Provision for business structure improvement

271

275

2,550

Provision for reforestation

409

521

3,849

Liability for retirement beneﬁts (Note 17)

11,772

13,656

110,774

Asset retirement obligations (Note 18)

2,951

2,057

27,769

676

605

6,362

84,43597,606

794,533Other
TOTAL LONG-TERM LIABILITIESINVESTMENTS AND OTHER ASSETS:
Investments in securities (Notes 4 & 5 )31,99530,560301,073

CONTINGENT LIABILITIES (Note 10)

Investments in and receivables from unconsolidated subsidiaries and aﬃliates

40,541

39,170381,491

7

14

66

NET ASSETS (Note 11)

473

535

4,451

SHAREHOLDERSʼ EQUITY:

Long-term loans receivable
Guarantee deposits
Asset for retirement beneﬁts (Note 17)

2,638

2,257

24,824

Common stock:

Deferred income taxes (Note 12)

1,454

1,459

13,682authorized

Other (Note 7)

6,614

6,690

62,237

̶500,000,000 shares in 2018 and 2017

Allowance for doubtful accounts (Note 7)(2,438)(2,460)(22,942)issued and outstanding

81,28478,225

764,882¥367,244¥362,205$3,455,764

TOTAL INVESTMENTS AND OTHER ASSETSTOTAL ASSETS
The accompanying notes are an integral part of the consolidated ﬁnancial statements.

̶209,263,814 shares in 2018 and 2017

42,02142,021

395,417

Capital surplus

45,52445,397428,381

Retained earnings

98,81590,752929,848

Treasury stock(9,977)(10,160)(93,883)

176,383

168,010

1,659,763

Unrealized holding gains on securities, net of taxes

11,361

10,535

106,907

Unrealized losses on hedging derivatives, net of taxes

(22)

(57)

(207)

3,065

1,596

28,842TOTAL SHAREHOLDERSʼ EQUITYACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF TAXES

Foreign currency translation adjustment
Accumulated adjustments for retirement beneﬁt, net of taxes (Note 17)

367

211

3,453

TOTAL ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF TAXES

14,771

12,285

138,995

122

140

1,148

SHARE SUBSCRIPTION RIGHTSNON-CONTROLLING INTERESTSTOTAL NET ASSETSTOTAL LIABILITIES AND NET ASSETS

48

701

600

6,596

191,977

181,035

1,806,502¥367,244¥362,205$3,455,764

49

Consolidated Statements of Income

Consolidated Statements of Cash Flows

Hokuetsu Corporation and Consolidated Subsidiaries
For the years ended March 31, 2018 and 2017

NET SALES (Notes 19)
COST OF SALESGROSS PROFITSELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note 13)
OPERATING INCOME
OTHER INCOME(EXPENSES):Interest and dividend income
Interest expenses
Foreign exchange gains (losses)
Equity in income of affiliates
Gain on sales of investments in securities
Loss on devaluation of investments in securities
Loss on sales or disposal on property, plant and equipment
Impairment loss on property, plant and equipment (Note 14)
Loss on reduction of property, plant and equipment
Costs in relation to suspending the operation of production equipment
Gain on revision to retirement benefit plan (Note 17)
Other, net
INCOME BEFORE INCOME TAXESINCOME TAXES (Note 12):Current
Deferred
NET INCOME
NET INCOME(LOSS) ATTRIBUTABLE TO NON-CONTROLLING INTERESTSNET INCOME ATTRIBUTABLE TO OWNERS OF PARENT COMPANYAMOUNTS PER SHARE OF COMMON STOCK (Note 2):
Net income
Diluted net income
Cash dividends applicable to the year

Millions of yen

Thousands of
U.S. dollars(Note 1)

2018

2017

2018

¥269,100
216,847
52,25340,83911,414¥262,398
209,628
52,77039,87012,900$2,532,229
2,040,529
491,700
384,294
107,406

1,076
(767)
76
1,844
46
(58)
(2,602)
(88)
(43)
̶
2,104
519
2,107
13,521890(655)(1,476)
3,019
28
(10)
(1,573)
̶(2)(1,427)
̶
821(385)
12,515

10,125(7,217)715
17,352433(546)(24,485)
(828)
(405)
̶
19,7994,884
19,827
127,233

2,192
827
3,019
10,502
175¥10,327

1,882
337
2,219
10,296(85)¥10,381

20,627
7,782
28,40998,824
1,647$97,177

Yen

U.S. dollars(Note 1)

2018

2017

2018

¥54.6853.42
12.00¥55.09
52.99
12.00

$0.52
0.50
0.11

The accompanying notes are an integral part of the consolidated ﬁnancial statements.

Hokuetsu Corporation and Consolidated Subsidiaries
For the years ended March 31, 2018 and 2017

Millions of yen

Thousands of
U.S. dollars(Note 1)

2018

2017

2018

Income before income taxes¥13,521¥12,515$127,233

Depreciation and amortization

19,06519,094

179,402

CASH FLOWS FROM OPERATING ACTIVITIES:

Impairment loss of property, plant and equipment
Loss (gain) on sales or disposal of property, plant and equipment
Loss on reduction of property, plant and equipment
Interest and dividend income
Interest expenses

NET INCOME
OTHER COMPREHENSIVE INCOME (Note 21)
Unrealized holding gains on securities, net of taxes
Unrealized gains on hedging derivatives, net of taxes
Foreign currency translation adjustment
Adjustments for retirement beneﬁt, net of taxes
Share of other comprehensive income of associates accounted for using equity method
TOTAL OTHER COMPREHENSIVE INCOME
COMPREHENSIVE INCOME
Comprehensive income attribute to owners of the parent company
Comprehensive income attribute to non-controlling interests

2018

2017

2018

¥10,502¥10,296$98,824

934
35
1,489
210
(161)
2,507
¥13,009

3,070
112
(361)
(128)
851
3,544
¥13,840

8,789
329
14,012
1,976(1,515)23,591$122,415

12,813
196

13,991(151)

120,570
1,845

2

405

(890)

(10,125)

655

7,217

(2,338)(62,567)(Increase) decrease in inventories(3,707)

1,663(34,883)

890

176

8,375

Increase (decrease) in notes and accounts payable
Increase (decrease) liability for retirement benefits

144

(439)

1,355

Equity in (earnings) losses of affiliates(1,844)(3,019)(17,352)

Other, net(2,529)785(23,799)
198,127

SUBTOTAL

21,05529,761

Interest and dividend income received

1,420

1,992

13,363

Interest paid

(761)

(671)

(7,161)(2,155)(2,164)(20,279)

Income taxes paid
Insurance payment received
NET CASH PROVIDED BY OPERATING ACTIVITIES

183

̶

1,722

19,742

28,918

185,772

(48)

(281)

(452)
(128,964)

CASH FLOWS FROM INVESTING ACTIVITIES:Payments for purchases of investment securities
Payments for purchases of property, plant and equipment(13,705)(12,932)

Proceeds from sales of property, plant and equipment

395

239

3,717

Other, net

(800)

(675)

(7,528)(14,158)(13,649)(133,227)(1,365)

3,295(12,845)̶

(9,000)̶

NET CASH USED IN INVESTING ACTIVITIESCASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term loans
Increase (decrease) in commercial paper
Proceeds from long-term loans

3,871

3,363

36,426

Repayments of long-term loans(10,538)(19,112)(99,163)

Proceeds from issuance of unsecured yen straight bonds̶

20,000̶

Redemption of unsecured yen straight bonds

̶(10,000)̶

(2,274)(2,273)(21,398)

(2)

(2)

(19)

(337)

(718)

(3,170)(100,169)

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIESThousands of
U.S. dollars(Note 1)43
(1,076)
767

Other, net

Millions of yen

828
22,038(6,649)Payments for purchases of treasury stock

Hokuetsu Corporation and Consolidated Subsidiaries
For the years ended March 31, 2018 and 2017

̶
1,557

(Increase) decrease in notes and accounts receivable

Dividends paid

Consolidated Statements of Comprehensive Income

88
2,342

(10,645)(14,447)

TRANSLATION (LOSS) GAIN ON CASH AND CASH EQUIVALENTS

58

(428)

546

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS(5,003)394(47,078)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

19,28518,891

181,472

CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 3)¥14,282¥19,285$134,394

The accompanying notes are an integral part of the consolidated ﬁnancial statements.

The accompanying notes are an integral part of the consolidated ﬁnancial statements.

50

51

Consolidated Statements of Changes in Net Assets
Hokuetsu Corporation and Consolidated Subsidiaries
For the Years ended March 31, 2018 and 2017

Millions of yen

Number of shares Common stock Capital surplus Retained earnings

Treasury stock

Unrealized holding
Total gains (losses) on
shareholdersʼsecurities,
equitynet of taxes

Unrealized gains(losses) on hedging Foreign currency
derivatives,translation
net of taxes
adjustment

Accumulated
adjustments for
retirement benefit,
net of taxes

Total accumulated
other
Share
comprehensive subscription
income, net of taxes
rights

Noncontrollinginterests

Total net assets

209,263,814¥42,021¥45,401¥82,671¥(10,189)¥159,904¥6,633¥(169)¥1,891¥319¥8,674¥128¥823¥169,529

Net income attributable to owners of parent company

̶

̶

̶

10,381

̶

10,381

̶

̶

̶

̶

̶

̶

̶

10,381

Cash dividends (¥12.00 per share)

̶

̶

̶

(2,262)

̶

(2, 262)

̶

̶

̶

̶

̶

̶

̶

(2,262)

Disposal of treasury stock

̶

̶

(4)

̶

31

27

̶

̶

̶

̶

̶

̶

̶

27

Purchases of treasury stock

̶

̶

̶

̶

(2)

(2)

̶

̶

̶

̶

̶

̶

̶

(2)

Change in scope of consolidated aﬃliates under equity method

̶

̶

̶

(38)

̶

(38)

̶

̶

̶

̶

̶

̶

̶

(38)

Net changes during the year

̶

̶

̶

̶

̶

̶

3,902

112

(295)

(108)

3,611

12

(223)

3,400

209,263,814¥42,021¥45,397¥90,752¥(10,160)¥168,010¥10,535¥(57)¥1,596¥211¥12,285

¥140

¥600

¥181,035

Net income attributable to owners of parent company

̶

̶

̶

10,327

̶

10,327

̶

̶

̶

̶

̶

̶

̶

10,327

Cash dividends (¥12.00 per share)

̶

̶

̶

(2,264)

̶

(2, 264)

̶

̶

̶

̶

̶

̶

̶

(2,264)

Disposal of treasury stock

̶

̶

127

̶

249

376

̶

̶

̶

̶

̶

̶

̶

376

Purchases of treasury stock

̶

̶

̶

̶

(66)

(66)

̶

̶

̶

̶

̶

̶

̶

(66)

Change in scope of consolidated aﬃliates under equity method

̶

̶

̶

(0)

̶

(0)

̶

̶

̶

̶

̶

̶

̶

(0)

Balance at March 31, 2016

Balance at March 31, 2017

̶

̶

̶

̶

̶

̶

826

35

1,469

156

2,486

(18)

101

2,569

209,263,814¥42,021¥45,524¥98,815¥(9,977)¥176,383¥11,361¥(22)¥3,065¥367¥14,771

¥122

¥701

¥191,977

Unrealized gains(losses) on hedging Foreign currency
derivatives,translation
net of taxes
adjustment

Accumulated
adjustments for
retirement benefit,
net of taxes

Net changes during the year
Balance at March 31, 2018

Thousands of U.S. dollars (Note 1)

Number of shares Common stock Capital surplus Retained earnings

Noncontrollinginterests

Total net assets$1,703,537$99,134$(536)$15,018$1,986$115,602$1,317$5,646

̶97,177

̶

̶

̶

̶

̶

̶

̶

97,177

̶

(21,305)

̶

̶

̶

̶

̶

̶

̶

(21,305)

̶

2,343

3,539

̶

̶

̶

̶

̶

̶

̶

3,539

̶

̶

(620)

(620)

̶

̶

̶

̶

̶

̶

̶

(620)

̶

(0)

̶

(0)

̶

̶

̶

̶

̶

̶

̶

(0)

̶

̶

̶

̶

̶

7,773

329

13,824

1,467

23,393(169)

950

24,174$395,417$428,381$929,848$(93,883)$1,659,763$106,907$(207)$28,842$3,453$138,995$1,148$6,596$1,806,502$395,417$427,185

Net income attributable to owners of parent company

̶̶

Cash dividends ($0.11 per share)̶̶

Disposal of treasury stock̶

Purchases of treasury stock
Change in scope of consolidated aﬃliates under equity method
Net changes during the year
Balance at March 31, 2018

Treasury stock

Total accumulated
other
Share
comprehensive subscription
income, net of taxes
rights$1,580,972

209,263,814

Balance at March 31, 2017

Unrealized holding
Total gains (losses) on
shareholdersʼsecurities,
equitynet of taxes$853,976$(95,606)

̶

97,177

̶

(21,305)

̶

1,196

̶

̶

̶

̶

̶
209,263,814

The accompanying notes are an integral part of the consolidated ﬁnancial statements.

52

53

Notes to Consolidated Financial Statements
Hokuetsu Corporation and Consolidated Subsidiaries
Years ended March 31, 2018 and 2017

Note 1: Basis of Presenting Consolidated Financial Statements
The accompanying consolidated financial statements
have been prepared in accordance with the provisions
set forth in the Japanese Financial Instruments andExchange Law and its related accounting regulations
and in conformity with accounting principles generally
accepted in Japan (“Japanese GAAP”), which are
different in certain respects as to application anddisclosure requirements of International Financial
Reporting Standards.
The accompanying consolidated financial
statements have been restructured and translated into
English from the consolidated financial statements of
Hokuetsu Corporation (“the Company” ) prepared inaccordance with Japanese GAAP and filed with theappropriate Local Finance Bureau of the Ministry of
Finance as required by the Financial Instruments andExchange Law. Certain supplementary information
included in the statutory Japanese language
consolidated financial statements, but not required forfair presentation, is not presented in theaccompanying consolidated financial statements.
The translation of the Japanese yen amounts into
U.S. dollars is included solely for the convenience ofreaders outside Japan, using the prevailing exchange
rate at March 31, 2018, which was ¥106.27 to U.S.
$1.00. The convenience translation should not be
construed as representations that the Japanese yenamounts have been, could have been, or could in the
future be, converted into U.S. dollars at this or any
other rate of exchange.

Note 2: Summary of Significant Accounting Policies(a) Consolidation
The consolidated financial statements include theaccounts of the Company and its significant
subsidiaries ( “the Companies” ). All significant
inter-company balances, transactions and unrealized
profits have been eliminated in consolidation.
In the elimination of investments in subsidiaries, theassets and liabilities of the subsidiaries are evaluatedusing the fair value at the time the Company acquired
control of the respective subsidiaries.
Goodwill, except for immaterial amounts, areamortized within twenty years from the day of theoccurrence of goodwill for the period when the effectexists.
Investments in all significant unconsolidated
subsidiaries and affiliates are accounted for by theequity method.
The number of consolidated subsidiaries andaffiliates accounted for by the equity method is asfollows:
Number of Companies
2018

2017

Consolidated subsidiaries

22

22

Affiliates accounted forby the equity method

45

The consolidated financial statements are preparedusing their financial statements as of their accountclosing date. Significant transactions, which occurred
during the period between these fiscal year ends andMarch 31, are adjusted in the accompanying
consolidated financial statements.
During the current fiscal year, Hokuetsu Toyo FibreCo., Ltd. changed its account closing date to March 31,
which is the same as the consolidated financial
statement date. The accounting period for the current
fiscal year for this subsidiary is 13 months.

54(b) Consolidated statements of cash flows
In preparing the consolidated statements of cash
flows, cash on hand, readily-available deposits andshort-term highly liquid investments with maturities
not exceeding three months at the time of purchaseare considered to be cash and cash equivalents, andwhich represent an insignificant risk of change invalue.
(c) Translation of foreign currencies
Monetary assets and liabilities denominated in foreign
currencies are translated into Japanese yen at the spot
exchange rates as of the account closing date, with thetranslation gains or losses reported in profit or loss.
Assets and liabilities of overseas subsidiaries aretranslated into Japanese yen at the spot exchange
rates as of the account closing date, and their income
and expenses are translated into Japanese yen at the
average exchange rates during the accounting period,
with the translation gains or losses included in foreign
currency translation adjustment and non-controllinginterests in the net assets section of the consolidatedbalance sheet.
(d) Securities
Under the Japanese accounting standard for financial
instruments, all companies are required to examine theintent of holding each security and classify thosesecurities as (a) securities held for trading purposes(“trading securities”), (b) debt securities intended to beheld to maturity (“held-to-maturity debt securities”), (c)equity securities issued by subsidiaries and affiliates or(d) all other securities that are not classified in any of
the above categories (“available-for-sale securities”).
The Companies did not have the securities defined as(a) and (b) above in the years ended March 31, 2018and 2017.
Equity securities issued by unconsolidated
subsidiaries and affiliates not accounted for by theequity method are stated at the moving-average cost.
If the market value of available-for-sale securities
declines significantly, such securities are stated at fairmarket value and the difference between fair market
value and the carrying amount is recognized as loss inthe period of the decline. If the fair market value ofequity securities, except for those accounted for by theequity method, is not readily available, such securities
should be written down to net asset value with acorresponding charge in the statement of income in theevent net asset value declines significantly. In thesecases, such fair market value or the net asset value willbe the carrying amount of the securities at the
beginning of the next year.
Available-for-sale securities are included ininvestments and other assets.
Available-for-sale securities with available fair market
values are stated at fair market value. Unrealized gain
and loss on these securities are reported, net of
applicable income taxes, as a separate component ofaccumulated other comprehensive income, net of tax innet assets section. Realized gain and loss on sale of suchsecurities are computed using the moving-average cost.
(e) Allowance for doubtful accounts
The Companies provide the allowance for doubtful
accounts in an amount sufficient to cover probablelosses on collection by estimating individuallyuncollectible amounts in addition to applying an actual
rate of bad debts incurred in the past.
(f) Inventories
Inventories held for sale in the ordinary course ofbusiness are stated at the lower of cost or net sales
value. Cost is primarily determined by the monthly
average method for raw materials, supplies andmerchandise and finished goods. Cost ofwork-in-process is primarily determined using the FIFO
(first-in, first-out) method. Cost of timber is primarily
determined using the specific identification method.
(g) Property, plant and equipment (excluding leased
assets)Property, plant and equipment are stated at cost.
Subsidies are deducted directly from the cost of therelated assets.
• Buildings, structures and machinery and equipment
Mainly straight-line method over the useful lives.
• Other tangible fixed assets
Mainly declining-balance method at rates
determined based on the useful lives.
Expenditures for new facilities and those that
substantially increase the useful lives of existing plantand equipment are capitalized. Maintenance, repair andminor renewals are charged to expenses as incurred.
(h) Finance leases
Finance leases, except for certain immaterial or
short-term finance leases which are accounted for as
operating leases, are capitalized.

Leased assets related to financial leases that transfer
ownership rights are depreciated by the samedepreciation method that is applied to fixed assets
owned by the Companies.
Leased assets related to finance leases withouttransferring ownership are depreciated over the lease
period as useful life using the straight-line method withno residual value.
(i) Accrued environmental expenditures
Accrued environmental expenditures are provided at an
estimated amount for environmental expenses, including
disposal of PCB (polychlorinated biphenyl) waste.
(j) Provision for reforestation
Based on an agreement with the state government, theCompanyʼs Canadian subsidiary is engaged in forest
harvesting for the purpose of procuring raw timber for
pulp materials and the anticipated costs arising fromforest planting (coniferous forest) have been
incorporated into accounts as liabilities.
(k) Provision for business structure improvement
A provision has been made for the amount of estimatedlosses incurred in connection with a review which was
implemented to improve business structure.
(l) Issuance costs of stocks and bonds
Issuance costs of stocks and bonds are expensed as
incurred.
(m) Derivatives and hedge accounting
The Companies state derivative financial instruments atfair value and recognize changes in the fair value as gainor loss unless derivative financial instruments are used forhedging purposes.
If derivative financial instruments are used as hedges
and meet certain hedging criteria, the Companies defer
recognition of gain or loss resulting from changes in fairvalue of derivative financial instruments until the related
loss or gain on the hedged items is recognized.
Special treatment has been adopted for interest rate
swaps that qualify for special treatment.
In addition, integrated treatment has been adopted forinterest rate and currency swaps that qualify for
integrated treatment (special treatment / appropriatedtreatment).
(n) Income taxes
The Companies recognize the tax effects of temporary
differences between the carrying amounts of assets andliabilities for tax and financial reporting. The provision forincome taxes is computed based on the pretax income
included in the consolidated statements of income. The
asset and liability approach is used to recognize deferred
tax assets and liabilities for the expected future tax
consequences of temporary differences.

55

Notes to Consolidated Financial Statements(o) Per share information
Net income per share is computed based upon the
average number of shares of common stock outstanding
during each year. The average number of common sharesused in the computation was 188,864,106 shares and
188,442,763 shares in 2018 and 2017, respectively. For theyear ended March 31, 2018, diluted net income per sharewas ¥53.42（$ 0.50）.
Cash dividends per share have been presented on an
accrual basis and include dividends to be approved after
the balance sheet date, but applicable to the year thenended.
(p) Reclassification and restatement
Certain prior year amounts have been reclassified toconform to the current year presentation.
These reclassifications had no impact on previously
reported results of operations or retained earnings.
(q) Accounting methods for retirement benefits(1) Attribution method for projected retirement benefits
This method is applied in calculating retirement
benefit obligations and involves attributing the
projected retirement benefits to the period up to theend of the current consolidated accounting period
based on benefit formula basis.
(2) Method of amortization relating to actuarial gain or
losses and past service cost.
Past service cost is expensed as incurred.
Actuarial gains or losses are amortized from thesubsequent financial year using the straight-line
method over 10 years, which is not longer than anestimated average remaining service period of theemployees when the gains or losses are incurred.
(3) Simplified method for small enterprises.
When calculating retirement benefit obligations andretirement benefit costs, some consolidated
subsidiaries use the simplified method, in which theyear-end voluntary payments relating to retirement
benefits are treated as retirement benefit obligations.
(r) Disclosure of new accounting standards issued but
not yet effective“Implementation Guidance on Tax Effect Accounting”(ASBJ Guidance No. 28; February 16, 2018)“Implementation Guidance on the Recoverability ofDeferred Tax Assets” (ASBJ Guideline No. 26; February 16,
2018)(1) Overview
The above guidance was revised in regard to thetreatments for taxable temporary differences forinvestments in subsidiaries within the context of
non-consolidated financial statements, and to clarify
the treatments in determining recoverability ofdeferred tax assets in a company which wascategorized as ʻType1ʼ according to the guidance.
(2) Effective date
Effective from the beginning of the fiscal year ending
March 31, 2019.
(3) Effects of the application of the standards
The Company and its consolidated domestic
subsidiaries are currently in the process of determining56

the effects of these new standards on the
consolidated financial statements.
“Accounting Standard on Revenue Recognition” (ASBJ
Statement No. 29; March 30, 2018)“Implementation Guidance on Accounting Standard on
Revenue Recognition” (ASBJ Guidance No. 30; March 30,
2018)(1) Overview
This is a comprehensive accounting standard onrevenue recognition. Revenues are to be recognizedby applying the following five steps.
Step 1: Identify the contract with customer.
Step 2: Identify the performance obligations in thecontract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to theperformance obligations in the contract.
Step 5: Recognize revenue when, or as, the entity
satisfies a performance obligation.
(2) Effective date
Effective from the beginning of the fiscal year ending
March 31, 2022
(3) Effects of the application of the standards.
The Company and its consolidated domestic
subsidiaries are currently in the process ofdetermining the effects of these new standards onthe consolidated financial statements.
(s) Change in presentation method“Loss on sales of investments in securities” and “Income
from subsidies” presented as individual items in “Other
income (expenses)” in the previous fiscal year are now
presented in “Other” from the current fiscal year because
their monetary amount become immaterial. To reflect
this change in the presentation method, theconsolidated financial statements for the previous fiscal
year have been reclassified.
As a result, “Loss on sales of investments in securities”([2] million yen), “Income from subsidies” (2 million yen),and “Other” (821 million yen) presented in “Other
income (expenses)” in the previous fiscal year have been
reclassified as “Other” (821 million yen).

Note 3: Cash and Cash Equivalents
A reconciliation of cash and deposits shown in the consolidated balance sheets and cash and cash equivalents
shown in the consolidated statements of cash flows at March 31, 2018 and 2017 are as follows:
Millions of yen

Thousands of
U.S. dollars

2018

2017

2018

Cash and deposits¥14,316¥19,494$134,713

Restricted deposits

(34)

(209)

(319)

¥14,282¥19,285$134,394

Cash and cash equivalents

Note 4: Financial Instruments
Information on financial instruments for the year ended March 31, 2018 and 2017 are as follows.
Status of Financial Instruments
The Companies raises necessary funds for investment
plans to conduct its business of manufacturing, saleand processing of paper mainly by bank loans or
issuance of bonds. Temporary cash surpluses areinvested in deposits and short-term working funds areraised by bank borrowings or issuance of commercial
paper. Derivatives are used, not for speculative
purposes, but to manage exposure to financial risks as
described below.
The Company manages and mitigates customer
credit risk from trade receivables in accordance with its
Debt Management Policy. Consolidated subsidiaries
also implement the same control in accordance with
the Companyʼs Debt Management Policy.
Investments in securities are exposed to the risk ofmarket price fluctuations. Those securities arecomposed of mainly stocks associated with businessand capital alliances with principal business partners.
The Companies check regularly to maintain awarenessof their fair value.

The Company uses interest rate swap contracts toavert their exposure to the risk of fluctuations ininterest costs related to debt, and interest rate andcurrency swaps to avert exposure to the risk offluctuations in principal and interest costs related toforeign currency-denominated debt.
The Company and certain consolidated subsidiaries
use forward exchange contracts to address the risk offluctuations in foreign exchange rates regarding
certain trade receivables and payables denominated inforeign currencies.
Fair Values of Financial Instruments
The book values, fair values and differences of thefinancial instruments as of March 31, 2018 and 2017
are as follows. Financial instruments with fair values
not readily determinable are excluded from thefollowing table (see (b)):(t) Additional information(Method of accounting procedures related to retirement
benefits)
The Company reviewed benefit levels following
revisions to its retirement benefit plan. “Accounting forTransfer between Retirement Benefit Plans” (ASBJ
Guidance No.1) was adopted for the accounting
procedures following this transfer. For profit associatedwith this transfer, other income of 2,104 million yen wasrecorded as gain on revision to retirement benefit planfor the current fiscal year.

57

Notes to Consolidated Financial Statements

Millions of yen

2018Book value

Fair value

Diﬀerence(1) Cash and deposits¥14,316¥14,316¥̶(2) Notes and accounts receivable

69,17969,179̶(3) Electronically recorded monetary claims

5,954

5,954

̶

①Stocks of affiliates

35,89847,576

11,678②Available-for-sale securities

25,64125,641̶Total assets¥150,988¥162,666¥11,678(5) Notes and accounts payable¥21,841¥21,841¥̶(4) Investments in securities:(6) Electronically recorded obligations-operating

7,118

7,118

̶

(7) Short-term loans

15,525

15,525̶(8) Commercial paper

11,00011,000̶(9) Bonds*1

30,00030,03030(10) Long-term loans payable*2

51,48251,405(77)¥136,966¥136,919¥(47)¥ (32)¥(32)¥̶Total liabilities
Derivative transactions*3

Millions of yen

2017Book value

Fair value

Diﬀerence(1) Cash and deposits¥19,494¥19,494¥̶(2) Notes and accounts receivable

64,15064,150̶(3) Electronically recorded monetary claims

3,859

3,859

̶

①Stocks of affiliates

34,35945,134

10,775②Available-for-sale securities

24,207

24,207

̶Total assets¥146,069¥156,844¥10,775(5) Notes and accounts payable¥20,149¥20,149¥̶(4) Investments in securities:(a) Calculation method of fair values of financial
instruments and securities and derivativetransactions are as follows:
Assets(1) Cash and deposits
With regard to deposits with indefinite maturity andtime deposits with maturities within one year, thecarrying values approximate fair value.
(2) Notes and accounts receivable and (3) Electronicallyrecorded monetary claims
The carrying values of assets mentioned above
approximate fair value because of their shortmaturities.
(4) Investments in securities
The fair value of marketable equity securities ismeasured at the quoted market price of the stock
exchange. Please see Note 5 regarding securities
categorized by holding purposes.
Liabilities(5) Notes and accounts payable (6) Electronicallyrecorded obligations-operating (7) Short-term loans,and (8) Commercial paper

The carrying values of liabilities mentioned above
approximate fair value because of their short maturities.
(9) Bonds
The fair value of bonds issued by the Company ismeasured at the quoted market price.
(10) Long-term loans payable
The fair values of long-term loans payable aredetermined by discounting the aggregated amountof the principal and interest using estimated interest
rate, assuming that the same type of borrowing was
newly made. The fair values of long term loans
payable which qualify for special treatment forinterest rate swaps and integrated treatment forinterest rate currency swaps are determined bydiscounting the aggregated amount of the principal
and interest that are included as part of the relevantinterest rate swap and interest rate currency swap at
the estimated interest rate, assuming that the same
type of borrowing was newly made.
Derivative Transaction
For details of derivative transactions, see Note 16.

(b) Unlisted equity securities have no market price and there is no way of estimating for future cash flows.
Determining fair value is therefore acknowledged to be extremely difficult and they are not included in(4) Investments in securities.
Thousands of
U.S. dollars

Millions of yen

Unlisted equity securities

2018

2017

2018

¥10,186¥10,341$95,850(6) Electronically recorded obligations-operating

7,738

7,738

̶

(7) Short-term loans

17,15917,159̶(8) Commercial paper

11,00011,000̶(9) Bonds*1

30,00030,04949(10) Long-term loans payable*2

58,20658,012(194)¥144,252¥144,107¥(145)

¥(82)

¥(82)

¥̶

2018

2017

2018

Thousands of U.S. dollars

Due inone year

Due after one
year throughtwo years

Due inone year

Due after one
year throughtwo years

Due inone year

Due after one
year throughtwo years

Cash and deposits¥14,316¥̶

¥19,494¥̶

$134,713$̶Notes and accounts receivable

69,179̶

64,150̶

650,974̶

Electronically recorded monetary claims

5,954

̶

3,859

̶

56,027

̶

¥89,449¥̶

¥87,503¥̶$841,714$̶Total liabilities
Derivative transactions*3

2018Book value

Fair value

Diﬀerence(1) Cash and deposits$134,713$134,713$̶(2) Notes and accounts receivable

650,974

650,974̶(3) Electronically recorded monetary claims

56,02756,027

̶

①Stocks of affiliates

337,800

447,690

109,890②Available-for-sale securities

241,282

241,282̶

$1,420,796$1,530,686$109,890$205,524$205,524$̶(6) Electronically recorded obligations-operating

66,98066,980̶(7) Short-term loans

146,090146,090

̶(8) Commercial paper

103,510

103,510̶(9) Bonds*1

282,300

282,582282(10) Long-term loans payable*2

484,445483,721(724)$1,288,849$1,288,407$(442)$(301)$(301)$̶(c) Planned redemption of receivables after the balance sheet dateMillions of yen

Total

Thousands of U.S. dollars(4) Investments in securities:

Total assets(5) Notes and accounts payable

Total liabilities
Derivative transactions*3(d) Repayment schedule of short-term bank loans, commercial paper, bonds and long-term loans payable
Millions of yen

2018
Due inone year

Due after one
year throughtwo years

Due after two
years throughthree years

Due after three
years throughfour years

Due after four
years throughfive years

Due overfive years

Short-term bank loans¥15,525

¥̶

¥̶

¥̶

¥̶

¥̶

Commercial paper

11,000

̶

̶

̶

̶

̶

Bonds

10,000̶̶

20,000̶̶Long-term loans payable*
Total

6,417

13,83810,350

4,767

16,110̶¥42,942¥13,838¥10,350¥24,767¥16,110¥̶*1 Bonds payable within a year are classified as “current maturities of long-term debt” on the consolidated balance sheets.
*2 Current portion of long-term loans payable is classified as “current maturities of long- term debt” on the consolidated balance sheets.
*3 Receivables and payables incurred by derivative transactions are presented in net. Net payables are presented in parenthesis.

5859Notes to Consolidated Financial Statements

Millions of yen

2017
Due inone year

Due after one
year throughtwo years

Due after two
years throughthree years

Due after three
years throughfour years

Due after four
years throughfive years

Due overfive years

Short-term bank loans¥17,159

¥̶

¥̶

¥̶

¥̶

¥̶

Commercial paper

11,000

̶

̶

̶

̶

̶

̶

10,000̶̶

20,000

̶

9,665

6,412

13,891

10,402

1,762

16,074¥37,824¥16,412¥13,891¥10,402¥21,762¥16,074

Bonds
Long-term loans payable*
Total

Thousands of U.S. dollars

Note 6: Inventories
Inventories at March 31, 2018 and 2017 are as follows:

Due inone year

Due after two
years throughthree years

Due after three
years throughfour years

Due after four
years throughfive years

Due overfive years

Short-term bank loans$146,090

$̶

$̶

$̶

$̶

$̶

Commercial paper

103,510

̶

̶

̶

̶

̶

Bonds

94,100̶̶

188,200̶̶Long-term loans payable*

60,384130,215

97,39344,857

151,596̶

$404,084$130,215$97,393$233,057$151,596

$̶

Total

Thousands of
U.S. dollars

2018

2017

2018
$221,135¥23,500¥20,510Work-in-process

2,031

1,976

19,112

Raw materials and supplies

23,66022,403

222,640¥49,191¥44,889$462,887

Merchandise and Finished goods

2018
Due after one
year throughtwo years

Millions of yen

Note 7: Amounts Relating to Fraudulent Activity for the year ended March 31, 2015
Balances relating to fraudulent activity at March 31, 2018 and 2017 are as follows:
Millions of yen

Thousands of
U.S. dollars

2018

2017

2018

Other in investments and other assets¥2,360¥2,360$22,208

Allowance for doubtful accounts in investments and other assets(2,360)(2,360)(22,208)

Millions of yen

Thousands of
U.S. dollars

2018

2017

2018

¥34

¥209

$319

Millions of yen

Thousands of
U.S. dollars*Long-term loans payable include the current maturities of long-term loans payable.

Balances:

Note 5: Securities
The following tables summarize acquisition costs and book value of securities with available fair value at March
31, 2018 and 2017:
Available-for-sale securities:

Millions of yen

2018
Type

Acquisition cost

Book value

Diﬀerence¥12,297¥25,319¥13,022

332

322

(10)

¥12,629¥25,641¥13,012Note 8: Assets Pledged and Secured Liability
Assets Pledged and Secured Liability at March 31, 2018 and 2017 are as follows:

Equity securities:
with book value (fair value) exceeding acquisition costswith book value (fair value) not exceeding acquisition costs

Cash and deposits

Millions of yen

2017
Type

Acquisition cost

Book value

Diﬀerence¥12,299¥23,878¥11,579

374

329

(45)

¥12,673¥24,207¥11,534

Notes and accounts payable

2018

2017

2018

¥162

¥212

$1,524Equity securities:
with book value (fair value) exceeding acquisition costswith book value (fair value) not exceeding acquisition costs

Thousands of U.S. dollars

2018
Type

Acquisition cost

Book value

Diﬀerence$115,715$238,252$122,537

Equity securities:
with book value (fair value) exceeding acquisition costswith book value (fair value) not exceeding acquisition costs

Total sales of available-for-sale securities sold in the year
ended March 31, 2018 amounted to ¥81million ($762
thousand), the related gains amounted to ¥46 million($433 thousand). Total sales of available-for-sale securities
60

3,124

3,030

(94)

$118,839$241,282$122,443

sold in the year ended March 31, 2017 amounted to ¥88
million, the related gains amounted to ¥28 million andthe related losses amounted to ¥2 million.

61

Notes to Consolidated Financial Statements

Note 9: Short-Term Debt, Commercial Paper, and Long-Term Debt

Note 11: Net Assets(1) Short-term debt had weighted-average interest rates of 2.11% and 1.36% at March 31, 2018 and 2017,
respectively.
(2) The weighted-average interest rate on commercial paper were (0.01)% and (0.00)% at March 31, 2018 and 2017,
respectively.
(3) Long-term debt at March 31, 2018 and 2017 are as follows:

Net assets comprise four subsections, which areshareholdersʼ equity, accumulated othercomprehensive income, net of tax, share subscription
rights and non-controlling interests.
Under the Japanese Corporate Law (“the Law” ) andregulations, the entire amount paid for new shares isrequired to be designated as common stock. However,a company may, by a resolution of the Board of
Directors, designate an amount not exceeding one-halfof the price of the new shares as additional paid-in
capital, which is included in capital surplus.
In cases where a dividend distribution of surplus ismade, the smaller of an amount equal to 10% of thedividend or the excess, if any, of 25% of common stockover the total of additional paid-in-capital and legal
earnings reserve must be set aside as additional
paid-in-capital or legal earnings reserve. Legal earnings
reserve is included in retained earnings in theaccompanying consolidated balance sheets.
Appropriations of legal earnings reserve andadditional paid-in capital generally require a resolutionof the shareholders' meeting.

Millions of yen

Thousands of
U.S. dollars

2018

2017

2018

(Loans due with one year, weighted-average interest rate 0.44%)¥6,417¥9,665$60,384(Loans due after one year, weighted-average interest rate 0.49%)

Long-term loans from banks and other financial institutions
45,06548,541

424,061

0.384% unsecured yen straight bonds due in 201910,00010,00094,1000.170% unsecured yen straight bonds due in 2021

10,00010,00094,1000.180% unsecured yen straight bonds due in 2021

10,00010,00094,100(Loans due with one year)

72

232

677

(Loans due after one year)

161

157

1,515

Lease obligations

81,71588,595

768,937

Less current portion due with one year

(16,489)(9,897)(155,161)

Long-term debt

¥65,226¥78,698$613,776

Millions of yen

Thousands of
U.S. dollars

2019¥16,489$155,161

2020

13,903130,8272021

10,39997,8552022

24,803

233,396

Additional paid-in capital and legal earnings reserve
may not be distributed as dividends. However, byresolution of the shareholdersʼ meeting, all additional
paid-in-capital and all legal earnings reserve may betransferred to other capital surplus and retained
earnings, respectively, which are potentially available
for dividends. Other capital surplus and retained
earnings are included in capital surplus and retained
earnings, respectively.
The maximum amount that the Company can
distribute as dividends is calculated based on the
non-consolidated financial statements of the Company
in accordance with the Law and regulations.
At the annual shareholdersʼ meeting held on June27, 2018, the shareholders approved cash dividends
amounting to ¥1,137 million ($10,699 thousand). Suchappropriations have not been accrued in the
consolidated financial statements at March 31, 2018.
Such appropriations are recognized in the period inwhich they are approved by the shareholders.

(4) The annual maturities of long-term debt at March 31, 2018 are as follows:Year ending March 31,

2023 and thereafter

16,121

151,699¥81,715$768,938

Note 12: Income Taxes
The Companies are subject to a number of taxes leviedon income, which, in the aggregate, resulted in normal
statutory income tax rates of approximately 30.7% and30.7% for the year ended March 31, 2018 and 2017,
respectively.

2018

2017

30.7％

30.7％

Non-deductible expenses

1.1

0.5

Dividends received not taxable

(0.6)

（0.4）

Per capita inhabitants taxes

0.4

0.4

Valuation allowance

(3.0)

(7.3)

Statutory tax rate

Note 10: Contingent Liabilities

Notes receivable discounted

62

Millions of yen

Thousands of
U.S. dollars

2018

2017

2018

¥50

¥41

$471

Balance of notes receivable transferred by endorsement

¥61

¥149

$574

Discounted electronically recorded receivables

¥55

−

$518

Transfer of electronically recorded receivables

¥33

−

$311

The following table summarizes the significant
differences between the statutory tax rate and theCompaniesʼ effective tax rate for financial statement
purposes for the years ended March 31, 2018 and 2017:

Effect of multiple tax rates

0.1

(0.0)

Equity in income of affiliates

(4.2)

（7.4）

Other
Effective tax rate

(2.2)

1.2

22.3%

17.7%

63

Notes to Consolidated Financial Statements

Significant components of deferred income tax assets and liabilities at March 31, 2018 and 2017 are as follows:
Millions of yen

Thousands of
U.S. dollars

2018

2017

2018

¥725

¥799

$6,822

Note 14: Impairment Loss on Property, plant and equipment
In the year ended March 31, 2018, the Companies recorded impairment loss on property, plant and equipment
for the following group of assets:

Deferred income tax assets:

AmountAccrued bonuses
Unrealized gain from sales of inventories between the Companies
Liability for retirement benefit

104

291

979

3,980

4,557

37,452

21

25

198

Unrealized gain from sales of fixed assets between the Companies

1,010

1,030

9,504

Unrealized holding gain on fixed assets

2,712

3,210

25,520Depreciation and amortization

909

962

8,554

Impairment loss of fixed assets

515

542

4,846

Loss on devaluation of investments in securities

968

1,052

9,109

Provision for business structure improvement

83

84

781

Accrued environmental expenditures

169

30

1,590

Asset retirement obligations

866

433

8,149

Net operating loss carry forwards

2,140

1,503

20,137

Allowance for doubtful accounts

824

834

7,754

Long-term accrued amount payable

Other
Subtotal deferred income tax assets
Valuation allowance
Total deferred income tax assets

1,704

2,466

16,034

16,73017,818

157,429(8,518)(8,820)(80,154)¥8,212¥8,998$77,275$(9,984)

Use

LocationType

Afforestation business

Kamikitayama-mura,
Yoshino District, Nara Prefecture

Mountain forests

Idle assets

Shingu City, Wakayama Prefecture

Land

Total

The Companies classify property, plant and equipment
into groups based on the place of business and the
products with mutual supplementation. However, theCompanies classify real estate for rent and idle
properties, which are not expected to be used in the
future, individually.
(Process for Recognition of Impairment Loss on
Property, plant and equipment)
Due to the significant decline in market value ofmountain forests in the afforestation business the bookvalue was reduced to the recoverable amount and theMillions of yen

¥88
0
¥88

reduced amount was recorded under other expenses as
an impairment loss.
With regard to idle assets, the book value was
reduced to the recoverable amount because their future
use is not expected, and the reduced amount wasrecorded under other expenses as an impairment loss.
The recoverable value is measured by the net salevalue, evaluated based on the rational estimates. The
recoverable value for the assets which have difficulty insale and other conversion is evaluated as zero.

Deferred income tax liabilities:¥(1,061)¥(953)

Reserve deductible for Japanese tax purpose

(85)

(105)

(800)

Reserve for deferred gain on sales of fixed assets for tax purpose

(849)

(810)

(7,989)Valuation difference on Property, plant and equipment(1,937)(1,939)(18,227)

Unrealized holding gain on securities

Asset for retirement benefit(3,962)(3,411)(37,282)

Accumulated adjustments for retirement benefit

(231)

(140)

(2,174)

Other

(68)

(150)

(640)

¥(8,193)¥(7,508)$(77,096)¥19¥1,490$179

Total deferred income tax liabilities
Net deferred income tax assets (liabilities)

Note 13: Research and Development Expenses
Research and development expenses are recognized in
the consolidated statements of income in the year
when they are incurred. Research and development
expenses included in selling, general and64

administrative expenses are ¥713million($6,709thousand) and ¥778 million for the years ended
March 31, 2018 and 2017, respectively.

65

Notes to Consolidated Financial Statements

Note 15: Lease Transactions

Note 16: Derivative Transactions

Lease transactions for the years ended March 31, 2018 and 2017 are as follows:

Depreciation equivalent is computed on the straight-line method over the lease period without residual value.

Derivative financial instruments currently utilized by
the Companies include mainly forward exchange
contracts, interest rate swap contracts, and interest
rate and currency swaps contracts, all of which are forhedging purposes.
The Companies use forward exchange contracts toavert exposure to market risks arising from changes inforeign exchange rates, interest rate swap contracts
to avert the Companiesʼ exposure to adverse
movements in interest rates and interest rate andcurrency swap contracts to avert the Companiesʼ
exposure to adverse movements in principal andinterest on foreign currency loans payable.
Forward exchange contracts, interest rate swap
contracts, and interest rate and currency swaps
contracts, are subject to risks of foreign exchange ratechanges and interest rate changes, respectively.

Operating lease transactions
Lease commitments under non-cancelable operating leases at March 31, 2018 and 2017 are as follows:

Derivative transactions for which hedge accounting had not been applied at March 31, 2018 and 2017are as follows.

Finance lease transactions without ownership transfer to lessee, which commenced prior to April 1, 2008(a) Lease payments, reversal of allowance for impairment loss on leased assets, depreciation equivalent:Millions of yen

Thousands of
U.S. dollars

2018

2017

2018

Lease payments

¥̶

¥39

$̶

Reversal of allowance for impairment loss on leased assets

̶

―

̶

Depreciation equivalent

̶

39

̶

(b) Calculation method of depreciation equivalent:Millions of yen

Thousands of
U.S. dollars

2018

2017

2018

¥222

¥238

$2,089（lessee）
Due within one year

906

606

8,525

¥1,128¥844$10,614

Due within one year

¥18

¥31

$169

Due after one year

31

48

292

¥49

¥79

$461

Due after one year
（lessor）

The derivative transactions are executed by theCompanyʼs Corporate Planning Department andmanaged by the Companyʼs Accounting Department
in accordance with the established policies andwithin the specified limits on the amounts ofderivative transactions allowed. Information onderivative transactions is reported to the Executive
Management Meeting quarterly.
The Companies evaluate hedge effectiveness bycomparing the cumulative changes in cash flows or
the changes in fair value of hedged items and thecorresponding changes in fair value of the hedging
derivative instruments. If the percentage changes ofhedged items and hedging instruments, ranging
between approximately 80% to 125%, hedging
transactions are considered to be effective.

Thousands of
U.S. dollars

Millions of yen

2017

2018
Contract amountType of derivativetransaction

Contract amount

2018
Contract amountOver
Total one year

Fair Valuation
value Gain (Loss)

Over
Total one year

Fair Valuation
value Gain (Loss)

Over
Total one year

Fair Valuation
value Gain (Loss)

¥13

¥(0 )

¥20

¥(0)

$122

$(0 )

Forward exchange
contracts
Buy contracts
U.S. Dollar

¥̶

¥(0 )

¥̶

¥(0)

$̶

$(0 )

Derivative transactions for which hedge accounting had been applied at March 31, 2018 and 2017 are as follows.
(1) Currency-related

2017

2018
Contract amountType of derivativetransaction

Main hedged
items

Thousands of
U.S. dollars

Millions of yen

Total

Contract amount

2018
Contract amount

Fair
value

Total

Over
one year

Fair
value

Total

¥̶ ¥(33)¥3,836¥̶¥(80)$15,931$̶ $(310)

¥1

¥361

¥̶

¥(2)

$1,289$̶Over
one yearOver
one year

Fair
value

Forward exchange
contracts
Buy contracts
U.S. Dollar
EUR

Trade payables¥1,693
¥137

¥̶

$9

Fair value on Forward exchange contracts is based on the price offered by the contracted financial institution.

66

67

Notes to Consolidated Financial Statements(2) Interest ‒related

Note 17: Retirement Benefits

The following interest rate swap contracts are used ashedges and meet certain hedging criteria. The net
amount to be paid or received under the interest rate

swap contract is added to or deducted from theinterest on the assets or liabilities for which the swap
contract was executed.
Thousands of
U.S. dollars

Millions of yen

2017

2018
Contract amountType of derivativetransaction

Main hedged
items

Total

Contract amount

Over
Fair
one year value

Total

2018
Contract amount

Over
Fair
one year value

Total

Over
Fair
one year value

Interest rate swap
contracts
Receive floating,
Pay fixed

Long-termloans payable¥̶

¥14,775 ¥11,340

Fair value on interest rate swap contracts is based on
the price offered by the contracted financial institution.
Market value of interest rate swap is included in thecorresponding hedged long-term debt as this interest¥20,435 ¥14,775¥̶$139,033 $106,709

2017

2018
Contract amount
Main hedged
items

Total

Contract amount

Over
Fair
one year value

Total

2018
Contract amount

Over
Fair
one year value

Total

Fair value on interest rate and currency swap contracts
is based on the price offered by the contracted
financial institution.
Market value of interest rate and currency swap isMillions of yen

2018

2017

2018

¥18,183¥18,247$171,102

Service cost

977

998

9,194

Interest cost

125

124

1,176

Actuarial (gain) loss

(78)

406

(734)

Benefits paid

(804)

(1,583)(7,566)(2,104)

̶

(19,799)

35

(9)

329

¥16,334¥18,183$153,702

Millions of yen

Thousands of
U.S. dollars

Decrease due to revisions to retirement benefit plan
Other
Balance at the end of the year

(2) Movements in plan assets
2018

2017

2018

¥8,052¥7,803$75,769

Expected return on plan assets

97

93

913

Actuarial (gain) loss

329

367

3,096

Contributions paid by the employer

275

372

2,588

Benefits paid

(237)

(572)

(2,230)

Balance at the beginning of the year¥̶¥12,646 ¥11,680¥̶Thousands of
U.S. dollars

Over
Fair
one year value

Interest rate andcurrency swaps
contracts
Receive floating,Long-term
Pay fixed
loans payable
Receive U.S. dollar,¥11,680 ¥10,713
Pay Japanese Yen

1. Defined benefit plans, except plan applied simplified method

Balance at the beginning of the year

Thousands of
U.S. dollars

Millions of yen

Under the corporate pension fund plan and the
lump-sum retirement payment plan of someconsolidated subsidiaries, retirement benefit
obligations and retirement benefit costs are calculatedusing the simplified method.
Also, the Company has made revisions to its
retirement benefits plan. As a result, other income of
2,104 million yen was recorded as gain on revision to
retirement benefit plan for the current fiscal year.

(1) Movement in retirement benefit obligations

rate swap is recorded as an adjustment to thecorresponding hedged long-term debt under the
special treatment.

(3) Interest and currency ‒related

Type of derivativetransaction$̶

The Company and its consolidated subsidiaries have inplace a corporate pension fund plan and a lump-sum
retirement payment plan as their defined benefit
pension plan, and some consolidated subsidiaries use
small‒to-medium enterprisesʼ retirement benefit mutual
aid schemes in conjunction therewith. Forthermore, theCompany has set up a retirement benefits trust. In
addition, a defined contribution pension plan has been
established for some overseas consolidated subsidiaries.

$109,909 $100,809$̶included in the corresponding hedged long-term debt
as this interest rate and currency swap is recorded as
an adjustment to the corresponding hedged
long-term debt under the special treatment.

Other
Balance at the end of the year

24

(11)

224

¥8,540¥8,052$80,360(3) Reconciliation from retirement benefit obligations and plan assets to liability (asset) for retirement benefits
2018

68

Millions of yen

Thousands of
U.S. dollars

2017

2018

Funded retirement benefit obligations¥6,047¥5,926$56,902

Plan assets(8,540)(8,052)(80,361)(2,493)(2,126)(23,459)

Unfunded retirement benefit obligations

10,287

12,25796,801

Total Net liability (asset) for retirement benefits

7,794

10,131

73,342

Liability for retirement benefits

10,39912,36397,855

Asset for retirement benefits(2,605)(2,232)(24,513)

Total Net liability (asset) for retirement benefits¥7,794¥10,131$73,34269

Notes to Consolidated Financial Statements(4) Retirement benefit costs
Service cost

Millions of yen

Thousands of
U.S. dollars

2018

2017

2018

¥977

¥998

$9,194

Interest cost

125

124

1,176

Expected return on plan assets

(97)

(93)

(913)

Net actuarial loss amortization

(106)

(143)

(997)

1

3

9

¥900

¥889

$8,469(2,104)―(19,799)

Other
Total retirement benefit costs
Gain on revision to retirement benefit plan**These accounts are recorded in other income (expenses).

Other
Total adjustments for retirement benefit

Millions of yen

Thousands of
U.S. dollars

2018

2017

2018

¥301

¥(182)$2,832

2

(1)

19

¥ 303

¥(183)$ 2,851

Millions of yen

Thousands of
U.S. dollars

2018

2017

2018

¥(819)¥(516)$(7,707)(6) Accumulated adjustments for retirement benefit
Unrecognized actuarial gains and losses(1) Movement in liability for retirement benefits

1. Plan assets comprise:

2017

2018

¥1,231$11,922Retirement benefit costs

215

268

2,023

Benefits paid

(52)

(109)

(489)

Contributions paid by the employer

(90)

(121)

(848)

Other

(0)

(1)

(0)

¥1,340¥1,268$12,608(2) Reconciliation from retirement benefit obligations and plan assets to liability (asset) for retirement benefits

2018

2018

2017

28.4％

28.2％

Equity securities

49.1％

48.4％

Cash and deposits

5.0％

5.0％

General account of life insurance companies

15.9％

16.7％

Other

1.6％

1.7％

Total*

100.0％

100.0％*Total pension assets include the pension benefits trust, established under the corporate pension system, which accounted for 12.6% ofassets in the previous fiscal year and 12.4% of assets in the current fiscal year.

2. Determination method of long-term expected rateof returnCurrent and target asset allocations, historical andexpected returns on various categories of plan assets

Millions of yen

Thousands of
U.S. dollars

2017

2018

Funded retirement benefit obligations

¥855

¥809

$8,046

Plan assets

(838)

(765)

(7,886)

17

44

160

Unfunded retirement benefit obligations

1,323

1,223

12,449Total Net liability (asset) for retirement benefits

1,340

1,267

12,609Liability for retirement benefits

1,373

1,293

12,920Total Net liability (asset) for retirement benefits

Bonds

Thousands of
U.S. dollars

2018

Asset for retirement benefits(7) Plan assets

Millions of yen¥1,267

Balance at the beginning of the year

Balance at the end of the year

(5) Adjustments for retirement benefit
Actuarial gains and losses

2. Defined benefit plan applying the simplified method

(33)

(26)

(311)

¥1,340¥1,267$12,609

Millions of yen

Thousands of
U.S. dollars

2018

2017

2018

¥215

¥269

$2,023

Millions of yen

Thousands of
U.S. dollars

2018

2017

2018

¥353

¥326

$3,322(3) Retirement benefit costs
Total retirement benefit costs based on the simplified method

3. Defined contribution pension plan
Required contributions provided to defined contribution pension plansat consolidated subsidiaries

have been considered in determining the long-term
expected rate of return.

(8) Actuarial assumptions
The principal actuarial assumptions:

70

2018

2017

Discount rate

0.6% (mainly)

0.6% (mainly)

Long-term expected rate of return

1.0% (mainly)

1.0% (mainly)

Anticipated rate of increase

2.8% (mainly)

3.2% (mainly)71Notes to Consolidated Financial Statements

Note 18: Asset Retirement Obligations

3. Information regarding segment sales, segment income or loss, segment assets and other significant items:

1. Asset retirement obligations recorded on the consolidated balance sheets

Millions of yen

2018(1) Outline of the asset retirement obligations recorded:
The Company recorded asset retirement obligations
covering the expenses for the removal of asbestos to
be incurred at the time of removal from buildings andstructures owned by the Company, treatment

expenses stipulated by the Waste Management andPublic Cleansing Act, and expenses for the restoration
to their original state of properties leased byconsolidated subsidiaries.

(2) Basis for the calculation of the amount of the relevant asset retirement obligations:
The projected use period of each fixed asset isestimated to be 4 to 64 years based on the useful life ofeach, and the discount rate of 0.516% to 2.330% isused.

Millions of yen

Thousands of
U.S. dollars

2018

2017

2018

¥2,106¥2,091$19,817

139

10

1,308

Increase (Decrease) due to change of estimates

931

22

8,761

Decrease in loss on disposal of property, plant and equipment

(208)

(13)

(1,957)

63

(4)

593

¥3,031¥2,106$28,522

Balance at the end of the year

Sales to outside customers

unclear, and also in view of the fact that theCompanies currently have no plan to exit from theseproperties, it is not possible to clearly estimate theamounts of asset retirement obligations. For thisreason, the asset retirement obligations that
correspond to these obligations are not recorded in
the accompanying consolidated financial statements.

Note 19: Segment Information

72

Consolidated*3¥242,082¥19,428¥261,510¥7,590

¥̶

2,739

81

2,820

37,349(40,169)̶

Total

244,821

19,509264,330

44,939(40,169)

269,100

Operating income¥8,809¥1,128¥9,937¥815¥662¥11,414

Identifiable assets¥344,318¥16,698¥361,016¥20,023¥(13,795)¥367,244¥18,297¥783¥19,080¥411¥(426)¥19,065Intersegment sales or transfers

Impairment loss

¥269,100

¥̶

¥̶

¥̶

¥88

¥̶

¥88

Investment in affiliates¥37,814¥̶

¥37,814¥̶¥̶

¥37,814

Increase in property, plant andequipment/intangible assets¥13,868¥887¥14,755¥347¥(392)¥14,710

Thousands of U.S. dollars

2018

1. Overview of Reporting Segments
Reporting segments of the Company are subject toregular review so that the Board of Directors is able todecide on the best allocation of management
resources and evaluate results.
The Companies evaluate business results on an each
entity basis, and treat independent entity as a unit
functioning within each of its business segments. The
Company groups each unit into segments according tocommonality in economic characteristics, productmanufacturing methods and markets. Based on thisapproach, the Company maintains two reporting
segments: the “Paper and Pulp Business” and the“Packaging and Paper Processing Business.”
The Paper and Pulp Business consists of the
manufacture and sale of paper and pulp products,
while the Packaging and Paper Processing Businessconsists of the manufacture and sale of paper
containers and liquid package cartons, various printing
products, including business forms, and the dataprocessing service (DPS) business.

2. Basis for measurement of segment sales, segment
income or loss, segment assets and other significant
items:The basis of the accounting treatment for the reporting
segments is substantially the same as described in“Summary of Significant Accounting Policies” herein.
The segment income represents the operating
income-based amount. The intersegment revenues
and transfers are determined based on the prevailingmarket value.

Packaging andPaper and Paper Processing
Business
Pulp Business

Total$2,277,990$182,817

25,774763

Others*1 Adjustments*2

Consolidated*3$2,460,807$71,422$̶

$2,532,229

26,537351,453(377,990)

̶

(377,990)

2,532,229

Sales:
Sales to outside customers
Intersegment sales or transfers

2. Asset retirement obligations other than thoserecorded on the consolidated balance sheets
The Companies have obligations to restore land,buildings and other structures which the Companies
use under lease or rental contracts to their original state
when vacating them. However, because the use periodsof the leased properties related to such obligations are

Others*1 Adjustments*2

Sales:

Depreciation and amortization

Adjustments over time

Foreign currency translation adjustment

Total

Other items(3) Increase or decrease in the total amount of the relevant asset retirement obligations during the fiscal year
ended March 31, 2018 and 2017:

Balance at the beginning of the year

Packaging andPaper and Paper Processing
Business
Pulp BusinessTotal

2,303,764

183,580

2,487,344

422,875

Operating income$82,893$10,614$93,507$7,670$ 6,229$107,406

Identifiable assets$3,240,030$157,128$3,397,158$188,417$(129,811)$3,455,764$172,175$7,368$179,543$3,868$(4,009)$179,402

$̶

$̶

$̶

$828

$̶

$828

Investment in affiliates$355,829$̶

$355,829$̶$̶$355,829

Increase in property, plant andequipment/intangible assets$130,498$8,346$138,844$3,266$(3,689)$138,421

Other items
Depreciation and amortization
Impairment loss

*1 The “Others” category indicates business segments not included in the reporting segments, encompassing the wood products business, the construction business,sales of real estate, the transportation and warehousing business and the wastepaper wholesale business.
*2 Amounts of adjustments are as follows:(1) Adjustments in segment income in the amount of ¥662 million ($6,229thousand) mainly represent eliminations of intersegment transactions.
(2) Adjustments in segment assets in the amount of ¥(13,795) million ($(129,811) thousand) include ¥(21,642) million ($(203,651) thousand) for eliminations ofintersegment debts and credits and ¥7,847 million ($73,840 thousand) for the corporate assets that are not allocated to each reportable segment.
(3) Adjustments in increases in property, plant and equipment and intangible fixed assets totaling ¥(392) million ($(3,689) thousand) represent eliminations ofintersegment unrealized gains on noncurrent assets.
*3 Segment income is adjusted to reflect operating income as recorded in the consolidated statements of income.

73

Notes to Consolidated Financial Statements

Millions of yen

2017
Packaging andPaper and Paper Processing
Business
Pulp Business3. Information by Major Customer

Millions of yen

Thousands of
U.S. dollars

2018

2018

¥37,246$350,485

Name of Customers
Total

Others*1 Adjustments*2 Consolidated*3

SHINSEI PULP & PAPER COMPANY LIMITED

Sales:¥234,576¥20,146¥254,722¥7,676¥̶

¥262,398

2,644

98

2,742

34,392(37,134)

̶

Total

237,220

20,244257,464

42,068(37,134)

262,398

Operating income¥10,321¥1,261¥11,582

¥624

¥694

¥12,900

Identifiable assets¥339,201¥17,525¥356,726¥19,441¥(13,962)¥362,205¥18,254¥833¥19,087¥418¥(411)¥19,094

Sales to outside customers
Intersegment sales or transfers

Other items
Depreciation and amortization

¥―

¥―

¥―

¥―

¥̶

¥―

Investment in affiliates¥36,272¥̶

¥36,272¥̶¥̶¥36,272

Increase in property, plant andequipment/intangible assets¥12,450¥367¥12,817¥300¥(366)¥12,751

Impairment loss

Year ended March 31, 2017
1. Information by Product or Service
This information is omitted here as it is disclosed in the Segment Information section.

2. Information by Region(1) Net Sales

2017
Net Sales*1 The “Others” category indicates business segments not included in the reporting segments, encompassing the wood products business, the construction business,sales of real estate, the transportation and warehousing business and the wastepaper wholesale business.
*2 Amounts of adjustments are as follows:(1) Adjustments in segment income in the amount of ¥694 million mainly represent eliminations of intersegment transactions.
(2) Adjustments in segment assets in the amount of ¥(13,962) million include ¥(21,728) million for eliminations of intersegment debts and credits and ¥7,766 million
for the corporate assets that are not allocated to each reportable segment.
(3) Adjustments in increases in property, plant and equipment and intangible fixed assets totaling ¥(366) million represent eliminations of intersegment unrealized
gains on noncurrent assets.
*3 Segment income is adjusted to reflect operating income as recorded in the consolidated statements of income.

(Related information）
Year ended March 31, 2018
1. Information by Product or Service
This information is omitted here as it is disclosed in the Segment Information section.

Millions of yen
Japan

China

Asia

North America

OthersTotal¥189,942¥24,200¥14,210¥26,604¥7,442¥262,398

Classification of net sales is determined by country or geographical location of customers.
Major countries and areas which belong to segments other than Japan and China are as follows:(1) Asia……South Korea, Vietnam, Taiwan, Hong Kong, Thailand(2) North America……United State of America, Canada(3) Other……Europe, the Middle East, Oceania(2) Property, plant and equipment

Property, plant and equipment

3. Information by Major Customer

2. Information by Region

Name of Customers(1) Net Sales

Millions of yen

2018
Net Sales

Japan

China

Asia

North America

OthersTotal¥181,324¥34,671¥14,595¥30,431¥8,079¥269,100SHINSEI PULP & PAPER COMPANY LIMITED

Millions of yen

2017
Japan

China

OthersTotal¥123,832¥13,755¥6,795¥144,382

Millions of yen

2017¥37,328

Thousands of U.S. dollars

2018
Net Sales

Japan

China

Asia

North America

OthersTotal$1,706,258$326,254$137,339$286,356$76,022$2,532,229

Classification of net sales is determined by country or geographical location of customers.
Major countries and areas which belong to segments other than Japan and China are as follows:(1) Asia……South Korea, Taiwan, Vietnam, Thailand, Malaysia(2) North America……United State of America, Canada(3) Other……Europe, Oceania, the Middle East

(2) Property, plant and equipment

Millions of yen

2018
Property, plant and equipment

Japan

China

OthersTotal¥116,707¥13,832¥9,434¥139,973

Thousands of U.S. dollars

2018
Property, plant and equipment

74

Japan

China

OthersTotal$1,098,212$130,159$88,774$1,317,145

75

Notes to Consolidated Financial Statements（Information regarding the amounts of amortization and unamortized balance by reportable segment）
Year ended March 31, 2018

Note 20: Related Party Transactions

Millions of yen

2018
Packaging andPaper and Paper Processing
Business
Pulp Business

Total

OthersAdjustments

Consolidated（1) Transactions with related party
Year ended March 31, 2018
Parent company and principal stockholder, etc., of the Company

Goodwill:
Amortization of goodwill
Balance at end of year

¥131

¥̶

¥131

¥̶

¥̶

¥131

¥1,383¥̶¥1,383¥̶¥̶

¥1,383Thousands of U.S. dollars

2018
Packaging andPaper and Paper Processing
Business
Pulp Business

Total

OthersAdjustments

Consolidated

Goodwill:

Attribute

Name

Location

Amount of The contents
Ownership ratio
capital or of a business(Parent company
investment operation orownership ratio)in capital an occupation of voting rights (%)

Principal
Mitsubishi Chiyoda- ¥204,447
stock- Corporation ku, Tokyo
million($1,923,845
holderthousand)$̶$1,233$̶$̶

$1,233

Year ended March 31, 2017

Balance at end of year

$13,014$̶$13,014$̶$̶$13,014

Parent company and principal stockholder, etc., of the Company(Note) The amounts of “Others” are those related to the construction business and the machinery manufacture, sales and maintenance operations.

Attribute

Name

Location

Principal
Mitsubishi Chiyodastock- Corporation ku, Tokyo
holder2017
Packaging andPaper and Paper Processing
Business
Pulp Business

Total

OthersAdjustments

Consolidated

TradingamountBalance atthe end of
Account the fiscal year

¥17,703 Accountmillion receivabletrade($166,585
thousand)

Sales ofpaper

¥5,163
million($48,584
thousand)（Transaction terms and conditions, policy to decide such terms and conditions）
The sales price of paper is determined each time through negotiations, taking into account market prices.

$1,233

Millions of yen

Nature ofRelationship transaction

A general (Parent company Agency fortrading ownership ratio) the products
Direct 19.4of thecompany
Company

Amortization of goodwill

Year ended March 31, 20172018

Amount of The contents
Ownership ratio
capital or of a business(Parent company
investment operation orownership ratio)in capital an occupation of voting rights (%)¥204,447
million2017
Nature ofRelationship transaction

A general (Parent company Agency fortrading ownership ratio) the products
Direct 19.4of thecompany
Company

Sales ofpaper

TradingamountBalance atthe end of
Account the fiscal year

¥17,582 Accountmillion receivabletrade¥4,866
million（Transaction terms and conditions, policy to decide such terms and conditions）
The sales price of paper is determined each time through negotiations, taking into account market prices.

Goodwill:
Amortization of goodwill

¥134

¥̶

¥134

¥̶

¥̶

¥134

Balance at end of year

¥1,372¥̶¥1,372¥̶¥̶¥1,372(Note) The amounts of “Others” are those related to the construction business and the machinery manufacture, sales and maintenance operations.

（2）Notes on parent company or significant affiliated company
For the year ended March 31, 2018 and 2017, the significant affiliated company is Daio Paper Corporation andits summarized consolidated financial statement is as follows:
Millions of yen

76

Thousands of
U.S. dollars

2018

2017

2018

Total current assets¥260,808¥257,048$2,454,202

Total noncurrent assets

425,108

400,530

4,000,263

Total current liabilities

192,223

196,288

1,808,817

Total noncurrent liabilities

300,853

270,380

2,831,025

Total net assets

193,065

191,079

1,816,740

Net sales

531,311477,140

4,999,633

Income before income taxes

11,124

18,118104,677

Net income attributable to owners of parent company

3,971

12,13637,36777

Notes to Consolidated Financial Statements

Note 21: Comprehensive Income

Note 22: Stock Option

Amounts reclassified to net income in the current period that were recognized in other comprehensive incomein the current or previous periods and tax effects for each component of other comprehensive income were as
follows:

The Company has the compensation plan based on the stock option system for its directors other than outside
directors.

Millions of yen

Thousands of
U.S. dollars

2018

2017

2018

¥1,468¥4,211$13,814

Unrealized holding gains (losses) on securities, net of taxes
Occurrence amount

11

(14)

103

Before tax effect

1,479

4,197

13,917

Tax effect(545)(1,127)(5,128)

Unrealized holding gains (losses) on securities, net of taxes¥934¥3,070$8,789Occurrence amount¥(77)¥(549)$(725)

Recycling

127

711

1,196

Recycling

Unrealized gains (losses) on hedging derivatives, net of taxes

Before tax effect

50

162

471

Tax effect

(15)

(50)

(142)

Unrealized gains (losses) on hedging derivatives, net of taxes

¥35

¥112

$329

¥1,489¥(361)$14,012

−

−

−

1,489

(361)

14,012(1) The following shows the Companyʼs stock options as of March 31, 2018.
Persons granted

Number of stock
options granted

Grant date

Exercise price

Exercise period

2011 Stock options

11 directors

117,000 shares

July 11, 2011

¥1

From July 12, 2011
to July 11, 2026

2012 Stock options

11 directors

153,500 shares

July 17, 2012

¥1

From July 18, 2012
to July 17, 2027

2013 Stock options

9 directors

117,000 shares

July 12, 2013

¥1

From July 13, 2013
to July 12, 2028

2014 Stock options

9 directors

80,000 shares

July 11, 2014

¥1

From July 12, 2014
to July 11, 2029

2015 Stock options

9 directors

62,000 shares

July 13, 2015

¥1

From July 14, 2015
to July 13, 2030

2016 Stock options

9 directors

58,500 shares

July 14, 2016

¥1

From July 15, 2016
to July 14, 2031

2017 Stock options

9 directors

35,500 shares

July 14, 2017

¥1 ($0.01)

From July 15, 2017
to July 14, 2032

Stock options

Foreign currency translation adjustment
Occurrence amount
Recycling
Before tax effectTax effectForeign currency translation adjustment

−

−

−

¥1,489¥(361)$14,012Adjustments for retirement benefit, net of taxes(2) The following shows the number of stock options.
2011
Stock options(shares)

2012
2013
2014
2015
2016
2017
Stock options Stock options Stock options Stock options Stock options Stock options(shares)(shares)(shares)(shares)(shares)(shares)Non-vested stock option:
Outstanding at March 31, 2017

̶

̶

̶

̶

̶

−

−
35,500Occurrence amount

¥409

¥(40)

$3,849Granted

̶

̶

̶

̶

̶

−

Recycling

(106)

(143)

(998)

Forfeited

̶

̶

̶

̶

̶

−

−

Before tax effect

303

(183)

2,851

Vested

̶

̶

̶

̶

̶

−

35,500Tax effect

(93)

55

(875)

Outstanding at March 31, 2018

̶

̶

̶

̶

̶

−

−

Adjustments for retirement benefit, net of taxes¥210¥(128)$1,97623,00080,00058,00074,50048,50058,500

−

¥975

¥872

$9,175Vested

̶

̶

̶

̶

̶

−

35,500(1,136)(21)(10,690)

Exercised

14,00047,5008,500

28,5004,500

17,000−¥(161)¥851$(1,515)

Forfeited

̶

̶

̶

̶

̶

−

−

¥2,507¥3,544$23,591

Outstanding at March 31, 2018

9,000

32,50049,50046,00044,00041,50035,500Occurrence amount
Recycling
Share of other comprehensive income of associates accounted for using equity method
Total other comprehensive income

Vested stock option:
Outstanding at March 31, 2017

Share of other comprehensive income of associates accounted for using equity method(3) The following shows the per share prices.
2011
Stock options

Exercise price

2012
2013
2014
2015
2016
2017
Stock options Stock options Stock options Stock options Stock options Stock options

¥1

¥1

¥1

¥1

¥1

¥1

¥1($0.01)

Average stock price at exercise

¥660

¥688

¥721

¥639

¥717

¥763

̶

Fair value price at grant date

¥428

¥314

¥359

¥354

¥599

¥657 ¥743($6.99)(4) The following shows the estimate method for stock option price.
2011
Stock options

Estimate method
Expected volatility

Black-Scholes Black-Scholes Black-Scholes Black-Scholes Black-Scholes Black-Scholes Black-Scholes
option-pricing option-pricing option-pricing option-pricing option-pricing option-pricing option-pricing
modelsmodelsmodelsmodelsmodelsmodelsmodels33.120％33.243％35.972％37.089％37.064％37.117％32.561％

8 years

8 years

8 years

8 years

8 years

8 years

8 years

Expected dividend¥12/share¥12/share¥12/share¥12/share¥12/share¥12/share¥12/share($0.11/share)

Risk-free interest rate

0.844％

0.502％

0.685％

0.356％

0.295％(0.352)％0.025％

Expected life

78

2012
2013
2014
2015
2016
2017
Stock options Stock options Stock options Stock options Stock options Stock options

79

Independent Auditor’s Report

Notes to Consolidated Financial Statements

Note 23: Subsequent Events
Distribution of Retained Earnings
The following items were approved at the annual
shareholdersʼ meeting of the Company held on June27, 2018:

80

Payment of a cash dividend of ¥6.00 ($0.06) per share,or a total of ¥1,137 million ($10,699 thousand), toshareholders on record as of March 31, 2018.

81

Affiliated Group Companies

Consolidated Subsidiaries
Hokuetsu Paper Sales Co., Ltd.
Takebashi 3-3 Bldg., 3-3, Kanda Nishiki-cho, Chiyoda-ku, Tokyo 101-0054
Sales and distribution agent
Alberta Pacific Forest Industries Inc.
P.O. Box 8000, Boyle, Alberta, Canada T0A 0M0
Manufacturing and sale of pulp
Xing Hui Investment Holdings Co., Ltd.
Unit 01-12, 19/F, Metro Centre, No. 32 Lam Hing Street, Kowloon Bay,
Kowloon, Hong Kong, China
Management of Jiangmen Xinghui Paper Mill Co., Ltd.
Jiangmen Xinghui Paper Mill Co., Ltd.
Complex Developing Area, Shuangshui Town, Xinghui District,
Jiangmen, Guangdong Province, China
Manufacturing and sale of white paperboard
Bernard Dumas S.A.S.
Le Bourg 2, Rue de la Papeterie 24100, Creysse, France
Manufacturing and sale of glass fiber sheets
Hokuetsu Toyo Fibre Co., Ltd.
888, Otsuka, Numazu City, Shizuoka Prefecture 410-0306
Manufacturing and sale of vulcanized fiber products and paper

Hokuetsu Logistics Co., Ltd.
560-11, Shimokido, Higashi-ku, Niigata City, Niigata Prefecture 950-0885
Transportation and warehousing
Hokuetsu Suiun Co., Ltd.
560-11, Shimokido, Higashi-ku, Niigata City, Niigata Prefecture 950-0885
Transportation and warehousing
Hokuetsu Engineering Co., Ltd.
57, Enoki-cho, Higashi-ku, Niigata City, Niigata Prefecture 950-0881
Manufacturing and sale of industrial machinery, electric instrumentation
construction, design and construction of civil engineering and buildings

Number of shares authorized

500,000,000

Number of shares issued

209,263,814

Number of shareholders

11,582Major Shareholders (as of March 31, 2018)*

19.33

Japan Trustee Services Bank, Ltd. (Trust Account)

12,277

6.48

Hokuetsu Trading Corporation
3-2-2, Nihonbashihongoku-cho, Chuo-ku, Tokyo 103-0021
Sale of raw materials, fuels and chemicals for paper manufacturing andchemical products

The Master Trust Bank of Japan, Ltd. (Trust Account)

10,924

5.77

Hokuetsu Kishu Paper Stock Ownership Association

5,533

2.92

Sompo Japan Nipponkoa Insurance Inc.

4,499

2.37

Kishu Kohatsu Co., Ltd.
4-22-1, Minami-Suita, Suita City, Osaka 564-0043
Management of driving school and golf practice range

The Daishi Bank, Ltd.

4,317

2.28

The Hokuetsu Bank, Ltd.

4,315

2.28

Kawasaki-kami Unyu Co., Ltd.

4,286

2.26

DFA International Small Cap Value Portfolio

4,073

2.15

Mizuho Bank, Ltd.

3,600

1.90

Hokuetsu Paper Tec Katsuta Co., Ltd.
1760, Takaba, Hitachinaka City, Ibaraki Prefecture 312-0062
Cutting, selecting, packing and loading/unloading of thecompanyʼs products

Nikkan Co., Ltd.
3-5-1, Nishizao, Nagaoka City, Niigata Prefecture 940-0027
Manufacturing and sale of paper, nonwoven fabric, and films

Hokuetsu Material Co., Ltd.
1529, Aza-Shitadairayamako, Oaza-Sakamoto, Aizubange-machi,
Kawanuma-gun, Fukushima Prefecture 969-6586
Sale of wood chips for paper manufacturing and woods
Purchase and sale of used paper

1-2-1, Yaesu, Chuo-ku, Tokyo

36,619

Daio Paper Corporation
2-60, Mishimakamiya-cho, Shikoku Chuo City, Ehime Prefecture 799-0492
Manufacturing and sale of paper, paperboard, pulp, and secondary
products, and production, processing, and sale of everyday goods

Shanghai Toh Tech Co., Ltd.
330-8, Xiya Road, Waigaoqiao Free Trade Zone, Shanghai-city, China
Processing and sale of carrier tape for precision electronic parts

Mizuho Trust & Banking Co., Ltd.

Mitsubishi Corporation

Hokuetsu Paper Tec Kishu Co., Ltd.
182, Udono, Kiho-cho, Minamimuro-gun, Mie Prefecture 519-5701
Cutting, selecting, packing and loading/unloading of thecompanyʼs products and related work to paper manufacturing

Hokuetsu Package Co., Ltd.
3-2-2, Nihonbashihongoku-cho, Chuo-ku, Tokyo 103-0021
Manufacturing and sale of paper containers including liquid package
cartons and packaging, and processed paper products such as
laminated paper and related materials
Supply of computer-related components and mailing business

Shareholder registry administrator

Percentage to total numberof shares in issue (%)

Affiliated Companies Accounted for
Under the Equity Method

MC Hokuetsu Energy Service Company
47, Enoki-cho, Higashi-ku, Niigata City, Niigata Prefecture 950-0081
Supply of steam and electric power

Stock Information (as of March 31, 2018)

Number of shares held(Thousands of shares)

Hokuetsu Pallet Co., Ltd.
3-2-2, Nihonbashihongoku-cho, Chuo-ku, Tokyo 103-0021
Processing of woods, purchase and sale of processed wood products
Manufacturing, purchase and sale of pallets

Hokuetsu Paper Tec Niigata Co., Ltd.
57, Enoki-cho, Higashi-ku, Niigata City, Niigata Prefecture 950-0881
Cutting, selecting, packing and loading/unloading of thecompanyʼs productsTechno-Hokuetsu Co., Ltd.
57, Enoki-cho, Higashi-ku, Niigata City, Niigata Prefecture 950-0881
Paper and pulp manufacturing work, industrial wastewater
purification processing, waste disposal, etc.

82

Equity Data

Name

*In addition to the above, the Company holds 19,788 shares of treasury stock.

Distribution of shares by shareholders (as of March 31, 2018)
Number of shareholders
Financial institutions 0.6％
Non-Japanese individuals/Corporations 1.6％

Securities companies 0.5％

Other Japanese corporations 3.1％

Treasury stock 0.0％

Niigata GCC Co., Ltd.
35-1 Enoki-cho, Higashi-ku, Niigata Prefecture 950-0881
Manufacturing and sale of filler for papermaking
Niigata PCC Co., Ltd.
2-3, Kamiose-machi, Higashi-ku, Niigata Prefecture 950-0063
Manufacturing and sale of filler for papermaking

Total
11,582shareholders
Individuals/Other 94.3％

Number of shares
Securities companies 0.8％
Non-Japanese individuals/Corporations 13.5％

Individuals/Other 9.5％

Treasury stock 9.5％

Total
209,263,814
sharesFinancial institutions 36.4％

Other Japanese corporations 30.3％

83Corporate Data

Corporate Data
Corporate Name: Hokuetsu Corporation

Fiscal year ending: March 31

Established: April 27, 1907

Number of consolidated subsidiaries: 22 (17 in Japan , 5 overseas)

The registered head oﬃce:

Number of aﬃliated companies accounted for under the equity method: 43-5-1, Nishizao, Nagaoka, Niigata Prefecture

Number of employees: 4,779 (consolidated); 1,581 (non-consolidated)

Paid-in capital: 42,020,940,239 yenOﬃces and Mills (as of March 31, 2018)
Head OfficeOsaka Branch

3-2-2 Nihonbashi hongoku-cho,
Chuo-ku, Tokyo 103-0021, Japan
TEL +81-3-3245-4500

4-22-1 Minami-Suita, Suita,
Osaka 564-0043
TEL +81-6-6339-5151

Nagoya Office

Fukuoka OfficeNiigata Office

1-7-28, Nishiki, Naka-ku, Nagoya,
Aichi Prefecture 460-0003(inside the J-SQUARE Marunouchi)
TEL +81-52-211-1272

2-2 Tsunaba-machi, Hakata-ku,
Fukuoka Prefecture 812-0024(inside the Fukuoka Daiichi Bldg.)
TEL +81-92-271-4982

57, Enoki-cho, Higashi-ku,
Niigata Prefecture 950-0881
TEL +81-25-273-1141

Central Research Laboratory
3-5-1, Nishizao, Nagaoka,
Niigata Prefecture 940-0027
TEL +81-258-24-0635

Niigata Mill

Kishu Mill

Kanto Mill Ichikawa

57, Enoki-cho, Higashi-ku,
Niigata Prefecture 950-0881
TEL +81-25-273-1141

182, Udono, Kiho-cho, Minamimuro-gun,Mie Prefecture 519-5701
TEL +81-735-32-1111

3-21-1, Ohsu, Ichikawa City,
Chiba Prefecture 272-0032
TEL +81-47-378-0101

Kanto Mill Katsuta

Nagaoka Mill

Osaka Mill

1760, Takaba, Hitachinaka City,
Ibaraki Prefecture 312-0062
TEL +81-29-275-5500

3-2-1, Zao, Nagaoka City,
Niigata Prefecture 940-0028
TEL +81- 258-24-0630

4-20-1, Minami-Suita, Suita City,
Osaka 564-0043
TEL +81-6-6385-3851

HOKUETSU GROUP Corporate Report 2018
IssuedDecember 2018

Publisher

Sekio Kishimoto, President and CEO

Inquiries

Hokuetsu Corporation General Aﬀairs Department
3-2-2, Nihonbashi hongoku-cho, Chuo-ku, Tokyo 103-0021, Japan
TEL + 81-3-3245-4500 FAX + 81-3-3245-4511

Website84

www.hokuetsucorp.com/en

85

HOKUETSU GROUP Corporate Report 2018
Published December 2018

3-2-2, Nihonbashihongoku-cho, Chuo-ku,
Tokyo 103-0021 Japan
TEL +81-3-3245-4500
FAX +81-3-3245-4511
www.hokuetsucorp.com/en

Low CO2

Cover printed on Hokuetsu Corporation’s High Apis NEO Max white, 174.5 g/m², inside pages on µ Matt EX, 128 g/m²,
and financial information on aqua blue colored wood-free paper KISHURAINBOW.