Value Creation Approach Practiced by the Sumitomo Rubber GroupA Message from the Executive Director in Charge of Finance
Optimizing Our Business
Portfolio via Selection andConcentration to Return to aGrowth Track

Naoki Okawa
Director and Senior Executive Officer

Starting from Lessons Learned in the Course of Past Midterm Plans
The formulation of our latest Midterm Plan started with reflecting onlessons learned over the course of the two preceding midterm plans,
which saw many targets remaining unmet. Although the aim of bothof these plans was to secure stable profit growth, actual operating
results included year-on-year declines of 30% to 40% in profit due inpart to fallout from the COVID-19 pandemic.
The root cause of these shortfalls was the handling of our businesses following the dissolution of our alliance with Goodyear Tire & Rubber
Company (Goodyear) in October 2015. Specifically, because of thestate of the business environment at the time of the dissolution of thisalliance and relevant joint ventures, the Sumitomo Rubber Group has
still not been able to expand into the global market in the mainstay TireBusiness. After entering into the alliance agreement with Goodyear in1999, we went on to pursue growth in China, emerging countries andelsewhere overseas with an eye to developing a solid earnings framework. To this end, we endeavored to develop a network of overseas
production bases, in 2013 acquiring a factory in South Africa andlaunching our Brazil Factory and in 2015 opening our Turkey Factory.
Amid these endeavors, we acquired rights to use the Dunlop
brand as a result of the dissolution of the abovementioned alliance.
The acquired rights encompassed 33 countries and enabled us tosell products under this brand to Japanese automakers in NorthAmerica, as well as customers in Japan, Russia, the Middle East andAfrica. Drawing on these rights, we have striven to further expand
our production capacity. We have also maintained and stepped up abusiness approach centered on pursuing cost reductions via higher

utilization rates at production facilities and raising sales revenue tosecure profit. However, instead of focusing on our fields of strength,
we began overemphasizing keeping factory utilization rates high tomeet rising orders. This had a negative effect on profitability. Then,the COVID-19 pandemic struck.
Our sales have stagnated ever since in China, which had otherwise been an important source of revenue, due to the enforcementof the “zero-COVID” policy. Moreover, maritime transportation fees
associated with exports from Japan, Thailand and Indonesia toNorth America surged and have remained high, at seven to eighttimes the pre-pandemic levels, for some time. This has put us in theodd situation of the more we export the higher the losses we record.
Taking this into account, we can now clearly conclude that a business approach overly reliant on maximizing production capacity isdemonstrably problematic.
Under the new Midterm Plan, we shifted our focus away from prioritizing sales and toward other means of achieving profitability. Inline with this shift, we are pursuing the timely and optimal allocationof human resources, materials and funds to enhance our earnings
power. In this way, we will transform Sumitomo Rubber Industries sothat we will once again reclaim our standing as a company known
for innovation and profitability. For example, we have set a target ofimproving the product mix by reducing the number of tire models in
production by approximately 30%. So far, we have decreased thisnumber by around 17%. We will allocate the surplus cash arisingfrom these efforts to businesses with high growth potential.

Maintaining a Priority on North America in the Tire Business while Reconsidering thePositioning of the U.S. Factory from the Ground Up
Maintaining our market foothold in North America involves both managing local businesses and running local factories.
Of course, we consider our tire business in North America an
important operation and our priorities for this business are unflagging. On the other hand, our North American product supply
involves two supply channels: (1) exports from Japan, Thailand andIndonesia and (2) production at local factories.
Declines in business profit from the North American tire businesscan be attributed primarily to the surging maritime transportation
fees mentioned earlier. Prior to the COVID-19 pandemic, we had
been able to secure sufficient profitability in the United States bymarketing tires exported from Japan, Thailand and Indonesia.
However, that situation has changed radically. Although maritime
transportation fees have begun to stabilize somewhat and thusallowed us to secure profit from exports, we now have no choice butto expand local production volumes if we are to circumvent the risk33

Integrated Report 2023

of once more being confronted by such circumstances.
Second, due to travel restrictions enforced upon the breakout of
the COVID-19 pandemic, we have become unable to dispatch staff
reinforcements to the USA Factory. This hindered us from implementing planned productivity enhancements.
Our strategy had been to offset losses recorded by the USA
Factory with earnings from exports to keep our North American
operations on a profitable track. While doing so, we had aimed tothoroughly upgrade production lines in place at this factory.
However, this strategy did not progress as expected. To rectify thissituation, we recently began dispatching specialists from international
business- and manufacturing-related divisions in Japan to the USAFactory, as the COVID-19 pandemic has largely been subdued.
These individuals are currently undertaking a fresh review of production issues at this factory to help it minimize losses.
In addition, although we may eventually establish a new factory inNorth America to increase the local production volume, our sole
focus at the moment is improving the profitability of local operations
by 2025. We will then review the positioning of our existing USA

Factory based on prevailing conditions and will for the present refrainfrom ruling out any options so as to make the best decision.

Promoting ROIC Management as We Shift Our Resources to Businesses with High Growth
Potential and Profitability
Looking ahead, we will work to optimize our business portfolio via
selection and concentration while raising cash from businesses
undergoing structural reforms, with the aim of shifting investment
and human resources to businesses with high growth potential andprofitability. To measure the success of these endeavors, we haveidentified Return on Invested Capital (ROIC) as an indicator.
Invested capital, the denominator of the ROIC formula, is significantly affected by changes in capital expenditure and working capital. Our Working Capital Task Force was launched as part of the “Be
the Change” Project, which aims to reinforce the foundations of ourbusiness, and has succeeded in achieving its target of raising cash
flows amounting to ¥30.0 billion by December 31, 2022, via thereduction of working capital. These ongoing efforts will be taken overand promoted by the Finance Department, which was newly established in January 2023.
As for internal infrastructure, preparatory measures are now under
way to incorporate ROIC data into our in-house developed
Enterprise Resources Planning (ERP) system. We plan to design anROIC management framework that will connect this indicator toindividual target management. We will strive to disseminate ROIC
management by helping employees thoroughly understand the significance working capital control in terms of improving ROIC and by
sharing outcomes of ROIC management with them.
ROIC Tree
Sales revenue

Business profit
after taxes

ROIC

VolumeUnit priceSales costs

Direct costs
Fixed manufacturing costs

Selling, general &administrative
expenses

Direct selling costs
Fixed selling costs

Tax costs
Working capital

Investedcapital

Trade receivables
Inventories
Trade payables

Non-current assets

Tangible assets
Intangible assets

CAPEX and Depreciation
CAPEX

Overseas

Cash Flows

Depreciation

Cash flows from operating activities(Billions of yen)80604020

Cash flows from investing activities

Free cash flow

(Billions of yen)

140

68.0

66.9

58.1

49.5

49.3

51.8

50.9

41.9
38.0

46.9

0

2018

2019

65.9

70

58.4

55.7
48.7

45.8
28.4

2020

2021

91.5

17.3

28.0

-65.5

-63.4

2018

2019

0

50.3

20.6

82.8

-70

123.5
77.9

63.1
9.1

-45.6

-54.0

2020

2021

27.9
-50.8
-78.7

-140

2022

2023 forecast

(FY)

2022

(FY)

* IFRS 16 (Lease) impact has not been included since 2019.

Policy on Returns to Shareholders
The Sumitomo Rubber Group aims to constantly improve its business and thereby maximize the volume of positive cash flows fromoperations in order to raise its stock price. We believe that suchimprovement is the most important form of returns to shareholders.
To this end, we allocate cash inflows from these endeavors to capital expenditures and R&D. Also, we intend to maintain a robust andstable stream of cash dividends over the long term while comprehensively reviewing our situation with respect to retained earnings,etc. At present, we have no plan to repurchase treasury stock for thepurpose of shareholder returns.
In addition, although this is not necessarily a commitment set instone, we do tell investors at our regular financial announcements that
we are aiming for a dividend payout ratio of at least 40%. Our group
has always endeavored to uphold high standards when it comes topaying out steady dividends over the long term, and we have no intention of changing our thinking on investor returns in the future.

Dividends per ShareDividends per share

Dividend payout ratio

(yen)

50

50

20
1055

55

55

55

23215555

404030(%)

120 *60

3530
2223252012

2013

2014

26

35314140120983510035498060
40

4402002011

2015

2016

2017

2018

2019

2020

2021

2022

2023 forecast(FY)* The exclusion of extraordinary impairment loss would result in dividend payout ratio of 48% for 2019.

Final Words
Under the current Midterm Plan, I will join all Sumitomo RubberGroup employees in assiduously working toward enabling our groupto reclaim a sound financial base and secure growth. Furthermore,
I will decisively execute measures designed to blaze a pathway

toward overall optimization. With regard to progress under theMidterm Plan, we will provide biannual opportunities for our stakeholders to receive status updates, with President Yamamoto serving
as a presenter.
Integrated Report 202334