Business Performance

Business Environment

In fiscal 2016, ended March 31, 2017, the global economy was generally characterized by modest recovery. The Japanese economy remained in a moderate recovery phase in both the corporate and household sectors.

In this environment, demand in the flat-rolled aluminum industry was generally robust. Demand for sheet products benefited from an ongoing rise in demand for mainstay beverage cans and automotive materials. Demand for use in LCD and semiconductor fabrication equipment was also solid, pushing up overall domestic demand year on year. Total shipment volume, including domestic demand and imports, was up for the third consecutive year.

In extruded products, demand was favorable for products related to trucks and buses, as was construction-related demand. Consequently, total shipment volume was up for the first time in three years.

Within the wrought copper industry, the mainstay category of copper pipes for air conditioners benefited from firm domestic production of household and commercial air conditioners. As a result, domestic shipment volumes were up year on year in both categories.

Financial Results Overview

In fiscal 2016, the UACJ Group recorded a 1.3% year-on-year decline in net sales, to ¥568.3 billion. This slight decrease was the result of a decrease on a foreign exchange basis due to yen appreciation, as well as to a downturn in primary ingot prices, despite higher sales volumes centered on automotive materials and materials for use in LCD and semiconductor fabrication equipment.

Income was affected by costs associated with raising funds through a public offering and subordinated loans, but cost reductions due to the effects of integration exceeded our expectations. Also, increases in productivity and production volume at the Rayong Works of UACJ (Thailand) Co., Ltd. (“UATH”), pushed up the company’s performance, having a significant positive influence on Group results. In addition, energy prices decreased, sales volumes rose, and the negative effect of inventory valuations subsided due to a decline in primary ingot prices. As a result, operating income surged 70.1%, to ¥25.9 billion, and ordinary income was ¥19.8 billion, up 65.0%.

Ordinary income before the impact of inventory valuations, which measures real performance, was up 18.2%, to ¥24.0 billion. Adjusted EBITDA increased 8.6%, to ¥56.8 billion.

Net income attributable to owners of the parent was ¥8.7 billion, up 70.7% year on year.

Principal measures of operating performance

Unit: billions of yen

	Fiscal 2015	Fiscal 2016	Fiscal 2017 (Forecast)
Consolidated net sales	575.7	568.3	630.0
Consolidated operating income	15.2	25.9	36.0
Ordinary income before the impact of inventory valuation	20.3	24.0	25.2
Consolidated ordinary income	12.0	19.8	30.0
Net income attributable to owners of the parent	5.1	8.7	17.0
Adjusted EBITDA	52.3	56.8	60.4

Assumptions and sensitivities

	Fiscal 2016	Fiscal 2017 (Forecast)	Sensitivity on Ordinary Income
Nikkei average price of aluminum (¥/kg)	236	275	¥10/kg change→¥2.0–3.0 billion
LME ($)	1,688	1,900	$100/t change→¥2.2–3.5 billion
Foreign exchange (¥/$)	109	112	Almost no impact -Fuel and additional material: Positively affected by stronger yen -Rolling margin, forex conversion: Positively affected by weaker yen
Foreign exchange (¥/Thai baht)	3.08	3.30
Crude oil ($)	45	55	$10 change→Approx. ¥1.0 billion

Forecast for Fiscal 2017

Issues to be Addressed

We expect the Japanese economy to continue its modest recovery, sustained by ongoing monetary easing, a rebound in exports, firm consumption and capital investment. Overseas, however, we expect the situation to grow increasingly opaque. We foresee mounting geopolitical risk in the Middle East and the Korean peninsula. In addition, we have concerns about the direction of the new US administration’s policies and the impact of the United Kingdom exiting the European Union and see a Chinese economic downturn as a potential risk.

Under these economic conditions, we face the risk of rising energy prices, stemming from OPEC’s decision to reduce production and concerns about the US administration’s efforts to weaken the dollar. Despite such uncertainties affecting our operating performance, we will push forward with initiatives for specific development in each business area under Global Step I, our medium-term management plan, as we work to establish a revenue base that is resilient to economic fluctuations and ensure sustainable growth.

Financial Performance Forecast for the Next Term

Fiscal 2017 marks the final year of Global Step I, our medium-term management plan. During the year, we expect the sales volume to rise. In addition to sharply higher sales of can materials from UATH’s Rayong Works, we anticipate higher sales for the automotive sector and of products for LCD and semiconductor fabrication equipment. Taking into account these factors and the impact of a rise in primary ingot prices, we expect net sales to grow ¥61.7 billion, to ¥630.0 billion.

We expect profits to grow substantially, rising to the highest level since the management integration, due to higher sales volumes, further profitability improvements at UATH’s Rayong Works, cost reductions due to integration effects, and improved inventory valuations stemming from a rise in primary ingot prices. We anticipate a ¥10.1 billion increase in operating income, to ¥36.0 billion; a ¥10.2 billion rise in ordinary income, to ¥30.0 billion; and an ¥8.3 billion expansion in net income attributable to owners of the parent, to ¥17.0 billion.

We expect ordinary income before the impact of inventory valuation, which measures real performance, of ¥25.2 billion, up ¥1.2 billion year on year. We also forecast a ¥3.6 billion rise in adjusted EBITDA, to ¥60.4 billion.

※1 CUA: Constellium-UACJ ABS LLC　※2 UAAU: UACJ Australia Pty. Ltd.　※3 TAA: Tri-Arrows Aluminum Inc.

Returning Profit to Shareholders

Dividend Policy

We believe it is important to return profits to shareholders in the form of dividends. While our basic policy is to provide stable and sustainable dividends, we also comprehensively consider a variety of factors when making decisions on dividend amounts. These factors include trends in corporate performance, securing funds to invest in improving corporate value and R&D to boost competitiveness, and strengthening our financial standing.

Our general policy is to pay dividends twice annually: an interim dividend that is decided by the Board of Directors and a fiscal year-end dividend that is decided at the General Meeting of Shareholders.

The interim and year-end dividends for fiscal 2016 were ¥3 each. For first 2017, we anticipate a total dividend of ¥6 per share, comprising an interim dividend of ¥3 and a year-end dividend of ¥3.

Note: Figures are before changes in the number of shares constituting one trading unit and a reverse stock split (to change on October 1, 2017).

Financial Position

Balance Sheet Analysis

Total assets at the end of fiscal 2016 were ¥725.4 billion, up 9.5% from one year earlier, affected by the April 2016 acquisition of shares in UACJ Automotive Whitehall Industries, Inc. (UWH), a US company that manufactures and sells automotive aluminum structural materials and parts.

Total liabilities rose 8.9%, to ¥527.1 billion, due to the UWH acquisition and an increase in long-term loans payable for strategic investments in TAA’s Logan Mill and UATH’s Rayong Works.

Net assets were ¥198.4 billion, up 11.1%, due to increases in the capital stock and capital surplus as a result of new share issuance, plus a rise in retained earnings owing to the posting of net income attributable to owners of the parent.

Research and Development

The UACJ Research & Development Division, the heart of the Group’s R&D, aims to respond to diverse customer needs and environmental, energy and social changes by engaging in the basic development to technologies involving the utilization of products.

To accelerate the development of innovative products and technologies that are ahead of the times, in fiscal 2016 we continued to proactively liaise with leading-edge global research institutions. We also concentrated on nurturing human resources that can be active on a global stage and ensuring thorough compliance.

Total R&D expenditure amounted to ¥4.4 billion in fiscal 2016.

●Rolled Aluminum Products Business

For our mainstay flat-rolled aluminum products, the focus is on R&D that enables the Group to respond to increasingly diversified and sophisticated customer needs in a wide spectrum of fields, including can stock, automotive panel materials, automotive heat exchangers, air conditioners, IT-related devices, memory disks, thick plates for tankers and lithium-ion battery current collectors.

To raise productivity and lower manufacturing costs and environmental impact, we are developing new processes from both tangible and intangible perspectives and moving forward proactively with the introduction of IoT technologies. We are also pursuing the further development of simulation technologies and enhancing our basic technologies, such as by increasing the sophistication of analysis instruments. We are also participating in the Innovative Structural Materials Project, commissioned by Japan’s Ministry of Economy, Trade and Industry, in the aim of developing new alloys that can be used in the construction of next-generation aircraft.

Regarding extruded products, we are developing automotive heat exchanger materials—an area of strength—and pushing forward with the development of aluminum alloy materials to meet new demand in areas such as aircraft and automotive structural parts and smartphone cases.

Regarding cast products, we are proactively developing high-value-added aluminum components such as compressor wheels, which only a few companies worldwide have the ability to manufacture.

In fiscal 2016, we earned accolades for the tailored aluminum blank materials we developed for friction stir welded joints that connect materials of different thicknesses, winning the Cho Monozukuri Innovative Automotive Parts and Components Award together with our development partner, Pacific Industrial Co., Ltd.

R&D expenditures for rolled aluminum products totaled ¥4.3 billion in fiscal 2016.

●Wrought Copper Products

In the wrought copper products segment, we are developing high-strength copper pipe for air conditioners, contributing greatly to the development and mass production of air conditioners with higher performance and greater energy savings.

We are proceeding with the development of materials to prevent infestation by ant nests, and have begun mass producing a new alloy for this purpose. We were presented the 50th Research Paper Award from the Japan Copper and Brass Association for the clarification of this corrosion mechanism.

In fiscal 2016, R&D expenditures for wrought copper products totaled ¥0.1 billion.

●Precision-machined Components and Related Businesses

In the precision-machined components and related businesses, we are developing cooling devices such as a high-performance, precise power control devices, and have already begun sample shipments. We anticipate increased sales in this category, as demand for high-performance applications expands.

We are proceeding with the development of all-aluminum heat exchangers for air conditioners, utilizing the combined technological prowess of Group companies and applying technologies accumulated in the fields of materials and evaluation. Mass production commenced in fiscal 2015, and we are now working to increase sales further.

In automotive parts, we are mass producing and endeavoring to expand sales for our ultralight aluminum bumper system that complies with global specifications. We are also endeavoring to increase the scope of application for aluminum parts in response to growing demand for use in automotive structural materials in Japan and North America.

During the year, R&D expenditures for precision-machined components and related businesses was ¥5 million.

Capital Investment

Analysis of Capital Resources and Funding Liquidity

●Analysis of Cash Flows

Cash and cash equivalents totaled ¥41.1 billion as of March 31, 2017, up ¥22.3 billion from one year earlier.

Details of individual cash flows and the factors affecting them are described below.

Cash Flow from Operating Activities

Net cash provided by operating activities amounted to ¥28.4 billion, up 26.1% from the previous year. This was mainly because of an increase in income before income taxes and the shift from a decrease to an increase in trade notes and accounts payable.

Cash Flow from Investing Activities

Net cash used in investing activities was ¥55.5 billion, up 59.5%, mainly stemming from the acquisition of shares in the current UWH and investments in affiliates.

Cash Flow from Financing Activities

Net cash provided by financing activities amounted to ¥49.5 billion, up 342.7% year on year. This was due mainly to proceeds from the issuance of new shares and the raising of funds through long-term loans payable