Interview with Kazuhisa Shinoda, President and CEO, Oji Paper Group, Japan

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Over the past decade, the business environment for Japanese industries and companies has changed dramatically. Emerging economies such as China are seeing rapid economic growth, while the U.S. economy has remained buoyant. Globalization is now having significant impact. Some Japanese industries and companies have adapted successfully to these changes, while others have lagged behind. No company can expect to survive in the global arena unless they respond to the new conditions."

What are your impressions after your first year as president of Oji Paper?
It was an extremely busy year. Shortly after I took office in June 2006, we started to implement several major projects, including a scrap-and-build project that will enhance the cost competitiveness of Tomioka Mill. We also restructured production operations for printing papers, and focused on counteracting the effects of persistently high fuel prices and surging raw material prices.
Over the past decade, the business environment for Japanese industries and companies has changed dramatically. Emerging economies such as China are seeing rapid economic growth, while the U.S. economy has remained buoyant. Globalization is now having significant impact. Some Japanese industries and companies have adapted successfully to these changes, while others have lagged behind. No company can expect to survive in the global arena unless they respond to the new conditions.
That is why we are actively implementing reforms.
Globalization has also increased the inward and outward flows of goods. The scrap-and-build project at Tomioka Mill aims to enhance our price-competitiveness in response to inward flows of imported paper. The start-up of operations in China is a policy relating to outward flows. We have made great efforts and I believe that we have made tangible progress.

Please tell us about the aims of the new medium-term management plan.
This plan, which covers the four years from fiscal 2007 to fiscal 2010, is a response to a number of aspects of our business environment, including the maturation of the Japanese market and the expansion of East Asian markets, especially China. It also reflects our awareness of the impact of globalization in this context. [Ed.'s Note: see chart Oji Paper's View of the Business Environment]
These perceptions are reflected in the plan's basic strategies, which aim to accelerate the growth of the Oji Paper Group over the next four years. First, we will strengthen our business base through pursuing efficiency in the domestic business.
Second, through overseas expansion, we will work toward fulfilling our vision of Oji Paper as a global company capable of sustainable manufacturing of pulp and paper. Third, we will transform our corporate culture with the values of Passion, Sincerity and Teamwork.
What do you mean by "pursuing efficiency in the domestic business"?
Pursuing efficiency in the domestic business and overseas expansion are the plan's two pillars. Overseas investment inevitably entails greater risk than investment in Japan. Our business base in Japan is essential for a dynamic expansion of our overseas business operations.
Today, Oji Paper is Japan's biggest paper manufacturer. However, to stabilize our business base in the face of escalating competition, including foreign manufacturers, we need to make further improvements in our operations at home.
The core segments we have invested the most capital in are newsprint and publication and printing papers. Our top priority is to strengthen competitiveness in these areas. We have also decided to restructure production facilities and implement a scrap-and-build project at Tomioka Mill. These measures focus in particular on publication and printing papers, another core segment.
To further enhance competitiveness, we have integrated our sales and production operations by appointing the Mill Managers of our three main production facilities for coated printing papers as Deputy Division Managers.
We will also implement reforms targeting our distribution of publication and printing papers. The recent years' rapid changes in the industry's business environment have caused far-reaching restructuring within the distribution sector. Some agencies have been forced out, merged with wholesalers or absorbed by paper manufacturing groups.
We intend to be part of this process by improving our efficiency and competitiveness within the product supply chain. We have already made plans for warehouse standardization and the joint establishment of warehouses with major sales agencies, such as Japan Pulp and Paper and Kokusai Pulp and Paper. Measures such as these will cut distribution costs and help us to improve customer satisfaction, for instance through faster deliveries.
In the area of household products, we are developing a new marketing strategy that will be introduced in fiscal 2007. In the area of baby diapers, we have introduced new technology and rebranded our product range as nepia GENKI!
What measures will you use to accelerate growth under your "overseas expansion" strategy?
A major priority is the Nantong Project. We plan to establish integrated manufacturing facilities, starting with pulp production, in the rapidly growing Chinese market. After receiving approval in July 2006, we began to implement this project to produce 700,000 tons of pulp and 800,000 tons of coated paper in China. [Ed.'s Note: see chart Outlook for Coated Paper Supply & Demand in China]
Outlook for Coated Paper Supply and Demand in China
The need to negotiate contracts with our local joint venture partner has brought some delays, but we need to avoid hasty decision-making. We will be investing over US$2 billion in this project, and need to assess risks carefully so that appropriate safeguards are in place before work begins in earnest. In addition to having high expectations for our overseas operations in the area of communications papers, we also aim to further expand our already large share of the world market for thermal papers. In this area, our share of the U.S. market is already approaching 30%, and we have a 12% share in the European market. Our next priority is to expand our share in the growing markets of Asia. One target is to reach a 20% share of Asian markets other than Japan and China by replacing exports from Japan with increased production at our Thai subsidiary, OPT. [Ed.'s Note: see chart Outlook for Printing and Writing Paper Supply and Demand in Asian Markets
As we strive to meet growth in world demand, access to forest resources will also be a priority. In the past, our target for overseas forest plantations was 200,000 hectares. We have increased this target to 300,000 hectares. In January 2007, we took an important step toward reaching this target by establishing the Strategic Resource Management Division. Its mission is to ensure the successful expansion of our overseas forest plantations in cooperation with other parts of our organization, especially our Forestry Research Institute, which already has a solid track record.
A key aim of the plan is to transform the corporate culture. Please tell us more about this.
This is one of my top priorities. Oji Paper grew to its present size through a series of mergers. Those who used to work for smaller size company now form the nucleus of our management and business operations. However, Oji Paper itself and our business environment have changed drastical .ly, and I am convinced that we need to develop human resources who can adapt to these changes.
In static environments, people tend to become locked in routines. As president, I will encourage all employees to review their approach to work, and consider what they can do to enhance corporate value. That is why transforming our corporate culture is a key strategy in the medium-term management plan.

What quantitative targets are included in the new medium-term management plan?
The main targets are ordinary profit of at least Yen 100 billion, ROE of at least 7.0%, a D/E ratio of 1.5 times or lower, and an ordinary profit margin of at least 5%.
These targets show our strong determination. Obviously, future movements in fuel and raw material prices may affect our ability to achieve them. However, as long as China, India and other large nations continue to grow, long-term trends in resource supply and demand are likely to remain tight. We must devise policies that allow us to achieve ordinary income of at least Yen 100 billion despite inevitable rises in fuel and raw material prices.
Our investment will remain high over the next few years, due to restructuring of domestic operations to improve our international competitiveness, and the installation of new-energy boilers to reduce reliance on fuel oil. Work on projects in China will also begin in earnest. While investment in these and other areas will lay foundations for future growth, in the short term it will put significant pressure on earnings, and we will need to firmly focus on our goals for the next four years.

Based on trends so far, what is your performance outlook for the year to March 2008?
While we are continuing to reduce costs, increases in raw material and fuel prices are difficult to absorb. We expect net sales to increase by Yen 34 billion to Yen 1,300 billion, but ordinary profit is forecasted to be around Yen 22 billion lower year-on-year at Yen 42 billion. The decline includes a Yen 8 billion increase in depreciation costs resulting from a change in Japanese taxation.
Fuel and raw material prices are already beyond the level that can be absorbed through our efforts alone. The forecasted figure does not include the effect of our efforts to gain customer acceptance for our passing on of part of the cost increases resulting from these significant raw material price rises. This measure, if successful to a significant degree, will improve our earnings in the year to March 31, 2008 to a level similar to those of the years ended March 31, 2006 and 2007.
We are working hard toward this goal.
We plan to establish integrated manufacturing facilities, starting with pulp production, in the rapidly growing Chinese market. After receiving approval in July 2006, we began to implement the Nantong project to produce 700,000 tons of pulp and 800,000 tons of coated paper in China."

To conclude, do you have a message for the shareholders and investors?
Our basic stance is to increase shareholder returns while maintaining dividend stability. I believe that our present annual dividend of Yen 12 is not low compared with other Japanese paper companies. We increased the dividend in the year ended March 31, 2005 to reflect record income, and have maintained the dividend at this level despite challenging business conditions.
We will continue efforts to increase earnings in the short term, while also implementing measures targeted toward the future. We look forward to the continuing support and understanding of shareholders and investors.
[Source: Oji Paper, Japan. Interview posted on May 25, 2007]