Sumitomo Forestry's value creation by wood

Long-term Vision Mission TREEING 2030

In 2022, the Sumitomo Forestry Group formulated its Long-term Vision Mission TREEING 2030, outlining our goals for 2030. In this Long-term Vision, we aim to provide three values to society through our business activities: namely, value for our planet, value for people and society, and value for the market economy. One of the pillars of our business policy is maximizing the value of forests and wood to realize decarbonization and a circular bioeconomy.
　Since our founding in 1691, our Group has consistently been involved in wood-related businesses. Wood has an important function known as carbon sequestration, storing carbon from the CO2 absorbed during its growth. By continuing to use logged wood for wooden buildings and furniture, carbon can be retained for a long period of time without being released into the atmosphere. At present, as global demand for decarbonization as a measure against global warming increases, we believe that our Group, which is expanding various wood-related businesses globally, will play an ever-expanding role in the future.
　We call our unique value chain, centered on wood and ranging from forest management to distribution and manufacturing of timber and building materials, wooden constructions, and biomass power generation, the Wood Cycle. By expanding this cycle globally, we will contribute to the realization of a decarbonized society through our business activities, as well as the conservation of the global environment, including biodiversity, contributions to people and society, and the creation of economic value. We are convinced that circulating the Wood Cycle through our own business activities will also lead to the realization of Sumitomo's Business Spirit of "Benefit self and benefit others, private and public interests are one and the same."

Review of the previous Medium-term Management Plan

During the three-year period from 2022 to 2024, which corresponded to Phase 1 of our Long-term Vision Mission TREEING 2030, we made progress toward laying the groundwork for future growth and contributions to decarbonization based on five basic policies: namely, 1. Efforts to address decarbonization challenges using wood resources; 2. Promotion of a more resilient earnings base; 3. Acceleration of global expansion; 4. Strengthen management base for sustainable growth; and 5. Further integration of business operations and ESG. We achieved net sales of 2,053.6 billion yen, surpassing 2 trillion yen for the first time, and recurring income of 198 billion yen, surpassing the initial plan of 173 billion yen by 25 billion yen to reach a record high, according to our consolidated financial results for the fiscal year ended December 31, 2024, the last year of the plan. Mainly with the help of the U.S. single-family homes business, the Global Construction and Real Estate business greatly surpassed the Medium-term Management Plan's goals. The domestic housing business also met the goals, primarily due to higher sales prices and profit margins in the primary custom-built detached housing business and the profit contributions of subsidiaries. However, weak domestic and international market conditions made it difficult for the Timber and Building Materials Business and the Environment and Resources Business to operate, offsetting the steep rise in timber prices brought on by the wood shock.
　In the Global Construction and Real Estate Business, we have used locally-driven management to establish advantages in our U.S. spec homes business, which is concentrated in the Sunbelt region where demand for housing is robust. In addition, rising mortgage rates have created a lock-in effect,*1 reducing the number of existing homes, which account for approximately 90% of the entire single-family home market, that come onto the market, but this has actually worked to the advantage of new home builders. In the U.S. real estate development business, we increased our position in multi-family rental housing starts to fourth largest nationwide, following the acquisition of JPI, which added to the existing capacity of Crescent. The U.S. real estate development market is currently facing a tough environment, with the issues of supply shortages and single-family home affordability*2 emerging. Therefore, we will grow our multi-family rental housing business from the medium- to long-term perspective of the chronic housing shortage.

1 Lock-in effect: The tendency to refrain from selling an existing home when refinancing from a low interest rate to a high interest rate is required. 2 Affordability: Refers to the ability to pay for a home, and is evaluated as the percentage of housing costs (rent or mortgage payments) to household income.

　In the single-family homes business in Australia, inflation caused material prices and labor costs to rise, while the COVID-19 pandemic caused chronic bottlenecks in administrative procedures and significant delays in construction progress, resulting in a challenging situation for some time. However, performance is recovering due to the significant increase in demand, mainly from first-time home buyers in Western Australia as well as the increase in sales prices and improved profit margins across the country. In November 2024, we acquired Metricon, the country's largest homebuilder, making it a consolidated subsidiary, thereby gaining an overwhelming share of the single-family homes business in Australia.
　In the domestic custom-built detached housing business, profitability deteriorated due to soaring prices for timber and various construction materials caused by the wood shock from 2021 to the end of 2022. However, by promoting the digitalization of marketing, including the expansion of our website, and restructuring our product strategy from first-time home buyers to high-net-worth individuals, and thanks to the effect of gradually increasing prices, we were able to secure orders while improving our sales prices and recovering our profit margins. On the other hand, in the Timber and Building Materials Business, the market environment remained challenging due to a decrease in the number of new housing starts and other factors. The Environment and Resources Division's forestry business suffered from a decline in the export log market, particularly to China, and increased expenses related to establishing reforestation sites, while the renewable energy business's profitability declined as a result of rising wood fuel prices.
　In terms of forests, under our business policy to accelerate circular forest management, we have seen steady progress in the acquisition of forest assets through our first forestry fund. Combined with the areas that we have traditionally owned and managed, the area of forests we are managing had reached 365,000 hectares as of the end of 2024. In addition, in the area of wood, under our approach aiming to promote wood change, we launched our first timber industrial complex called Kowa-no-mori in Iwaki City, Fukushima Prefecture, and are preparing to begin commercial production in 2026. In Mission TREEING 2030 Phase 1, we actively invested in M&A and new businesses to achieve our Long-term Vision. Following this, we are now working to complete the PMI*3 process to reap the benefits of these investments. We have secured approximately 80,000 lots, equivalent to more than seven years' worth of sales based on our 2024 results, which will be essential for expanding our single-family homes business in the U.S. However, it is becoming increasingly important to operate our business with an awareness of capital efficiency and inventory turnover. In terms of bottom line, we achieved our company profit target. However, we are heavily dependent on our overseas single-family homes business, and there are noticeable delays in our Timber and Building Materials and Environment and Resources businesses when it comes to achieving the targets of the Medium-term Management Plan. Therefore, we will closely examine each issue, identify businesses that need to be strengthened and improved, and those that need fundamental review, and reallocate management resources to optimize the overall situation.

3 PMI: Post-merger integration refers to the process of integrating management, organization, culture, etc. after an acquisition.

New Medium-term Management Plan Mission TREEING 2030 Phase 2

The Group has formulated its new Medium-term Management Plan Mission TREEING 2030 Phase 2, which will serve our Long-term Vision for the three-year period from the fiscal year ending December 2025 to the fiscal year ending December 2027.
　 The overall theme of this new Medium-term Management Plan is to dedicate "three years of reform and implementation for dramatic growth." We aim to achieve sustainable and steady profit growth by maintaining financial soundness and continuing to make aggressive investments.

Basic policy

The new Medium-term Management Plan sets out five basic policies. We will continue to deepen our global expansion, strengthen our management base to improve our earning power, contribute to decarbonization through our business activities, and further integrate our business operations and ESG.
　The business environment that forms the premise of the new Medium-term Management Plan is marked by a contraction of the domestic housing market due to a declining population, while the rental housing and renovation markets look to see stable demand for the time being due to inheritance planning and wealth effects. In the U.S. and Australian housing markets, although there are concerns such as rising construction material prices, rising labor costs due to chronic labor shortages, resurgence of inflation, and elevated interest rates, we expect solid demand due to a chronic housing supply shortage compared to the growing populations.
　In this business environment, we plan to achieve net sales of 3,220 billion yen and recurring income of 280 billion yen in the fiscal year ending December 31, 2027, which is the final year of the new Medium-term Management Plan. During the new Medium-term Management Plan period, we will aim for an extremely high average annual EPS growth rate of 14.7%, and plan for ROE to reach at least 15%, significantly exceeding the cost of equity of 7.4%.
　Following on from the previous Medium-term Management Plan, we plan to continue to make aggressive investments to achieve our Long-term Vision during the course of the new plan as well. We plan to invest a total of 413 billion yen over the next three years in our single-family homes business in the U.S. and Australia, which are driving our business growth, our real estate development business focusing on multi-family housing and medium- to large-scale wooden constructions, and the expansion of our wood building material manufacturing bases both in Japan and overseas. By promoting further business expansion through aggressive investment, we aim to achieve our Long-term Vision Mission TREEING 2030 ending in 2030. At the same time, keeping in mind the results of the previous Medium-term Management Plan and our aggressive investment plans for the future, we have raised our recurring income target for 2030, the final year of the Long-term Vision, from 250 billion yen to 350 billion yen. We aim to increase corporate value to the next level while expanding our management base both in Japan and overseas.