#1IR Discussion Material About the TOKAI Group Energy (LP gas or city gas) Number of LP Gas Direct Sales Consumers: No. 3 in Industry (*1) Communication (Information and communication services for companies) TOKAI Holdings Corporation Communication (Fixed broadband) (ISP) Internet Service Provider Sales: No. 4 in Industry (*2) Communication (Mobile) = CATV CATV Sales in Urban Areas: No. 3 in Industry (*3) (TSE: 3167) Aqua • No. of Customers in the Water Delivery Business: No. 6 in Industry (*4) Housing construction and renovation Security Nursing, bridal and other businesses Sources: 1. LP Gas Annual Report Facts and Figures, 2015 Edition; 2. Nikkei MJ, Nov. 5, 2014; 3. Nikkei MJ, Nov. 11, 2015; 4. Japan Delivery Water & Server Association, Yano Research Institute Inc., Mineral Water Market 2015#2A Group Providing People with Lifelines A history of our continuous expansion of energy and other services indispensable for people's lives ■ TOKAI was founded in 1950. Engaged in a range of services from city gas to LP gas, we expanded our business area from Shizuoka Prefecture to the entire Kanto region. Moreover, we diversified into offering a wide variety of life-related services in the era of advanced growth. We are now vigorously developing our Aqua and nursing services in new fields. ■ Information and communication services, in which we have engaged in a full-fledged manner since the 1980s, have now grown into pillars of the gas business and the Group's earnings. NEW LIFE-RELATED SERVICES ■ Aqua business (2007~) Nursing business (2011~) FULL-FLEDGED PARTICIPATION IN COMMUNICATION SERVICES ☐ Dial-up Internet business (1996~) Broadband Internet business (2001~) Mobile business (2006-) ERA OF CREATING INFORMATION AND COMMUNICATION SERVICES ◉ System development business (1983-) Data center business (1985~) CATV broadcasting business (1988~) ESTABLISHMENT OF FOUNDATION OF ENERGY BUSINESS " City gas business (1950~) LP gas business (1959-) 1950 TOKAI GAS DIVERSIFICATION OF LIFE-RELATED SERVICES Housing facilities business (1970-) Wedding hall operation business (1972~) Insurance business (1973~) Security business (1984~) Holding company to create a system providing total solutions 1970 1980 1990 2005 2011 1#3Number of Retail Customers of the Group Robust earnings base of Group derived from monthly fee income from ongoing customer transactions As of March 31, 2015, the number of retail customers was 2.54 million. Of these, over 50% (1.32 million) are gas and CATV customers with connections built through face to face contact. Since the 2000s Internet, Mobile, and CATV customers have grown dramatically. 2.54 million 2.52 million 2.19 million 130 (Unit: thousand) Aqua 630 Gas (LP and City) Communication 1.58 million (Mobile) 860 690 Communication (Internet) March 31, 1990 March 31, 1991 March 31, 1992 March 31, 1993 March 31, 1994 March 31, 1995 March 31, 1996 March 31, 1997 March 31, 1998 March 31, 1999 CATV 1.14 million 0.89 million March 31, 2000 March 31, 2001 March 31, 2002 March 31, 2003 March 31, 2004 March 31, 2005 March 31, 2006 March 31, 2007 March 31, 2008 March 31, 2009 March 31, 2010 March 31, 2011 March 31, 2012 March 31, 2013 March 31, 2014 March 31, 2015 Weaker Customer service Stronger 2#4Actively Expanding Regionally Customer base has spread from Shizuoka Prefecture and the Kanto region to all over Japan ■ TOKAI possesses a strong customer base, mainly in Shizuoka Prefecture and the Kanto region (Tokyo and 6 prefectures), the largest domestic commercial zone. TOKAI'S CATV business has spread to Nagano and Okayama prefectures. Our share of the broadcast-available area of Nagano Prefecture exceeds 90%, and we provide community- based broadcasting and communication services. We have developed our ISP and Aqua businesses nationwide, and we have customers throughout Japan. Over 1,000,000 Shizuoka (1) Over 200,000 ▪▪▪Kanagawa, Saitama, Chiba (3) Over 100,000 ・・・ Tokyo, Nagano, Okayama (3) Over 30,000 ■■■Tochigi, Ibaraki, Gunma (3) Over 5,000 ■■■Fukushima, Aichi, Miyagi, Niigata, Yamanashi (5) Shizuoka Head Office and Tokyo Head Office Over 1,000 ■■■Gifu, Osaka, Mie, Yamagata, Hyogo, etc. (8) Branches and offices of operating companies Under 1,000 ■■■ Aomori, Fukuoka, Hiroshima, Kyoto, Shiga, etc. (24) 3#5Operating Income by Segment Earnings created by the gas business stabilizes Group earnings and generates cash for growth businesses As regards information and communication services, in this fiscal year (FY2015) TOKAI started the full-scale Hikari collaboration*1 and has made upfront expenses (¥3 billion) to strongly uncover and win new customers. The CATV business has posted stable earnings, despite the impact of the completion of terrestrial digitization in FY2012. Sales of the FTTH communication service by itself have grown into the broadcast-available households area, and from now on we expect a further expansion of earnings. The Aqua business, in which eight years have passed since its launch in FY2007, has been developing nationwide since FY2013, and should go into the black in FY2016. FY2011 FY2012 FY2013 FY2014 Result Result Result Result FY2015 Forecast FY2016 Plan Gas and (\billion) 7.8 7.4 6.5 7.7 7.9 7.5 petroleum Information and (\ billion) 5.5 4.9 4.4 5 2.7 5.2 communication CATV (\ billion) 2.3 1.3 1.8 1.7 1.8 2 Building (\ billion) construction and 1 0.6 1.4 1 1.4 1.9 real estate Aqua (\ billion) - 0.9 - 0.9 - 2 - 1.3 - 1 0.2 Other businesses (\billion) - 4.8 - 4.3 - 4.7 - 5 - 5.1 - 4.2 and adjustments All companies (\ billion) 10.9 8.9 7.4 9 7.8 12.6 *1. Hikari collaboration: A model where NTT provides ISP operators and others with optical fiber lines they can use to provide their own-branded optical fiber broadband services. *2. On basis of before allocation to indirect expenses, etc. *3. Forecast for FY2015 was disclosed in May 2015. Plan for FY2016 was disclosed in June 2014. 4#6Medium-term Management Plan Innovation Plan 2016 "Growing" An aggressive plan to raise earnings to record levels in FY2016 TOKAI regained financial soundness by the FY2011-FY2013 medium-term management plan (Innovation Plan 2013), which had been our maximum concern. Currently, we are proceeding with the next medium-term management plan (FY2014-FY2016): Innovation Plan 2016 "Growing." TOKAI aims to achieve an approximately doubled EPS compared with the end of FY2013 to raise earnings to record levels in FY2016. (Operating income of ¥12.6 billion and net income of ¥6.2 billion.) ■ TOKAI also aims to achieve a capital adequacy ratio of about 30%, and plans to have interest-bearing liabilities at the level of half the figure of ¥124 billion, as they were before the Group integration in FY2010. FY2010 Result FY2013 FY2014 FY2015 FY2016 Result Plan Plan Plan Net sales (\ billion) 174.9 189 196.9 202.3 209.5 Operating income (\ billion) 10.8 7.4 8.2 9.7 12.6 Net income (\ billion) 2.2 2.6 3.2 4.0 6.2 Net earnings per share (\/share) 30.48 22.67 27.86 34.91 54.06 EBITDA (\billion) 26.3 24.9 25.2 26.7 28.7 Interest-bearing (\ billion) 124 85.8 81.8 74.1 64.7 liabilities Capital adequacy ratio (%) 7.7 21.6 23.0 25.1 28.6 5 * FY2014-FY2016 plan was disclosed in June 2014#7Progress With Medium-term Management Plan (1) Earnings This fiscal year, the final year of the plan, TOKAI should adequately get the benefit of the advance investment made in sales promotion costs for the fiber optic broadband service collaboration ☐ In FY2014, net income exceeded the innovation plan IP16 and achieved a record figure. This fiscal year (FY2015), TOKAI started the full-scale Hikari collaboration and will incur one-time reduced earnings due to the current upfront expenses (¥3 billion) for sales activities to win new customers. (From next fiscal year, TOKAI expects increased earnings from fee income and so does not expect any impact on FY2016 earnings.) Performance in the first half of FY2015 saw profits significantly exceed initial plans and steady progress is being made toward full-year projections. Uncertainties are inherent in the LP gas business in the second half, so we will defer revising the full-year forecast. The main factors for increased earnings from FY2015 to FY2016 are improved earnings in the Aqua business, increased earnings in the Hikari collaboration, increased earnings due to a larger number of customers mainly because of an expanded LP gas area, and reduced expenses due to the end of the amortization of goodwill generated at the time of the management merger. ■IP16 results and plan 8.2 12.6 IP16 54.06 results and plan Earnings per share (\/share) 34.16 12.6 9.7 6.2 6.2 9.0 28.05 4.0 7.8 3. 3.9 3.2 FY2014 FY2015 FY2016 FY2014 FY2015 FY2016 IP16 results and plan 28.7 28.7 26.2 25.2 26.7 25.3 FY2014 FY2015 EBITDA (¥billion) FY2016 Operating income (\ billion) Net income ( billion) * IP16 was disclosed in June 2014. Actual and Planned denote FY2014 actual results and forecasts for FY2015 (disclosed in May 2015) and FY2016 (disclosed in June 2014) 6#8Progress With Medium-term Management Plan (2) Financial Conditions TOKAI expects to achieve the plan targets for improving financial conditions by the end of the first half of FY2015 ■ The improvement in financial conditions has now exceeded the IP16 pace. TOKAI expects to achieve targets for both capital adequacy ratio and interest-bearing liabilities in FY2015, due to increased net income in FY2014 and to increased operating cash flows. 81.8 IP16 results and plan 74.1 73.1 72.5 64.7 63.1 FY2014 FY2015 FY2016 IP16 results and plan 30.1 28.6 26.1 25.7 25.1 23.0 FY2014 FY2015 FY2016 Interest-bearing liabilities (¥ billion) Capital adequacy ratio (%) * IP16 was disclosed in June 2014. Actual and Planned denote FY2014 actual results and forecasts for FY2015 (disclosed in May 2015) and FY2016 (figures disclosed in June 2014 from beginning of the period for actual results and reflecting forecasts) 7#9Breakdown of Capital Investment During FY2014-FY2016 TOKAI is investing ¥34.7 billion over 3 years, and is allocating 63% as growth investments to increase the number of retail customers and other businesses The main businesses receiving investments are gas and petroleum, CATV, and information a communication services. Of this, ¥21.9 billion, or 63%, is growth investment and the remaining ¥12.8 billion will be maintenance investment for existing equipment. The main growth investments are directed at the gas business (LP and City), facilities to win new customers in the CATV business, expanding facilities for optic-fiber trunk line transmission to expand communication demand for companies, together with data centers. TOKAI is also investing in mega solar. 0.9 billion Building construction and real estate 3.8 billion 0.6 billion 0.2 billion Gas and petroleum Growth investment 10.1 billion 21.9 (63%) Information and communication services 9.4 billion Capital investment during FY2014-FY2016 34.7 billion ■LP gas conduits for customer facilities ■ City gas conduits for facilities ■ CATV-FTTH facilities Expansion of optic trunk-line transmission facilities ■ Data center facilities Mega solar CATV 9.7 billion * FY2014-FY2016 plan was disclosed in June 2014 Investment to maintain facilities 12.8 Breakdown of capital investment 80#10FY2014-FY2016 Cash Flows TOKAI has created ¥41.3 billion in free cash flows, as underlying assets for debt repayments or shareholder returns ■ As regards cash flows during FY2014-FY2016, operating cash flows should exceed IP16 and free cash flows should also exceed plan targets. ■ Free cash flows are forecast to significantly exceed ¥3 billion. (Units: billion) Operations cash flows 70.8 Free cash flows 37.8 Investment cash flows 33.0 Operations cash flows 72.9 Free cash flows 41.3 Investment cash flows 31.6 Innovation Plan 2016 "Growing" FY2014 results and FY2015-FY2016 plan (Disclosed in June 2014) (FY2015 forecast was disclosed in May 2015, FY2016 plan was disclosed in June 2014) 9#11Approach to Shareholder Returns TOKAI's policy in FY2015 is to achieve a total return ratio of 100%. Aiming for a dividend payout ratio of 40%, TOKAI's approach is to achieve stable dividends, and when surplus cash has been generated, we will flexibly return it by purchasing TOKAI shares or alternative methods. For FY2015, the annual dividend is expected to be ¥12 (comprising an interim dividend of ¥6 and a year-end dividend of ¥6), and the total dividend amount to be ¥1.4 billion. In addition, we intend to purchase ¥1.8 billion of treasury stock because our business results have been progressing steadily toward the final fiscal year of IP16. Moreover, on November 6, 2015, TOKAI canceled 15.52 million of its treasury stock, representing 10% of its issued common shares. (Units: \ billion) 100.0% 4 3 Dividend Share buy-back Total return ratio 90.0% 70.0% 52.9% 44.2% 40.2% 1.8 50.0% 2 35.1% 30.0% 1 1.2 1.3 1.4 1.4 1.4 10.0% 0 -10.0% FY2011 FY2012 FY2013 FY2014 FY2015 10#12Expanding the Area of the LP Gas business Aiming to further stabilize and expand TOKAI's earnings foundation, including through M&A ☐ TOKAI has been pursuing the expansion of its sales area from the beginning of the current fiscal year. (We are newly advancing into one prefecture in South Tohoku and Tokai area.) Not limiting ourselves to electricity set plans alone, TOKAI will also simultaneously provide a set menu for Aqua, communications, broadcasting and lifestyle-related services. As the only Group capable of doing so, we will utilize this strength to push ahead with finding new customers. 1 South Tohoku area ■ LP gas market of 530 thousand households 2 Tokai area LP gas market of 2,030 thousand households 3 Koshin area LP gas market of 930 thousand households 2 (3) ...New area ■■■Kanto area and Fukushima Prefecture ■■■Shizuoka Prefecture 1 Shizuoka Prefecture ப LP gas market of 820 thousand households TOKAI share: 19.6% (Top share in Shizuoka Prefecture) Kanto (Tokyo and 6 prefectures) + Fukushima Prefecture LP gas market of 6,320 thousand households TOKAI share: 6.3% (No.2 in Kanto) 11#13Opportunity for Further Growth Through Cross-selling Currently, only 7% of customers make multiple transactions, so there is still a lot of room for future growth. ☐ ☐ The TLC Members Service was formed in December 2014 with the aim of capturing the business of customers engaging in multiple transactions, and currently the Service has 440 thousand members. The effect of the Service has been that 40% less members terminate their contracts as compared to non-members. Looking ahead, it will effectively reduce costs by anchoring customers. ☐ Cross-selling by vigorously recruiting members has led to TOKAI gaining results from over five times as many members as non-members. 93% 7% 50 50 Number of members of the TLC Members Service 44 42 40 40 38 36 30 29 31 33 20 30 20 25 16 9 10 0 March 31, Sept. 30, Sept. 30, Dec. 31, March 31, Sept. 30, Sept. 30, Dec. 31, March 31, Sept. 30, Sept. 30, 2013 2013 2013 2013 2015 2014 2014 2014 2014 2015 2015 The ratio of terminated contracts of members and non-members TLC non-member Ratio of customers doing multiple transactions Note1: The ratio of terminated contracts is the result of calculating the number of terminated contracts during the year of FY2014 divided by the number of customers at the beginning of each month in FY2014 Note2: The ratio of cross-selling contracts is the result of calculating the number of customers who did cross- selling each month during FY2014 divided by the number of customers at the beginning of each month in FY2014 TLC member (Note 1) The ratio of cross-selling of members and non-members (Note2) TLC non-member 0.67% 1.19% 0.88% 0.00% 0.50% 1.00% 1.50% TLC member 3.55% 0.00% 1.00% 2.00% 3.00% 4.00% 12#14Tie-up With Tokyo Electric Power Company (TEPCO) in Response to Electric Power Deregulation TOKAI will also provide services to 20 million households that are customers of TEPCO, independent the Group's 2.54 million customers ☐ TOKAI officially agreed on an official tie-up with TEPCO to sell electricity, and from the same day started selling high-voltage electricity to customer companies in the service area of Chubu Electric Power Co., Inc. At this year's end, TOKAI plans to announce a set menu for the sale of gas, other Group company services, and electricity. From October, TOKAI has started PR activities about being engaged in electricity sales, and from January 2016 TOKAI will start accepting business reservations. Targeting households and companies that will be completely affected by retail sales of electricity after electric power deregulation (Service area of TEPCO and Chubu Electric Power) TOKAI offers business benefits to customers that sign contracts for set products Various business products and service-charges plan Electricity-charges plan in response to electric power deregulation TOKAI Group LP gas Security Hikari CATV Aqua collaboration LPガス セキュリティ 光コラボ CATV アクア AAA Ly 放送+通信 Provision of Total Life Concierge (TLC) services TEPCO Electricity 電気 Provision of stable electricity power by virtue of possessing the largest power supply in Japan 13#15Promotion of Cross-selling Utilizing Electric Power Sales Opportunities Starting with the sale of electric power services that are popular in all households, TOKAI is promoting a set menu of the Group's business products Comprehensively proposing (through a set sales menu) the wide variety of life infrastructure services TOKAI possesses by means of the total 1.5 thousand customer-support staff having face-to-face meetings with customers. For customers, TOKAI will contribute to reducing monthly infrastructure costs by about 10%, and examine the effect on the Company of increasing earnings by 40%. Hikari Aqua collaboration 光コラボ アクア TLC points LP gas LPガス AAA Current membership service Electricity CATV 電気 セキュリティ 放送+通信 Addition of TOKAI'S electricity CATV Security Further addition of the Group's business products TLC ポイント Points reflecting monthly usage Points reflecting no. of contracts Benefits gained from using the TLC Members Service LP gas LPガス LP gas Electricity Hikari collaboration LPガス 電気 AAA AAA LP gas Electricity Hikari Aqua collaboration 光コラボ LPガス 電気 光コラボ アクア AAA TOKAI's profit 100 130 Customer's monthly cost About 5% reduction 140 About 10% reduction 14#16Future Growth Opportunities for the Group Aiming for further growth, TOKAI will expand its earnings foundation by area expansion and promoting membership services TOKAI will expand nationwide from peripheral areas by using the community-based life infrastructure service provision model that has been established in Shizuoka Prefecture and throughout the Kanto region. Seizing the opportunities provided by electric power deregulation, TOKAI will push ahead with cross-selling using the foothold of electricity sales in order to reduce customer anchoring costs and to efficiently improve earnings by multiple transactions. Expansion of area (M&As) Membership Cross-selling/ Preventing termination of contracts LP gas LPガス AAA 電気 Shizuoka Prefecture and throughout the Kanto region Retail 2.54 million customers Community-based life infrastructure service アクア Life Infrastructure Services Product Lineup Enhancement CATV Aqua Electricity Hikari collaboration 光コラボ T TOKAI GROUP セキュリティ 放送+通信 Security CATV 15#17Promote Various Further Collaborations Toward Topline Growth Enhance the Lifestyle Infrastructure Business lineup through alliances with many influential businesses Astomos Energy Rinnai Astomos Energy (Gas suppliers) - SoftBank SoftBank (Mobile phone agency) エアウォータ AIR WATER (Aqua service partners) Rinnai (Gas device suppliers) TEPCO ((Electric power) supply. partners) fiojima Nojima (ISP service acquisition partners) 立ちどまらない保険。 MS&AD Aioi Nissay Dowa Insurance (Insurance agency contractors) BUILT ON Microsoft Azure ☑ SOFTLAY-R Microsoft (Connection service partners of TOKAI cloud service). an IBM Company IBM Japan (Connection service partners of TOKAI cloud service) סיב Kojima (ISP service acquisition partners) NTT NTT (Optical fiber broadband line suppliers) KS ケーズデンキ K'S HOLDINGS (ISP service acquisition partners) ALSOK EON ALSOK (Security service partners) Google Cloud Platform Google (Connection service partners of TOKAI cloud service) AEONRETAIL (Members card service partners) IIJ GIO Internet Initiative Japan (Connection service partners of TOKAI cloud service) Designing The Future KDDI KDDI (Optical fiber broadband line suppliers) J:COM J:COM (Broadcast content buyers) TIT powered by amazon web services Amazon Data Services Japan (Connection service partners of TOKAI cloud service) TechFirm Techfirm (Systems development partners) 16#18(Summary) Attraction and Growth Opportunities of the TOKAI Group Expand the earnings base through both service area expansion and cross- selling promotion, which will further improve corporate value ⚫ TOKAI, engaged in LP gas, information and communications services, CATV, Aqua, and real estate businesses, is made up of a unique set of companies unprecedented in Japan. In the future, we will use this differentiation to further enhance our corporate value. Among these companies, the Group has more than 100 locations, about 1,500 sales representatives, and 2.25 million customers in Shizuoka Prefecture and the Kanto region (1.16 million customers in Shizuoka Prefecture and a strong customer base of 1.09 million customers in the Kanto region has been established as a result of our track record). • We will continue to efficiently expand our earnings base on the two key points of service area expansion and cross-selling promotion. To build a more robust earnings base, we must expand the current business area to include more regions of Japan and build up our customer base further. If we combine cross-selling with the current 2.54 million customers and sales of ¥200 billion, there is hidden potential to increase operating income to ¥12 billion. We are hopeful this will come about. Package contracts deployed by the Group will bring in three times more revenue than sales based on the LP gas business alone. Currently, only 7% of customers have package contracts. We aim to expand power machine sales to all households, including existing customers and new customers, as it is possible to start promotion of the set sales menu in hopes of effectively improving profitability. In the past, our financial structure was fragile with a high debt ratio and significant improvement was possible before the previous medium-term management plan (FY2011- 2013). In the future, we will shift our focus to ROE, while leveraging profitability improvement measures. For profit growth, we believe we must aggressively increase topline growth, including through M&A. In the Innovation Plan 2016 "Growing" period, we're thinking to strengthen shareholder value. The goal of the plan achievement of the final year of FY2016, we want to consider, actions such as dividend hikes and share buy back.#19These materials contain projections and other forward-looking statements on management's judgments derived from information available at the time of formulation, and include potential risks and uncertainties. Various factors may cause actual results in the future to differ materially from projections and other forward-looking statements made within these materials. For inquiries regarding these materials, please contact the following overseas investor's contact office. TOKAI Holdings Corporation Public Relations and Investor Relations Office 2-6-8, Tokiwa-cho, Aoi-ku, Shizuoka City 420-0034 TEL:+81-(0)54-669-7676 FAX:+81-(0)54-275-1110 http://tokaiholdings.co.jp E-mail: [email protected] うれしいをつなぐ。 ひろげる。 T TOKAI GROUP 18