Michihisa Shinagawa
President and Chief Executive Officer
Sumitomo Corporation of America
2007 Annual Report President's Message
Our 2007 fiscal year ending March 31, 2008 closed on solid footing in a year of significant volatility in the world economy. In the United States, what had been a very robust and expanding economy for several years, began to slow toward the last half of FY 2007. The combination of the mortgage crisis, rising oil prices and global inflation all had a significant effect on many business sectors throughout the United States.
Given the diversity of the many lines of business and industries we are involved in, it is natural to expect cyclical changes in our results when the marketplace dramatically fluctuates as it has.
I am pleased to say that Sumitomo Corporation of America (SCOA) managed well considering the marketplace turmoil toward the end of 2007. Although our results did not match last year’s record-breaking earnings, we remained financially strong with a consolidated net income, of $204 million. It was a challenging year, but I am very proud of what SCOA has done to effectively minimize adverse effects from all the unforeseen changes in the global economic and business environment in 2007. Through our on-going medium-term management plans like the AG (Achievement & Growth) Plan that we implemented in 2005-2006 and the GG (Great & Growing) Plan that we initiated in 2007, we have been continuously focused on enhancing our earnings base with new growth, while at the same time closely managing asset risks and inventories. Over the years, this careful building and monitoring of our business basics has helped us be better prepared to deal with economic changes and take advantage of opportunities. As a result, our credit remains strong, allowing us to continue to pursue good investments and expansion in a marketplace that was starting to contract in late 2007.
Overall, our consolidated earnings showed stable growth in many of our core business areas, with even exceptional results in a few.
We saw very good performance from business groups such as Tubular Products and Living-Related Business, which includes the Real Estate unit and our largest subsidiary, TBC Corporation, an independent marketer of automotive replacement tires.
The Tubular Products group continued to provide a substantial source of income for the company, although there were slightly lower margins and profitability than the year before due to increased competition and supply in 2007. With the escalating oil and gas prices as well as increased drilling activity, we anticipate this business will continue to flourish. Also, our Tubular Products group maximizes its worth through their ability to supply high quality products and also manage the logistics and supply chain for its customers. By expanding their role from supplier to a solutions provider in logistics, they are strengthening their bond with their customers and are providing value-added services, rather than just functioning as a commodity-driven business.
In the Living-Related Business group, the Real Estate unit continued its strategy of maximizing financial returns by managing its asset portfolio. In 2007, the Phelps Dodge Tower in Copper Square, a commercial office building in Phoenix, Arizona, was sold for an after-tax gain of approximately $32 million. I expect they will continue their portfolio management strategy through timely acquisition and selling of prime real estate.
The Living-Related Business group’s consolidated subsidiary, TBC Corporation, showed improvement in operating results by optimizing their organizational structure. This resulted in a positive change in net income.
Overall, our business foundation remained strong in 2007. We saw our Machinery, Power and Electronics group contribute good results, with several units, including Aerospace & Defense, Construction Equipment, Automotive and Power businesses showing good expansion. In 2007, Hamilton Sundstrand Space Systems International (HSSSI), a SCOA affiliate, was awarded a contract to create 13 key systems for NASA’s Orion Crew Exploration Vehicle (CEV) under Project Constellation. The CEV will succeed the Space Shuttle as NASA’s primary human space exploration vehicle. This was a milestone win given the 15-year duration of their contract.
Although the auto industry consumer market was hit hard by the rise in gasoline prices, our supplier business to automotive manufacturers remained strong. The same can be said for the construction equipment business. Even though the US market saw a drop in sales due to the slump in residential construction, Canada experienced excellent growth, driven by the increase in mineral resource development.
Our Mineral Resources & Energy Group continued the expansion of its businesses. With growing concerns over a shortage of natural gas in the United States, the group’s subsidiary, Pacific Summit Energy, focused on taking advantage of the important role Liquefied Natural Gas (LNG) will have in the future. With a well-established business in the western United States, they expanded their presence in the North American energy industry last year and opened an office in Houston, Texas, where they now have a broader base to purchase and sell natural gas to utilities, independent power producers and commercial and industrial companies.
SCOA also continued its activities supporting Sumitomo Corporation’s global mineral resources development. SC Minerals America, which owns interests in four operating mines, including two copper mines in Chile, a copper mine in Arizona and the Pogo gold mine in Alaska, continued its strategic expansion in the mining business. Last May, the Pogo mine opened for operation with commercial production and its mill at 80% capacity. The Pogo mine is considered to be one of the highest quality mines in the world, containing an average of 15 grams of gold per ton.
As our business model has evolved from being primarily a trading company, to investing in companies that enrich our core business strategies, we have seen a growth in earnings contributed by our consolidated group companies.
The strong results of consolidated subsidiaries like Oxford Finance Corporation are a good example of that.
In 2007, Oxford Finance Corporation, a provider of financing to companies in the life sciences industry showed remarkable growth in its portfolio of life science companies engaged in research, development and manufacturing of human therapeutics, diagnostics and medical devices. These companies are at various stages of growth, from start-up through post-IPO and are positioned to utilize SCOA’s resources to assist with drug and diagnostics licensing, research and development collaborations for pharmaceuticals, medical devices and equity investments.
The downturn in the economy did have a negative impact on some of our business groups, such as our Chemicals group. Their results suffered in comparison to the prior year due, in part, to the slowdown in the US residential real estate market and higher prices of raw materials. These factors impacted the operating results of one of their large companies, Cantex, a manufacturer of PVC pipe and conduit products for construction and home building. This business is relatively cyclical and we anticipate it will recover when the housing and construction market starts to improve. When it does, Cantex is poised to capture a larger market share, having opened a brand new manufacturing facility in Kingman, Arizona, last year that gives them a stronger presence in the western United States.
The Hartz Mountain Corporation, a subsidiary which manufactures and distributes pet products, felt some impact from the slowing economy. Hartz’s profitability was slightly less than expected in 2007 because of a drop in consumer spending. However, as pet ownership continues to grow, this market has great potential for expansion. We anticipate that this business will improve as the consumer market stabilizes.
Going forward, we will maintain revenue streams from businesses showing good potential and growth, and we will also continue to build on our strong business ventures in Canada, Mexico and South America. At the same time, we will continue to manage our asset portfolio to strengthen our total investment base, as we did last year when we sold subsidiaries such as Broadway Premium Funding, which had reached maturity and gave us a good return.
In 2007, we also invested in businesses to give us entry into new industries that we are targeting for future growth. We launched into the field of alternative energy sources and established Katana Summit, LLC, a manufacturer of wind turbine towers. We acquired Southern Illinois Railcar Company to establish a presence in the US rail car leasing business and we also invested in Presperse LLC, expanding SCOA’s activities in the global cosmetics market. And we established Summit VetPharm, a new animal health company marketing parasiticides like flea and tick topicals dispensed by veterinarians for use on companion animals.
We also increased our activities in infrastructure projects such as the development of transportation systems for urban transit, including light rail and Automated People Movers (APM). As concerns about the high costs of fuel and protecting the environment become increasingly important, more and more cities are looking for energy-efficient methods of mass transportation such as trains.
We believe that the environmental business opportunities will continue to grow, and we are already preparing for that growth. I am confident that both our experience and our ability to understand markets locally as well as globally give us a competitive advantage to excel in these new ventures.
As the business climate in the United States continues to change, the implications are clear; we must be agile and maintain our broad base of diversification to stay strong. We must anticipate the unexpected and continue to invest and acquire profitable businesses at reasonable prices.
While maintaining strong profit is important, it is also critical that every one of our employees conducts themselves according to the principles of our Code of Business Conduct. We must all individually practice sound and ethical judgment as we go about our business activities.
During uncertain business climates and volatile investment markets, it is important to maintain sound investment strategies and solid core businesses. The improvements we have made in 2007 and our continued focus on the expansion of core business areas through our medium-term management plans are paying off. But we know there is more to do. We will continue to carefully evaluate each of our business areas to find expansion opportunities and to find ways we can improve our results through more cost effective use of resources.
2007 may be remembered in part for starting the ripples of economic pessimism, but I remain optimistic as we look forward. I think SCOA is well positioned to take advantage of emerging opportunities. We have generated good momentum that will keep us focused on our goals to stay competitive for the long term. Continuing these efforts will help us maintain our competitive edge and our profitability in the years ahead.
Michihisa Shinagawa
Sumitomo Corporation of America
President and Chief Executive Officer
