Message from the Managing Executive Officer of Finance & Accounting Building on a Strong Balance Sheet, the IHI Group will Create a Virtuous Cycle of Growth Investment, Business Growth, and Shareholder Returns to Achieve Sustainable Enhancement of Corporate Value

Building Financial Foundations to Support Long-Term Growth

As its medium- to longer-term direction, the IHI Group has established a roadmap toward 2040. Until now, the Group has presented its Medium-Term Management Plan in three-year increments. However, many of the Group's businesses require 10 to 15 years or more before delivering results, making it difficult for a three-year management plan to adequately communicate the long-term growth story and the time horizon for investment recovery. To present these more clearly, the Group has established a roadmap that positions FY2026-FY2028 as “Phase 1,” focused on upfront investment and solidifying financial foundations; FY2029-FY2031 as “Phase 2,” focused on expanding operating profit and operating cash flow; and FY2032-FY2034 as “Phase 3,” focused on expanding free cash flow.

During the period of Group Management Policies 2023 (FY2023-FY2025), the IHI Group reviewed its business portfolio, including business divestitures, and carried out structural reforms designed to improve the profitability of its businesses. As a result, profitability has steadily improved, while capital efficiency and the Group’s ability to generate operating cash flow have also increased significantly. Following these reforms, the Group has finally laid the groundwork to pursue transformative medium- to longer-term growth.

The businesses that the IHI Group has identified as growth businesses, including civil aero engines, defense, and nuclear energy, are all expected to achieve strong global growth. To capture this robust demand with certainty, continued proactive investment is essential, including investments in research and development, capital expenditures, and human capital. A strong financial foundation is essential to sustain these investments over the long term.

Although shareholders' equity is steadily increasing as a result of improved earnings, the Group’s equity ratio and outstanding debt have not yet reached satisfactory levels. Over the medium- to longer-term, the Group has established targets of a D/E ratio around 0.5x or lower and an equity ratio around 35%. The Group believes these levels are necessary to absorb uncertainties in the external environment while executing an ambitious growth strategy. As the executive officer responsible for finance and accounting, I consider my most important responsibility to be building a strong balance sheet.

Proactive Investment in Growth Areas Under Disciplined Capital Allocation

In “Phase 1,” the IHI Group plans to invest ¥650 billion, primarily in growth investments. The Group classifies each business into one of three categories based on its role: “Growth Business,” “Development Business,” or “Stable Revenue Business.” For growth business, the Group prioritizes expanding the top line. For development-focus businesses, the Group aims to establish new pillars of revenue. Meanwhile, for stable revenue businesses, the Group seeks to expand profits and cash generation through its highly asset-efficient lifecycle business (LCB).

Businesses such as civil aero engines, defense, and nuclear energy all operate in markets that are themselves growing. To capture these opportunities, it is essential that the IHI Group execute investments proactively.

When making investment decisions for each business, the IHI Group places particular emphasis on the cash flow generation and ROIC. However, rather than evaluating ROIC as a single-year point-in-time metric, the Group considers it in balance with long-term returns. ROIC may decline immediately after an investment is made, and some businesses, such as the ammonia value chain and space infrastructure, require a longer-term perspective to develop. That is precisely why, based on the characteristics of each business, the Group assesses performance over separate short-, medium-, and longer-term time horizons, with particular focus on whether the business can generate sufficient cash and deliver returns that exceed the cost of capital. In addition to improving ROIC, the Group will reduce its cost of capital through engagement with the capital markets, thereby expanding the ROIC-WACC spread and enhancing corporate value.

As the executive officer responsible for finance and accounting, I also pay close attention to how the IHI Group approaches and manages risk. I believe risks can be categorized into three types: “risks we should take,” “risks we can take,” and “risks we must not take”. I will fully support taking the risks that are necessary for business growth. On the other hand, I have a responsibility to avoid risks that could threaten the Company's existence, no matter how attractive the investment opportunity may appear. Even outstanding technologies and ambitious concepts cannot contribute to the sustainable enhancement of corporate value unless they generate earnings and cash. As the executive officer responsible for finance and accounting, I will allocate the Group’s limited management resources, while maintaining financial discipline, to the business areas that are expected to create the greatest value.

Business Strategy and Financial Strategy: The Two Pillars Supporting Sustainable Growth

To ensure that the IHI Group’s growth strategy is not merely an aspirational vision but continues to be executed, it must be supported by a financial strategy that underpins the Group’s business strategy. In other words, advancing the Group’s business and financial strategies in an integrated manner is important for achieving sustainable growth.

Based on this philosophy, in April 2025 the IHI Group established the FP&A (Financial Planning & Analysis) team to oversee the Company's overall growth strategy. FP&A is a cross-functional team comprising members of the Finance Department as well as employees rotating in from business divisions. Working closely with the business divisions, FP&A Group connects business strategy and financial strategy while monitoring the progress of the strategy.

Corporate and business divisions, centered around FP&A, now work together as an integrated team to review monthly performance and discuss future outlooks. This not only accelerates the execution of growth strategies but also enables the early identification of potential issues and the prompt implementation of necessary countermeasures.

While reviewing business performance, the Group engages in thorough discussions on whether the assumptions underlying the forecasts established at the beginning of the fiscal year remain valid. If performance is expected to fall short of those forecasts, the Group examines the causes, determines what measures should be taken, and establishes when the shortfall will be recovered. Although this monthly process is by no means easy, the Group believes it is indispensable for achieving its management targets as one unified Group. The Group also believes that rigorous discussions from both perspectives enable it to pursue even higher levels of performance.

In this way, the IHI Group aims to contribute to enhancing corporate value by supporting strategy execution from a financial perspective through FP&A.

Enhancing Corporate Value Through Dialogue with the Capital Markets

To realize the IHI Group’s Desired State, enhancing corporate value requires the understanding and support of participants in the capital markets.

In the past, dialogue with the capital markets was conducted only by the President and the executive officer responsible for finance and accounting. Today, however, the IHI Group has expanded participation to include the Executive Vice President, Senior Executive Officers, and business leaders, transitioning to a structure in which the entire management team engages with the capital markets. As a result, the number of long-term-oriented shareholders who understand the Group’s longer-term growth strategy has increased.

The IHI Group believes that strengthening trust in the Company through this proactive dialogue with the capital markets will ultimately contribute to lowering its cost of capital and expanding the ROIC-WACC spread. Whether the Group’s business performance is strong or weak, it is committed to being a company that engages sincerely with the capital markets.

With respect to shareholder returns, in “Phase 1” the IHI Group will prioritize growth investments while aiming for sustained growth in dividends per share. As the Group progresses to “Phase 2” and “Phase 3” and free cash flow expands, it will consider strengthening shareholder returns, including through share repurchases. To further enhance shareholder returns in the future, the Group will steadily execute growth investments in the near term and expand profits, thereby increasing earnings per share and enhancing shareholder value.

My role is to achieve both disciplined growth investment and the establishment of a strong balance sheet that supports the IHI Group’s growth strategy over the medium- to longer-term. All management decisions ultimately come down to cash flow and the balance sheet. To realize sustained growth over the medium- to longer-term and further enhance corporate value and shareholder returns, I intend to insulate the company from downside risk and drive business growth from the financial side.