Message from the President

Introduction

In fiscal 2022, the SMCC Group reported a deficit for the second consecutive fiscal year, due in part to having recorded significant additional losses in connection with an ongoing large-scale domestic building construction project. I would like to offer my sincere apologies to our shareholders and many other stakeholders for any and all concerns and inconvenience experienced in relation to this.

In May 2023, we established additional measures in response to this significant downturn in the performance of our building construction business and conducted a review of our Mid-term Management Plan 2022-2024 to reflect these, taking into account the rapidly changing business environment and the progress of our various strategies.

Our newly established policy for our domestic building construction business includes significantly reducing the volume of new orders to be accepted, making progress on clearing our lengthy backlog of existing projects, and working to establish appropriate construction systems. Meanwhile, our policy for our domestic civil engineering business and overseas business, both of which have maintained a solid performance, will be to continue steady expansion. We have also set the same consolidated net sales target for fiscal 2024 (the final year of our current Mid-term Management Plan) and fiscal 2027, three years later, and will continue with efforts to rebuild a business framework that will allow us to generate stable profits over this period.

In fiscal 2023, we expect net sales to remain roughly on par with those of the previous fiscal year and to boost our operating income into positive figures. We are also aiming to quickly build up our financial health. To do this, we are moving forward with efforts to streamline our assets ― including by improving our fund balance and reducing our holdings of cross-shareholdings ― to strengthen the foundations of our business with a view to recovering our business performance.

Looking Ahead Toward Mid- to Long-term Growth

Aiming to Be a Company That Employees Feel Lucky to Work With

As a construction company, it goes without saying that people are our greatest asset. To me, the ideal company is one that employees feel lucky to work with, and that exists to bring happiness to its employees and others connected with the company. My approach since my appointment as the company's President in April 2021 has involved numerous visits to branches and worksites, where I listen directly to employee feedback and then incorporate this into the company's management.

This sustained dialogue has allowed me to form my own impressions on several points. One of these is that many of our employees have a sense of pride and confidence associated with working at Sumitomo Mitsui Construction. I believe that this is thanks to the track record and legacy the company has built up over our long history. Yet at the same time, I also realized that there are many instances in which our employees are not necessarily gaining a sense of fulfilment as they work to achieve their dreams or in the individual jobs they complete toward this goal. I suspect that one of the reasons for this is the strictly controlled, top-down way in which work is carried out in the construction industry. I believe that the present moment ― as we work to take steps forward toward recovering our business performance ― is the ideal time to change this work style.

This was the inspiration for the company-wide operational reform project that we established in June of this year, based around a concept of creating a company of maximally thriving employees, who deliver better results, through efficient ways of working. In Japanese, these keywords are katsuyaku, kouritsuteki, and kekka, giving the initiative its title, the K³ Project. In the course of this project, we will invite all members of the company to share their thoughts and suggestions for reforms on company-wide issues (improving operational efficiency, work style reforms, creating a non-hierarchical corporate culture, etc.), establish a reform agenda, and implement this in the near future. We hope that this will create an environment allowing each and every one of our employees to take their own approach and boldly, quickly, and independently explore new ideas and ways of doing things.

Promoting Work Style and Operational Reforms,
Starting with Our Frontline Project Sites

We are moving forward with a range of work style reform measures, including enhancing our employee benefits package and building systems to support diverse work styles. Of these measures, I consider reforms at our project sites, the company's front lines, to be a matter of urgency. We are putting measures in place ― such as support from our Head Office and branches ― that will help on-site staff concentrate on managing safety, quality, processes, costs, and other core tasks.

However, I do not believe that we can successfully enact these necessary reforms simply by moving a portion of these tasks we are currently struggling with to our offices. Instead, we plan to overhaul our ways of operating from the ground up, holding a series of discussions and using their outcomes to inform our DX, which will accelerate our reforms, as part of the K3 operational reform project mentioned above (as well as other initiatives). From April 2024, the maximum limit for working hours already in place in other industries will also come into effect in the construction industry. We will continue to focus our efforts on creating an environment where all of our employees can engage in their work with a true sense of work-life balance.

Creating an Open, Non-hierarchical Corporate Culture Where Our Diverse Human Resources Can Experience Job Satisfaction and Thrive

In our efforts toward human resources development, we are continuing to focus on creating working environments where our diverse human resources can thrive. Our staffing initiatives include direct recruitment activities at overseas universities, in addition to hiring foreign national employees within the Japanese labor market. With the challenge of promoting women's professional participation and advancement growing in importance, we have created a program to train women employees for management positions. In order to enact these and other diversity and inclusion (D&I) initiatives on a wide scale, the company established a D&I Promotion Department in fiscal 2022. As part of our provision for new employee development, we have introduced Core Human Resources Development Training, which aims to increase our new employees' ability to deliver results through thinking, communicating, and acting independently and on their own initiative both within and outside the company. We are also continually working to improve working conditions in order to increase employee motivation.

Increasing employee engagement is also a key issue in our ongoing efforts to enhance our human resource base. To help our employees engage with their work with a sense of job satisfaction, we started a system of personnel transfers using an in-house recruitment strategy in fiscal 2021. This fiscal year, we started Plus One Challenge, an internal campaign aimed at collecting new business ideas from employees from a wide cross-section of the company, and we will be developing these ideas into the seeds of new businesses going forward. As part of our efforts to create an open corporate culture, we have also introduced the Opinion Room,^*3 a program that allows employees to share their opinions directly with me in my role as President.

To allow each and every one of our employees, all with their own diverse values, to engage in a range of different work styles with a sense of job satisfaction, it is essential that we create an open, non-hierarchical corporate culture. As the company's President, I will take the lead in these efforts and hope to seize the opportunity we currently have before us to advance these reforms.

• *3 A virtual suggestion box for delivering feedback to the President, available on the company's internal network. Since it was set up in October 2021, we have received over 100 suggestions

Toward Achieving Ongoing Sustainable Growth in Step With Society

Turning Sustainability into New Business
Opportunities and Developing New Avenues

To allow us to advance together with wider society on a path of ongoing sustainable growth, we have positioned our sustainability initiatives as an extremely important focus area within our management approach. Many aspects of business processes within the construction industry are particularly closely tied with environmental issues. We are implementing sustainability initiatives not only in our planning and construction processes but in a wide range of others, from our raw materials--such as our environmentally friendly Sustain-Crete^®*4 ― to managing ZEB and ZEH^*5 facilities.

We are also proactively developing new businesses that seize the opportunities presented by sustainability. A success story among these is our currently burgeoning floating solar power generation project. We have independently developed our own floating photovoltaic system to be used on bodies of water and we are already managing arrays at six locations around Japan.

In Sumitomo Mitsui Construction's first off-site corporate PPA project,^*6 this system was installed on agricultural irrigation reservoirs in the city of Izumisano, Osaka Prefecture in November 2022. We also plan to pilot Japan's first marine floating photovoltaic system in Tokyo Bay.

Our other projects in the renewable energy sector include floating offshore wind turbines. We participated in a feasibility study conducted in Japan by the French company BW Ideol, and were able to confirm that the turbines' floating concrete substructures could be constructed in accordance with the economic and construction period standards expected by the Japanese market.

Creating these new businesses is a business strategy essential to Sumitomo Mitsui Construction's continued midto long-term growth. Going forward, we will concentrate our investment in fields where growth is expected, with consideration for capital efficiency.

• *4 An eco-friendly concrete that can reduce the CO₂ emissions associated with building materials by 40-90%
• *5 ZEB and ZEH stand for Net Zero Energy Building and Net Zero Energy House, respectively. These buildings aim to achieve zero net primary energy consumption
• *6 A Power Purchase Agreement, whereby the electricity we generate is delivered, through the electrical grid, to the facilities that will consume it

Working to Be Worthy of Our Stakeholders' Trust

While we have been experiencing a downturn in our performance as a result of significant losses in connection with projects in our domestic building construction business, both our domestic civil engineering business and our overseas business are performing well, and we are actively developing new sustainability-related businesses.

We have also made improvements from a governance perspective, appointing Outside Directors to a majority of the seats on our Board of Directors from this fiscal year onward and enhancing mutual checks and balances among Board members. In addition, by centering our Management Committee on discussion rather than operating it simply as a reporting body, we have revitalized it into a space for open, lively discussion, with an increase in questions from executives outside the team.

While carrying the core policies of our revised Mid-term Management Plan 2022-2024 over into our Mid-term Management Plan for the next period and monitoring progress on our efforts to recover and improve our business performance, I also hope to include more proactive policies looking ahead to our future growth.

To return to the subject of our corporate culture, which I touched on earlier, it is my belief that the effects of a lack of openness in our organizational structure contributed indirectly to the downturn in performance we have been experiencing. It is with this in mind, too, that I feel that now is the time for us to embark on company-wide reforms. Our ideal is to be a company that employees feel happiness to work with and we will unite our employees in pursuit of reforms toward this shared goal. I have every hope that this will hasten the recovery of our business performance and fulfil our stakeholders' expectations. I once again offer my sincere apologies for any and all concern we have caused, and hope that you will continue to generously lend Sumitomo Mitsui Construction your support.

October 2023

Shigetoshi Kondo
President and Representative Director