The Nisshinbo Group’s Financial Strategy
The Nisshinbo Group’s long-term goals are ROE of 12%. To achieve those goals, we will use capital investment to grow existing businesses, invest in R&D to create new businesses and advance strategic M&A deals. We are implementing the following financial strategy to secure funds in support of those efforts.
Measures to Achieve Our Long-term Goals
We aim to increase capital efficiency and achieve ROE of 12% by prioritizing growth in operating income.
Specifically, we will streamline the balance sheet to create a leaner company, while also aiming to generate operating income of ¥70-80 billion and lift the operating margin to around 7-8%.
Nisshinbo, as an Environment and Energy Company group, is channeling management resources into businesses related to the automotive and super smart society fields as part of its medium-to long-term business strategy. Reflecting that approach, we have separated investment into two categories — growth investment and underlying investment. To achieve our strategy objectives, the operating margin in growth businesses will have to be higher than in existing businesses. All investment decisions will take into account the Group’s cost of capital, which is currently around 6%.
(millions of yen)
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|Net Income Attributable to Owners
of Nisshinbo Holdings Inc.
Procuring and Allocating Funds to Invest in Growth
In the fiscal year ended March 2018, operating income and net income both exceeded start-of-year forecasts. However, looking back at the previous three years, we fell short of our forecasts in each fiscal year and it was imperative that we improved the earnings capabilities of our businesses to also help us procure funds on better terms.
As I mentioned earlier, we need to make timely investments in growth fields to strengthen earnings. In the automobile brakes business, we have moved quickly to respond to tighter regulations on brake friction materials in North America by developing copper-free friction materials. Orders for those materials have been strong, so we approved an investment to increase production capacity. The micro devices business, which has strengthened its presence in the market with the acquisition of Ricoh Electronic Devices Co., Ltd. earlier this year, will also invest heavily to address projected growth in demand for devices used in automotive and industrial machinery applications.
Meanwhile, we aim to invest the equivalent of roughly 4% of sales in research and development. We need to maintain that level of investment to generate cash flow in the future. Again, investment in research and development will be targeted on businesses in the automotive and super smart society fields, where demand for investment is strong. Examples include Nisshinbo’s parts and materials for fuel cell vehicles, which attracted considerable attention in the media in autumn 2017, and the establishment of JRC Mobility Inc.
To help us generate the cash for those investments, we will need to tighten inventory management even further. As of March 31, 2018, inventory assets stood at roughly ¥100 billion.
Even taking into account the characteristics of each business, I’m confident we can reduce inventories to support cash flow. Specifically, our businesses need to firmly take the initiative and set targets that will drive change in their operations and cut inventories. We are also selling real estate assets and securities holdings to procure funds for investment. We have formulated the Nisshinbo Corporate Governance Policy based on Japan's Corporate Governance Code. In line with our policy, we remain committed to reducing cross-shareholdings and we regularly assess the purpose and economic rationale for holding those shares.
We expect to seek funding from external sources to meet strong demand for funds across the Group. Interest-bearing debt is currently just under ¥150 billion, but we have the capacity to lift that to ¥200 billion without putting stress on the business.
However, with interest rates now rising in Europe and North America and the economic outlook increasingly hard to read, we have to be a little more cautious than before.
Supporting the Group’s Global Strategy
The Nisshinbo Group is stepping up efforts to create a global business to drive sustained growth. In the fiscal year ended March 2018, the overseas sales ratio reached 47%, and we expect the ratio to rise even higher. That accelerating global expansion is leading to an increase in the number of subsidiaries based overseas. Given that trend, we recently appointed Deloitte Touche Tohmatsu LLC as an additional auditing firm to help us widen and strengthen auditing procedures.
We also decided to change the Group’s consolidated fiscal year-end from March 31 to December 31 to increase the efficiency of Group operations and to enhance management transparency by improving the timing and quality of corporate disclosures. We next plan to look at the possibility of adopting international financial reporting standards (IFRS).
Another trend in our increasingly global business is the growing need to deal with tax matters and cross-border transactions in each market, particularly in emerging economies. We plan to reinforce tax governance processes as a management priority.
Shareholder Return Policy
The Nisshinbo Group is targeting a consolidated dividend payout ratio of roughly 30% through stable and consistent dividends. For the fiscal year ended March 2018, we maintained the annual dividend at ¥30 per share. Going forward, we are committed to paying a base-level dividend of ¥30 per share. When the Group has sufficient internal reserves to fund investment in growth, such as research and development, increases in capital investment and M&A deals, we will endeavor to return profits to shareholders through dividend hikes and share buybacks after taking into account the Group’s financial stability.
Dividends, Share Buybacks and Total Shareholder Return Ratio
Note: Total shareholder return ratio not shown for the fiscal year ended March 2009 due to losses in that year.