Continuous Engagement in M&A and Carveout Projects

From a management perspective, business portfolio transformation remains the core of business transformation. Despite making no significant progress in terms of drastic business portfolio transformations in fiscal 2022, we have continuously engaged in M&A and carve-out projects. Although the probability of concluding agreements on these projects is low, and despite being unable to provide specific timing and other details out of consideration for the counterparties involved, we engage in these projects with a seamless approach. When transferring our paper products business, we engaged in negotiations with a focus on the conditions and timing that were best for the target company employees, which ended up taking 10 years from decision-making to conclusion. The reason we have not announced current plans for the next fiscal year and beyond is because we are continuously engaged in these M&A and carve-out projects. We believe the right time to disclose medium- to long-term goals is after M&A has reached a certain scale, carve-outs have progressed to a certain point, and business portfolio reforms have been implemented to a certain extent.

At the same time, simply using M&A to achieve topline growth is meaningless. We position ROE and ROIC as important indicators for strengthening our earnings base and increasing asset efficiency. With regard to ROE, I believe we must consistently exceed 10%. While we are trying to change both the denominator and numerator when calculating ROE, it is of fundamental importance to increase profit in the numerator, which we recognize as the most important factor in improving PBR.

Within the Company, I remind employees to“ profit properly.” An approach whereby we increase sales and reduce fixed costs results in many businesses having low profit margins, so we launched an initiative three years ago to check the profit margin of each product and shift to businesses with higher profit margins. While it will take a bit more time before results are clearly seen in the numbers, we are constantly reviewing businesses and products as part of management efforts to assemble a business portfolio that contributes to improved profitability. Rather than focusing on current performance, we continuously view the portfolio from 5–10 years in the future, and will reorganize it in response to changes in the environment with efforts that include M&A and carve-outs while focusing efforts on the cultivation of new businesses.

Strengthening Profit Structure through DX and Creating New Business Models

In fiscal 2022, we promoted growth strategies under the slogan,“ strengthening profitability through business transformations.” To continue engaging in business activities, safety and health activities are most important, followed by continuous improvements. To realize a leaner structure, we must constantly strengthen our structure by steadily promoting continuous onsite improvements and drastically changing the business itself as well as the business systems employing methods, including those I mentioned earlier.

In addition to steadily strengthening our profit structure, we will further accelerate operational efficiency enhancements through the use of digital technologies in the improvement activities we have been promoting up to now. DX does not equal digitalization. How we use IT and digital technologies, and the details of“ X” are important. One direction we can target with DX is the use of digital technologies to enhance software content and launch subscription-based services. For example, subscriber services for the creation of drone flight plans and digital businesses utilizing J-Marine Cloud, which is a database of information collected from the sea and land, are nearing commercialization. These are precisely the kind of businesses developed based on manufacturing, and I have high expectations that they will bring about a transformation of the business itself.

Nisshinbo Group Sustainability Management

Our mission is to contribute to society through our business activities, so we are not fixated on business itself. Rather than fixating on one business, we contribute by providing solutions to changes in the social environment as they occur. This is Nisshinbo’s policy, based on the concept of being a public entity, which contributes to the SDGs.

At present, we are developing business centered on the environment to realize a super-smart society through businesses that contribute to the improvement of the global environment. Further, in fiscal 2022, we announced carbon neutrality in 2050 as our most important environment-related issue. As part of this process, we set the goal of reducing greenhouse gas emissions 50% by 2030 compared to fiscal 2014, and we have already achieved a reduction of about 35% toward that goal. As part of these efforts, we have seen a more than 40% reduction in greenhouse gas emissions from the shutdown of in-house coal-fired power generator equipment in Indonesia, the switch to geothermal power generation, and the installation of solar panels on plant rooftops. We are also on track to achieve our 2030 target by switching to gases used in the semiconductor business that have a lower environmental impact.

As we proceed with environmental initiatives, we want to further accelerate“ S” or people-centered initiatives going forward. Companies comprise people, goods, money, and data, but goods, money, and data generate value only when used by people. People are important to companies, so the key point is how well companies value their people. Even if we continue engaging in business focused on the environment (E), we will not be able to maintain business unless we can adequately guarantee the existence of people (S), which are a requirement for a company’s existence.

The Nisshinbo Group’s underlying principle is“ business is people,” and our focus on valuing people remains unchanged to this day“. People” are not limited to employees, as we also see the importance of engaging in win-win activities that can benefit all stakeholders. Thus, we are very passionate about“ people” and focus efforts on education, training, and meritocracy. In terms of education and training, we promote level-based training systems in parallel with selective human resource development, and encourage each individual to improve their professional literacy through a combination of mandatory training and self-directed educational efforts.

At the same time, increasing the number of women in management positions is not something that can be achieved overnight, so we continue to engage in efforts to change systems and employee mindsets. In addition to changing existing systems requiring a set number of years of experience before an employee is promoted, we have revised our personnel system to incorporate multi-track and transferable functions. Further, we have expanded the ratio of mid-career hires in career-track positions from around 20% to about 50% and promote an influx of diverse human resources in terms of gender, age, and other qualities.

Cultivating a Corporate Culture“ Unafraid of Change”

We have been enhancing diversity and inclusion efforts for about three years now, and to ensure these efforts become truly pervasive throughout the Company, I tell employees,“ First, you must acknowledge that you are one of the diverse individuals in our Company.” I myself am only one of many diverse individuals in the Company. When all employees adopt this perspective, psychological safety is created around us, and we can create an organization where opinions can be expressed openly and without undue restraint. An organization such as this is more likely to innovate, and this will also be reflected in the Company’s performance. As the D&I philosophy has become further entrenched, employee survey scores have also shown improvement. We are also working to make Group companies with comparatively low employee survey scores more aware by showing them Group companies with high scores. I often tell employees“ D&I is the starter of innovation, and DX is the accelerator.”

Another important aspect of change is to be unafraid of failure. We are attempting to cultivate a corporate culture that is unafraid of change by conveying the idea that“ failure is not something to be criticized, but rather forgiven and utilized. A culture that allows failure and makes the most of it will achieve innovations. A culture that does not allow failure breeds dishonesty.” That being said, we have no room for leniency when it comes to unlawful conduct, and impose severe punishments for any conduct that violates laws, corporate ethics, or public morals. Over 10 years ago, the Group established the Corporate Ethics Reporting System, which has functioned very well thus far.

Shareholder Returns

Our basic policy on shareholder returns is, after first prioritizing strategic investments for growth, to pay stable and continuous dividends, with a target consolidated dividend payout ratio of approximately 30%. If sufficient retained earnings are secured, we consider proactive shareholder return measures, including share buybacks.

In fiscal 2022, we provided ¥17 per share in both interim and year-end dividends, amounting to an annual dividend of ¥34 per share, an increase of ¥4 per share. Further, in terms of operating cash flows, as we are able to secure funds for growth investments, in May 2022, we announced share repurchases comprising a maximum of 12 million shares at a total repurchase price of ¥10 billion, which was executed at the end of November. In fiscal 2023, we project capital investments of approximately ¥40.0 billion and R&D investments of approximately ¥30.0 billion, and plan to increase the annual dividend to shareholders by ¥2 per share.

Message to Stakeholders

While shareholders are the owners of the Company, we believe it important to conduct business and increase value while maintaining an awareness of all stakeholders, including customers, employees, business partners, and local communities. We believe we can meet stakeholder expectations by rejecting capital monopolization, arbitrary management decisions, and autocratic labor, and instead recognize our mutual authorities and responsibilities while cooperating with each other to maximize profits as overall added value. We hope for your continued support as we work to increase profitability and enhance corporate value through the execution of our growth strategies.

Masahiro Murakami
Representative Director and President, Nisshinbo Holdings Inc.
June 2023