Nisshinbo Group Financial Strategy

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Shuji Tsukatani
Director and Managing Officer
Senior Manager of Finance, Accounting &
IT Service Department of Corporate Strategy Center
June 2023

Targeting Improved Asset Efficiency through the Steady Promotion of ROIC

Basic Financial Capital Strategy

The Nisshinbo Group promotes management emphasizing profitability and efficiency while maintaining financial soundness in preparation for medium- to long-term investment and risks. As we are engaged in a diverse range of businesses with the mission of“ contributing to society through businesses activities,” we are targeting further growth through business portfolio transformation without adhering to traditional businesses. The Group cannot advance without changing its business and asset profile.

In promoting business portfolio reorganization, we have introduced return on invested capital (ROIC) as an important internal management indicator. We have set the weighted average cost of capital (WACC) at 6%, and are initially aiming for ROIC of 8% as an average for the entire Group, after which we will attempt to increase ROIC even further. Several years have passed since we introduced ROIC, and we will utilize it as one criterion for determining business leverage and continuity. As our current challenge is to improve profitability, we believe it necessary to identify and revise the strategies of businesses that are not showing improvement in ROIC.

Even before these ROIC initiatives, we promoted Companywide continuous improvements and cost control activities, as well as selection and divestment at all levels, including business units and individual products. In line with this policy, we have also been consolidating and reorganizing overseas bases. Since 2020, we have used an ROIC tree to clarify issues that all employees should address and strengthen awareness of the need to generate operating cash flow. The full-scale introduction of ROIC is intended to refine business evaluations. In addition to organic growth, up to now we have been proactively pursuing M&A in key segments such as Wireless and Communications and Micro Devices to incorporate them as growth businesses. In May 2023, we announced the acquisition of Hitachi Kokusai Electric shares. The acquisition value is expected to total ¥37 billion, which will be financed by bank loans. Debt financing is expected to maintain the EBITDA/interest-bearing debt ratio at approximately 0.28x, the same level as in the previous year. As the share transfer agreement has yet to be concluded (as of June 30, 2023), dialogue with the target company has been limited due to antitrust law considerations. After closing the agreement, we will engage in thorough discussions with the target company regarding the effects of this acquisition and the pursuit of synergies.

Further, the Tokyo Stock Exchange has requested that we improve our P/B ratio, which is below 1x. We are preparing to disclose this information by carefully examining our business plan so as not to make any hasty decisions. To improve the P/B ratio, we are cognizant of the need to gain the confidence of the market by clearly stating our business plan, streamlining consolidated assets, and promoting sustainability management. Sustainability management is particularly important for improving equity and enterprise spreads. We believe that increased management resilience will reduce the medium- to long-term hurdle rate, which we put at WACC of 6%.

Resource Allocation and Growth Investments

Funds required for Group-wide working capital and growth investments come mainly from operating cash flows, but interest-bearing debts is also utilized effectively to improve capital efficiency as needed.

In allocating resources, we consciously invest in assetlight businesses such as Wireless and Communications. The solutions and marine systems businesses in Wireless and Communications belong to the assembly industry, thus initial investments are lower, with the main focus being investments in systems and human resources. We will transition from businesses that sell products to those that utilize the technologies and products we have honed through manufacturing. As we develop service businesses integrating DX and IoT, we will develop asset-light businesses. Semiconductors and brake friction materials, which require relatively large initial investments, tend to be disadvantageous in terms of asset efficiency, although this creates barriers to entry and contributes to business stability. The determining factor will be whether Nisshinbo can continue generating stable cash flows in the future, the key to which will be shortening the investment payback period (depreciation period) of about 10 years through improved profitability. Increasing asset efficiency will naturally affect the streamlining of shareholders’ equity on the procurement side. We aim to achieve ROE targets by streamlining shareholders’ equity while increasing profitability.

Response to Climate Change

The Nisshinbo Group corporate philosophy is“ Change and Challenge! For the creation of the future of Earth and People.” As climate change has become one of the major threats to the Earth and its inhabitants, seizing business opportunities and appropriately responding to the risks posed by climate change have become important management issues. As part of these efforts, in fiscal 2021, the Group began analyzing climate change scenarios in accordance with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. By fiscal 2022, the Group had completed analysis on segments accounting for more than 90% of net sales. Through scenario analysis, each business unit has begun to recognize the risks and opportunities posed by climate change as issues relevant to their business and measures have been launched to address these issues.

The Nisshinbo Group established and conducts activities in the three fields of Mobility, Infrastructure & Safety and Life & Healthcare as strategic business domains, enabling each to define initiatives related to climate change. The manufacturing industry must strive to reduce greenhouse gases emitted from production processes while responding to societal demands in ways that ensure our products help reduce greenhouse gas emissions. At the same time, we have a responsibility to provide the world with system technologies that maintain human safety and protect property from drastic climate changes caused by global warming. For example, the Group is involved in weather radar and disaster prevention systems. In a future assuming drastic climate change, weather radar will quickly predict linear precipitation zones and torrential rainfall, then relay this information to disaster prevention systems. Utilizing 5G and IoT technologies, we expect disaster prevention systems will be able to provide more personalized and detailed evacuation information. We believe resources should be proactively allocated to address inadequate software technologies and other areas deemed insufficient for this purpose.

Shareholder Returns

The Nisshinbo Group aims to continuously increase shareholder value by promoting management that emphasizes profitability and efficiency. We also intend to invest in areas that drive growth, such as R&D, capital expenditures and M&A, aiming to secure even greater support and trust from society and stakeholders as an Environment and Energy Company group. An important point in returning profits to shareholders is to increase the share price through improved business performance.

In principle, there are two distributions per fiscal year: the interim dividend and the year-end dividend. Targeting a consolidated payout ratio around 30%, Nisshinbo’s policy is to provide the stable and continuous distribution of dividends. Further, if sufficient internal reserves are available to execute future growth strategies, we will consider proactively returning profits to shareholders, including share buybacks, taking into consideration stability and dividends on equity (DOE).

Based on this policy, in the fiscal year ended December 31, 2022, we increased the full-year dividend per share by ¥4 (to ¥34 per share) and repurchased ¥10.0 billion in treasury stock. In the fiscal year ending December 31, 2023, based on earnings forecasts, we plan to increase the full-year dividend per share by ¥2 (to ¥36 per share).