The Nisshinbo Group's Financial Strategy

The Nisshinbo Group’s basic financial strategy is to promote management emphasizing profitability and efficiency while maintaining financial soundness in preparation for medium- to long-term investment and risks. The Group develops a diverse range of businesses centered on the environment, and we have continued to restructure these businesses with the mission of contributing to society through business activities. We will continue to fulfill this mission while aiming for further growth through the transformation of our business portfolio.

The Nisshinbo Group announced Medium-Term Management Plan 2026 in April 2024. The key element of this new mediumterm plan is the promotion of business portfolio reform. The plan also clearly defines the Group’s intention of making the Wireless and Communications and Micro Devices businesses the mainstays of our portfolio.

Over the next three years, as CFO, I will be proactively investing in focus areas including the Wireless and Communications and Micro Devices businesses. At the same time, in non-core areas, I will assess business from the perspective of consistency with the Group’s corporate philosophy, growth potential, profitability, return on capital, and industry competitiveness, then proceed with optimizing the allocation of management resources. We are looking at a weighted average cost of capital (WACC) of 5.7% for the entire Group in fiscal 2023. We also calculate ROIC by business, and going forward, we will continue to assess businesses by comparing them to the WACC for each business.

Domestic interest rates have begun to rise, especially since the beginning of 2024. With further rises in interest costs expected in the near future, there is a sense of urgency that unless business profits are raised even further, we may lose out in terms of financing and other financial opportunities geared towards investment in growth. For this reason, it is essential to promote business portfolio transformations and increase business profitability.

Our financial policy emphasizes a balance between optimal capital efficiency and financial soundness to ensure strategic financing. We will systematically reduce assets to improve capital efficiency. In addition to operating cash flows, funds obtained through the sale of assets will be proactively invested and profits returned to shareholders, as we prioritize investments in focus areas aimed at achieving our ideal business portfolio.

Specifically, over the three-year plan period, we assume the generation of approximately ¥290.0 billion from cumulative operating cash flows and asset sales, of which approximately ¥190.0 billion will be allocated to capital investment and R&D expenses, and approximately ¥40.0 billion will be allocated to strategic investments in focused areas. We expect to invest around 70% of the approximately ¥230.0 billion generated from the combination of these two efforts in focus areas.

At the same time, we plan to allocate approximately ¥30.0 billion to shareholder returns with the aim of achieving a dividend payout ratio of 40% through fiscal 2026. The full-year dividend for fiscal 2023 was ¥36 per share. Going forward, we will maintain this level and consider increasing dividends with the aim of achieving a payout ratio of 40%.

The remaining ¥30.0 billion in cash will be used to reduce interest-bearing debt. We have set a D/E ratio of 0.7 or less as a guideline for our target capital structure.

At present, Group PBR is under 1x, and we continue to fall short of stock market expectations. To increase PBR, we must first increase profit margins, then achieve sustainable growth. To this end, we must strive to improve the profitability of existing businesses, while also making use of M&A, business transfers, and other methods to transform our business portfolio and improve profitability by transforming our business model.

ROIC will be an important indicator as we move forward with future portfolio transformation. For businesses where ROIC is below WACC, drastic measures will probably have to be taken if there are no prospects of improvement. In 2024, we plan to further deepen discussions on assessing business at monthly Board of Directors meetings, and verify whether we can achieve solid business results going forward.

Specifically, the target areas are brakes, precision equipment, chemicals, and textiles, which have been summarized as the materials domain. In determining which areas to expand and which to reduce or withdraw from, I think one of the key points is whether or not synergies can be created with the focus areas of Wireless and Communications and Micro Devices.

If we honestly evaluate each business plan in the materials domain using DCF and other methodologies, we will arrive at appropriate corporate values. However, the total of these corporate values is not reflected in the Nisshinbo Holdings consolidated share price. At present, this is something that has been discounted.

To improve PBR and achieve a fair assessment of corporate value, it is essential to improve profit margins. To this end, we approach business portfolio reforms with a strong sense of urgency, as we cannot continue to maintain businesses that are driving down profit margins within the Group. I see it as my responsibility to ensure business units facing difficult conditions are prepared, which I will continue to do forcefully.

At the same time, in Wireless and Communications, which is a key focus area, we are looking forward to growth, especially in the Solutions and Specialized Equipment businesses. The Solutions business is involved in social infrastructure projects such as dams, river management, and disaster prevention, while the Specialized Equipment business works with the Ministry of Defense. Both have strengths in the government procurement business, with Japan Radio and KOKUSAI DENKI Electric, which recently joined the Group, possessing strengths in this area. The new medium-term plan only incorporates the idea of 1 + 1 = 2, but in the future, we hope to be able to create new value by promoting the integration of mutual technologies and customer bases.

The pressing issue at the moment is to improve short-term profits and reduce assets, which requires thorough inventory management. We must work to liquidate inventory for business use. I strongly dislike the term“ appropriate inventory,” as I am worried that the abstract expression“ appropriate” may lead to laxness in areas such as purchasing, shipping, and manufacturing. For this reason, I must constantly remind everyone in the workplace. Over the next three years, the Group must bring inventories valued at approximately ¥20 billion back to previous levels and improve asset turnover efficiency. However, what is truly important is not simply reducing the amount of inventory on hand. There are also businesses within the Group that rely on inventory to do business, such as the processing field involving semiconductors and other products, as well as the marine business, which is based at ports and conducts proposal-based sales, thus it is also important to grow the top line at the same time as implementing thorough inventory management.

The same can be said of the numerical targets for the entire medium-term plan. I think it is important to maintain a strong determination to achieve established numerical targets, unless something unexpected were to occur. Accordingly, we will maintain efforts to achieve the management targets announced in the new medium-term plan, especially the operating income target of ¥38 billion.

With regard to non-financial indicators, three years ago I personally took on the role of spearheading a disclosure project in line with the TCFD framework aimed at enhancing climaterelated financial information disclosure. Over the past three years, risk and opportunity analyses based on future scenarios have been conducted for all segments, and we are working towards the goal of net zero by 2050, targeting a 50% reduction in CO₂ emissions by 2035 compared to fiscal 2014 levels. Next, we will also be working on our response to the Task Force on Natural-related Financial Disclosures (TNFD). This will be the second round for each business unit, but this time we will start with natural capital at the core. In line with our mission, it is only natural that we should strive to avoid placing a burden on the environment, and we will continue to make the environment a key factor in our business decisions. We will expand TCFD, TNFD and other information disclosure while continuing to further accelerate sustainability initiatives.