Nisshinbo Group Financial Strategy
Director, Managing Officer
Senior Manager of Finance, Accounting & IT Service Department of Corporate Strategy Center
Improving Investment Efficiency through More Profitable Businesses
Basic Financial Capital Strategy
The Nisshinbo Group promotes management emphasizing capital productivity while maintaining financial soundness in preparation for medium- to long-term investment and risks. To realize our return on equity (ROE) target of 12% in 2025, we are aiming for autonomous corporate growth while introducing return on invested capital (ROIC) as an important internal management indicator.
Group working capital and the capital necessary for growth investments are mainly provided by operating cash flows, and we are working to improve capital efficiency by effectively utilizing interest-bearing debt as necessary. We are also making efforts to ensure liquidity within the Group and reduce the weighted average cost of capital (WACC) by raising and managing capital Group-wide with the aim of strengthening governance and improving the efficient use of capital.
Regarding ROIC, the WACC is set at 6% and the 2025 ROE target is 12%, thus the optimum ROIC level is estimated to be approximately 8%. With a variety of businesses, the Group establishes the ROIC level suitable for each business and then strives to achieve that profit level by passing on or reducing costs.
Prior to evaluating ROIC, we had been promoting business selection and divestment, and in line with that policy, took actions including the consolidation of Nanbu Kaisei’s overseas bases. Furthermore, in terms of measures aimed at improving profitability, we are promoting continuous improvements and cost control activities as well as selection and divestment at all levels, including business units and individual products. In the near future, we want to transition to detailed performance evaluations through the full-scale introduction of ROIC.
The key point is cultivating asset-light businesses. In the semiconductor and brake friction materials businesses, initial investments are unavoidably large and asset efficiency tends to decline. This creates barriers to entry and contributes to business stability but tends to be disadvantageous in terms of ROIC. At the same time, the solutions and marine systems businesses that handle the wireless and communications businesses belong to the assembly industry, thus initial investments are lower. Furthermore, 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. In this way, we want to prevent balance sheet bloating and increase asset efficiency. 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.
Financial Results Over the Past 10 Years
The scale of Nisshinbo Group business is undergoing major changes due to business portfolio reforms based on organic growth and numerous M&A activities. In the three core segments of Wireless and Communications, Micro Devices and Brakes, we have proactively engaged in M&A. We have also transferred the paper products business in consideration of its large environmental impact and growth potential within the Group. Through these efforts, Japan Radio, the core company in the Wireless and Communications business, has asset-light aspects leading to improved balance sheet asset efficiency. From the perspective of flow, we acquired a semiconductor subsidiary that is now part of Nisshinbo Micro Devices and have incorporated Micro Devices as a growth business.
Meanwhile, regarding safety indicators supporting structural reforms, for the past 10 years, we have considered safety while paying close attention to the EBITDA to interest-bearing debt ratio. From the fiscal 2021 results, which saw a recovery from the pandemic, we were able to confirm the revenue bases of each business with the ratio of cash flows (net income plus depreciation) to liabilities dropping to approximately 2.7 times. This means that we should be able to increase our dependence on debt by a multiple of four. When engaging in M&A as part of our bold business portfolio reforms, we will consider how to make the best use of leverage.
Climate Change Initiatives
The Nisshinbo Group corporate philosophy is “Change and Challenge! For the creation of the future of Earth and People.” As climate change is one of the major threats facing the Earth and people, seizing business opportunities created by climate change and appropriately responding to risks are 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 Disclosure (TCFD) recommendations and declared its endorsement of TCFD in June 2022. Scenario analysis is significant in that it provided an opportunity to incorporate the realities of climate change into our business.
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 lead to reduced greenhouse gases emitted from products. Furthermore, we have a responsibility to introduce system technologies that protect human safety and assets from the intensification of climate change caused by global warming. I believe each of these scenarios involves both business risks and opportunities.
Sometimes referred to as the keeper of resources, the CFO recognizes the need to be proactively involved in resource allocation when it comes to climate change efforts. In other words, the promotion of environmental investments and R&D contributes to the reduction of greenhouse gas emissions. Environmental investments, the utilization of renewable energy and R&D activities are likely to cause cost increases within short-term financial performance. We must overcome these increases by devising measures such as the favorable treatment of environmental investments and internal carbon pricing. We intend to recoup investments through the provision of products and services that are beneficial in resolving social issues caused by climate change.
From the perspective of funding, we will create a path toward sustainable finance efforts, such as green bonds, by organizing and promoting the Group’s environmental contribution activities in an easy-to-understand manner.
Financial Strategy Supporting Growth
The Nisshinbo Group has clearly defined strategic business domains and will invest capital mainly in the Wireless and Communications and Micro Devices businesses. Based on current depreciation costs and net operating profit after tax (NOPAT), we will budget resource allocations of no less than ¥40 billion annually to capex and R&D investment, mainly in priority investment areas. Furthermore, in addition to accelerating growth strategies, we want to proactively utilize M&A. Should single-year budgets be exceeded, we will use short-term bank loans while considering other options.
Regarding capital investment, M&A investment and other long-term capital, having thoroughly considered financial market trends, and maintaining a balance between the long and short term, Nisshinbo arranged long-term bank loans as appropriate. Over the medium to long term, we will revise our fund procurement structure, and in the event of decisions contributing to growth, we will approach financing flexibly and consider implementation after ensuring minimum safeties.
Basic Policy Regarding Shareholder Returns
The Nisshinbo Group promotes management focused on ROE with the aim of realizing sustained increases in shareholder value through the distribution of profits. We also intend to accelerate investment 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.
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.
Furthermore, if sufficient internal reserves are available to execute future growth strategies, in addition to being mindful of stability, our policy is to purchase our own shares among other more proactive efforts to enhance shareholder returns. Regarding treasury stock, in principle, shares will be cancelled. However, in the event of M&A projects that will contribute substantially to increased shareholder value, we can use shares for stock swaps.
Based on this policy, in the fiscal year ending December 31, 2022, we plan to increase the full-year dividend per share by ¥4 to ¥34 per share (comprising an interim dividend of ¥17 and a year-end dividend of ¥17). In May, we announced the acquisition of treasury stock, which limits the number of shares to be acquired and the total acquisition amount to 12 million shares and ¥10 billion, respectively. Operating cash flows in the current fiscal year are expected to amount to approximately ¥50 billion, and in addition to securing growth investment funds, we will acquire treasury stock within the scope of consolidated cash flows.