Message from the President

We have been promoting business portfolio transformations in line with the Nisshinbo Group corporate philosophy, Change and Challenge! For the creation of the future of Earth and People. This is because of a sense of crisis that, if we do not change our business portfolio to meet the needs of society, we will lose our competitive advantage and be unable to survive as a company. It is important that companies continuously change.

Fiscal 2023 was a year of major changes to our business portfolio, as we carved out the TMD Friction Group (TMD), which is engaged in the Automobile Brakes business in Europe, while also completing the acquisition of Hitachi Kokusai Electric Inc., which has strengths in highspeed, high-capacity communications technologies and video technologies. As a result, our core Wireless and Communications and Micro Devices businesses accounted for a combined 44% of sales in fiscal 2023, which is expected to rise to over 60% in fiscal 2024.

Unfortunately, performance in fiscal 2023 resulted in higher sales and lower profit. We have not yet achieved an optimal cost structure, and still lack the appetite to profit properly. To strengthen the competitiveness of individual businesses, we must accelerate business and product disposals.

In 2023, I noted that M&A and carveouts are always in the works. Both the TMD carveout and the Hitachi Kokusai Electric Inc., M&A required four years to complete.

The Group acquired TMD in 2011 with the aim of gaining a leading share in the global brake market. Originally, Nisshinbo Brake Inc., had strengths in the Japanese, U.S., South Korean, and Chinese markets, and by bringing TMD into the Group, a leading European manufacturer that had been the missing piece, we have been able to secure market superiority. However, rapid changes have subsequently occurred in the market environment: the accelerating shift toward xEVs in the automotive industry, and brake particulate emissions regulations in Europe. There are increasing concerns about the shrinking market for repair parts, which is TMD's earnings base, and large R&D investments have become necessary to comply with regulations. We have assessed these future risks facing TMD and have been preparing for the business transfer since 2019.

At the same time, the acquisition of Hitachi Kokusai Electric Inc., is intended to solidify the earnings base of the Wireless and Communications’ solutions business and accelerate our growth strategy. Japan Radio Co., Ltd., develops a wide range of Wireless and Communications business, from social infrastructure including disaster prevention and supervisory control systems, to mobile communications equipment for vessels and automobiles, but the bedrock of its earnings base as a business is public-sector demand solutions. Hitachi Kokusai Electric Inc. develops solutions businesses mainly for government agencies leveraging advanced video and communications technologies, and the two companies complement each other in terms of technology and sales. There is a particularly strong affinity between high-speed, high-capacity communications technologies and video technologies, and by making Hitachi Kokusai Electric a Group company, we expect to expand market and technological domains mainly in the industrial solutions field.

After the major TMD and Hitachi Kokusai Electric Inc., projects concluded and we had achieved significant progress in transforming our business portfolio, in February 2024 we announced Medium-Term Management Plan 2026. We held discussions from the draft stage with outside directors before formulating and announcing the medium-term management plan, taking the time to engage in multifaceted discussions from the perspectives of shareholders and a variety of other stakeholders.

The most urgent issues facing human society are environmental destruction and global warming. Thus, providing solutions to these global environmental problems is a business that is consistent with our corporate philosophy. First, we can save lives by providing disaster prevention wireless and sensor networks to address the issues we face, such as frequent disasters caused by climate change. We also provide solutions to environmental issues with private LTE, local 5G, and other communications systems, micro devices, and environmental materials such as brake friction materials and fuel cell separators. Additionally, through the use of technologies and products such as radar, GPS, and ultrasound sensors the Group has mastered in manufacturing, we intend to develop service businesses, expand our business domain, and increase profitability through data business growth.

The Group’s goal is to Connect Everything, Create Value. To this end, we will provide solutions to social challenges through sensing, wireless communications, and information processing technologies.

The three-year period beginning in 2024 is positioned as a time for laying the foundation necessary for realizing this aim. Accordingly, we have set three priority measures: Pursue a transformation of the business portfolio; build a business model that looks to future growth and invest management resources in a focused manner; and reduce management risk by further strengthening the management base.

We will continue to pursue the transformation of our business portfolio and proactively invest in growth, including M&A, with a focus on the Wireless and Communications and Micro Devices businesses. At the same time, we will also step up our efforts to identify unprofitable businesses. We calculate the WACC and ROIC for each business, and we also evaluate businesses comprehensively, including consistency with our corporate philosophy, market growth potential, competitiveness of the business in the market, profitability, and capital efficiency, to determine whether the business should be considered a growth business or if it should be downsized or transferred.

Next, with regard to building a business model that looks to future growth and investing management resources in a focused manner, in addition to proactive investment in the Wireless and Communications and Micro Devices businesses, we plan to expand our business domain by leveraging the technologies and products we have mastered in manufacturing and expanding into the data services business. The key to data business lies in transforming data collected by products into a business. For example, ship navigation data collected by the Marine Business J-Marine Cloud is an indispensable material for realizing automated navigation, and shifting our focus from sea to sky, we also envision business development utilizing air traffic control and weather radar. To develop data business with DX based on manufacturing, we invest in startups and accumulate knowledge within the Group through personal exchanges and human resource development.

Finally, to reduce management risk by further strengthening the management base, starting with the basic premise of respect for and protection of human rights for all people associated with our company, we will develop business with consideration for environmental impacts, promote the acquisition, development, and advancement of a diverse array of human resources, establish responsible supply chains, and improve corporate governance efficiency. Promoting sustainability management that protects and improves the global environment is consistent with our Group philosophy and contributes to achieving the SDGs.

Under Medium-Term Management Plan 2026, in fiscal 2026, the final year of the plan, we are targeting net sales of ¥580.0 billion, operating income of ¥38.0 billion, an operating margin of 6.5%, ROIC of 6%, and ROE of 10%. These targets are reasonable, as they were formulated with a slight stretch for organic growth in each business with an eye toward our goal around 2035.

In fiscal 2024, the first year of the medium-term management plan, under the slogan “generating profits through sincere business activities,” we forecast net sales of ¥513.0 billion, operating income of ¥24.0 billion, ordinary income of ¥26.0 billion, and net income attributable to owners of the company of ¥19.0 billion. By business segment, in the Wireless and Communications business, we expect significant increases in sales and profit, mainly due to the expected strong performance of the solutions and specialized equipment businesses against the backdrop of stable public works budgets, as well as the addition of Hitachi Kokusai Electric Inc., to the Group. In the Micro Devices business, in addition to the expectation that demand for automotive parts will remain solid, the plan assumes that the market for smartphones, PC-related, and other consumer products, which declined significantly in fiscal 2023, will enter a recovery trend in the second half of fiscal 2024, although market recovery conditions remain highly unpredictable. In the Automobile Brakes business, orders for copper-reduced and copper-free friction materials in response to environmental regulations remain firm, but compared to fiscal 2023, sales and profits are expected to decline overall, partly due to the impact of the TMD business transfer. In the Precision Instruments, Chemicals, and Textiles businesses, we expect higher sales and profit driven by market growth and increased orders, while sales and profit are also forecast to increase in the Real Estate business in line with the planned subdivision of asset holdings.

We aim to establish an earnings base centered on the Electronics business, but looking at fiscal 2023 results, we still face challenges in terms of profitability and establishing a stable profit base. As PBR remains below 1x, we recognize that the current situation does not meet shareholder expectations, and deeply regret that we have not sufficiently earned the trust of our investors.

As PBR is the product of ROE and PER, to improve PBR, the first priority is to increase the profit margin and improve ROE. By earning profits properly and enhancing corporate value, we will meet shareholder expectations, which will result in higher share prices. To turn this cycle around, we will improve the profitability of existing businesses and promote business portfolio transformations, including M&A and carveouts. Additionally, to improve asset efficiency, we will further promote the planned subdivision of real estate that is in the process of reorganization, while maintaining a policy of reducing cross-shareholdings.

If increased share price becomes the objective, it can lead to restrained investment in growth and wages, excessive shareholder returns, and financial leverage, which can damage financial stability and, in the long run, corporate value. The key is balance, as well as management that enhances corporate value. In turn, this will result in a higher share price. To this end, we will invest in growth with a steady focus on the future, while generating returns by ensuring employees engage in satisfying work and returning profits to our shareholders. Going forward, we will continue to firmly implement this approach.

Regarding shareholder returns, after making sufficient strategic growth investments, we will first maintain stable dividends while aiming to achieve a dividend payout ratio of 40%. Further, our policy is to flexibly conduct share buybacks, taking into consideration capital structure and the medium- to long-term outlook for free cash flow. To increase the dividend payout ratio from the current 30% to 40%, we will work to improve profitability, including reorganizing our business portfolio.

In terms of the management foundation supporting these business activities, we will continue to strengthen and promote sustainability management. In August 2023, we formulated the Nisshinbo Group Human Rights Policy to further strengthen our sustainability management foundation. For the Nisshinbo Group, human rights are an extremely broad concept, encompassing the right of people to lead fulfilling lives based on their own various choices.

In conducting human rights due diligence, which we will begin in earnest in 2024, management must consider human rights risks affecting people, rather than management risks affecting the company. In the event human rights violations are discovered, we must first respond to situations with the highest degree of negative impact on human rights based on how seriously individuals are affected, irrespective of the management risk of how severely the company is impacted. Human rights due diligence involves recognizing many issues, including employee health and safety, discrimination and harassment, and environmental issues arising from business activities. It also covers a wide range of areas, including supply chains, suppliers, investments, and joint venture partners. We must also make efforts over the long term to ensure business continuity.

It has been 20 years since the Group decided to target growth through the provision of solutions to global environmental issues, and yet, rather than nothing having changed, environmental problems continue to worsen. The Group is committed to reducing greenhouse gas emissions in its business activities with the goal of achieving carbon neutrality by 2050, with a 50% reduction in CO₂ by 2030 compared to fiscal 2014 levels.

With regard to human resources, we have shifted to a meritocracy that eliminates seniority, and we are encouraging the promotion of younger employees and the use of outside human resources. We have also revised our human resources system to incorporate multi-track and transferable functions by introducing a role-based grading system. As companies should provide employees with opportunities to play active roles, our long-established selfassessment and internal recruiting systems are widely used for this purpose. With safety as the basis of all our business activities, we will continue aiming for zero occupational injuries through the promotion of safety and health activities and continuous improvement efforts.

Over the past 10 years, the Group's business portfolio has undergone significant transformation, and we have also promoted business diversification. Additionally, we promoted the empowerment of core companies, and have also made progress in achieving flexible business operations and faster decision-making, which were objectives targeted when we transitioned to a holding company structure in 2009.

Amid these changes, one asset we continue to maintain is the trust of our customers and other stakeholders. Trust and satisfaction can be gained through fairness and sincerity, which take years to win, but can be lost in an instant. I feel our company has a very serious culture, and by continuing to work hard to achieve our goals with sincerity and self-discipline, thereby maintaining our asset of trust, I want to infuse our culture with a sense of speed.

Corporate value is also not discounted if the company can take full advantage of its strengths as a diversified collection of businesses. The holding company will act as a producer, solidly fulfilling its cross-functional role and selecting themes that can demonstrate the superiority of each Group company with cutting-edge core technologies while creating synergies. To this end, we will secure the necessary human resources and invest capital in the development of businesses, then return these businesses to Group companies for commercialization in an ongoing cycle. In the process of expanding our business domain from manufacturing to data business, we must also boldly take on the challenge of speed. Failure is an inevitable part of any challenge, but a culture that allows for failure and makes the most of it as a team will lead to innovation.

We will continue to enhance corporate value by taking on a variety of challenges, including business selection and divestment and business portfolio transformation, while remaining attentive to stakeholder concerns.