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.

Improving profitability is a particularly urgent issue. We will encourage efforts to generate profits in all segments. This includes Micro Devices, which posted a large loss; however, if we can turn all sub-segment business losses to profit in each segment, we can increase profits by around ¥5.0 billion. It is also important that we maintain efforts to further increase the profitability of businesses that are already generating profits. From the perspective of efficiency, we will also focus on Wireless and Communications, an assembly-based industry with higher investment efficiency compared to process-based industries.

The generation of profits is also a prerequisite for financial soundness. We will continue to reduce liabilities to the extent possible within the scope of profits and depreciation expenses. This should lead to medium- to long-term investment and risk preparedness.

At the core of our corporate philosophy is the concept of being a“ public entity.” This means that we generate profits by providing value to society, and clinging to businesses that do not generate profits can be interpreted as failing to fulfill our responsibility as a public entity. I will reflect on the significance of being a public entity as we move forward with business portfolio transformations focused on future growth.

Fiscal 2024 was a milestone year in which we sold our Automobile Brakes business subsidiary, TMD Friction Group, and acquired KOKUSAI DENKI Electric Inc., resulting in the elimination of a large portion of our process industry business, and the strengthening of our assembly industry business.

Although net sales decreased with the sale of TMD, operating income increased with the addition of KOKUSAI DENKI Electric to the Group. Net income attributable to owners of the company also returned to profitability due to the elimination of an extraordinary loss associated with the sale of TMD recorded in fiscal 2023. At the same time, in terms of results by segment, although deteriorating market conditions caused the Micro Devices business to fall into the red, this was offset by the Real Estate housing lot sales business. We must also increase profitability in the Wireless and Communications business.

Additionally, total assets have increased since the end of fiscal 2023. Although this is partly due to an increase in overseas asset value driven by yen depreciation, the main issue here is inventory. Due to supply uncertainties for electrical components and supply chain disruptions, inventories have remained high for the past few years, totaling ¥163.5 billion at the end of fiscal 2024, and placing pressure on cash flows. While expanding sales, we must also accelerate business restructuring to improve efficiency.

Business portfolio transformations are also being discussed in depth at Board of Directors meetings. Our company is a conglomerate engaged in a wide range of businesses, from Textiles to Wireless and Communications. However, given differences in the business environments and strategies of each, the process of deepening understanding and advancing discussions among Board members, and especially outside directors, requires considerable effort, both to explain and understand. In 2025, we began providing various opportunities for outside directors to receive briefings directly from each segment. Holding companies in particular are entrusted with important management decisions, and they are expected to make those important decisions quickly. In terms of making decisive management decisions quickly, I sometimes feel there is an element of conglomerate discount.

For each business, we have promoted management that takes capital costs into consideration utilizing weighted average cost of capital (WACC) and ROIC. We are now able to understand trends in ROIC for each segment, and I think it is important to continue tracking these trends going forward. As a conglomerate, it is somewhat frustrating that we cannot apply a single WACC or ROIC across all Group companies. However, taking into account the rise in interest rates in fiscal 2024, we recognize that the WACC for the entire Group has risen from the 5.7% disclosed in the medium-term management plan, and is now above 6.0%. Some businesses are even incorporating WACC into their ROIC trees to promote understanding and awareness among employees.

In promoting business portfolio transformations, we conduct quantitative analyses such as whether we are meeting hurdle rates set through ROIC management. Ultimately, whether a business will recover depends on its competitive capabilities, including technologies. Competitiveness is the key aspect of business strategy. As CFO, I pay close attention to how each business competes with rivals in their respective competitive environments, what resources they allocate and on what timescale, and whether these efforts are in line with sales and profit plans. Whether the business should remain part of the Nisshinbo Group is an entirely separate decision. As a constituent of the Nisshinbo Group, we believe it is important a business generates synergies within the Group. With regard to our business portfolio, we will formulate and execute a solid growth strategy for Wireless and Communications, an assemblybased industry, while at the same time reorganizing business, primarily in the materials domain, to reduce the proportion of business in process-based industries.

The medium-term management plan was based on the assumption that cumulative operating cash flow over three years and asset sales would generate approximately ¥290 billion in cash, of which approximately ¥190 billion would be allocated to capital investment and research and development expenses, and approximately ¥40 billion to strategic investments in focus areas. Results in the first year of the plan show lackluster cash generation, and at present, we are deviating from our planned trajectory. We recognize that we must revise to more realistic targets to instill confidence in investors.

At the same time, with regard to strategic investments comprising mainly M&A, despite investing a modest ¥1.0 billion in fiscal 2024, we acquired ARGONICS GmbH, a German venture company that possesses technology essential for advancements in the automated navigation of ships on rivers. In the future, we will combine this technology with radar owned by Alphatron Marine Beheer B.V., a subsidiary of Japan Radio in the Netherlands, to facilitate automated navigation on rivers. Regarding shareholder returns, we will set a minimum annual dividend of ¥36 per share and aim for a dividend payout ratio of 40% through fiscal 2026. Additionally, we believe our current level of interest-bearing debt, which exceeds ¥200.0 billion, is too high, and we intend to reduce it.

PBR remains under 1x, and we continue to feel a strong sense of crisis. With regard to PBR, our approach is to improve both the numerator and denominator that comprise PBR, but most important are measures to improve the numerator, which is profitability. With the exception of the Real Estate business, we must double profit levels in all businesses. If we can accomplish this, achieving ROE of 10% is not an unattainable goal. At present, our top priority is to continue demonstrating results through action, thereby earning the trust of capital markets.

To achieve an operating margin of 10% and ROE of 10% or more by around 2035, our top priority is to improve profitability. We need to identify and develop growth businesses and improve profits. This also involves ROA, and we believe that unless we reduce total assets, which currently stand at around ¥680 billion, it will be difficult to achieve ROE of 10%. While working to steadily increase revenue, it is essential to reduce inventory, dispose of unnecessary assets, and make uncompromising decisions regarding the liquidation of unprofitable businesses.

Newly appointed President Ishii and I, along with other current executives, have been working for about two years to identify and share the various issues facing the Group while developing measures to resolve them. We are now entering the implementation phase with greater speed than ever before.

With regard to non-financial indicators, I have been leading a disclosure project in line with the Task Force on Climaterelated Financial Disclosures (TCFD) framework. Over the past three years, we have made progress in analyzing risks and opportunities based on future scenarios in all segments, and we are now within reach of our goal of halving CO2 emissions by 2030 compared to 2014 levels, with a view to achieving net-zero by 2050. We are currently considering which policies should be adopted for each segment in relation to the Taskforce on Nature-related Financial Disclosures (TNFD), and we will proceed with TNFD disclosure efforts in all segments from fiscal 2026 onwards. I believe strengthening sustainability initiatives is essential to enhancing our corporate resilience. We are moving forward with this initiative based on the belief that it will lead to lower capital costs over the medium to long term.