Our Mid-Term Management Plan spells out a two-pronged management approach of investing profits gained through business activities into growth while also returning them to stakeholders.
At the same time, we will pursue sustainable management in an effort to enhance our corporate value.
Toshiki Yauchi
Director, Senior Executive Managing Officer, CFO, CSO, and Head of Management Control
Q1:
Would you care to reflect on FY2023, the last fiscal year of the previous Mid-Term Management Plan?
In recent years, even as management figures such as net sales and operating profit have improved, this has not unfortunately been reflected in earnings per share (EPS). One factor behind this was the unstable earnings of two consolidated subsidiaries. So, I think the decision to transfer those subsidiaries (Nifco Germany GmbH and its subsidiary, Nifco KTW America Cooperation) was a momentous decision. The transfer had a major impact not only financially but also strategically. These subsidiaries became part of Nifco as business units in 2013-2014 with the aim of expanding our customer portfolio in line with the management strategy of our founder (Toshiaki Ogasawara ), which aimed at global growth. Although initially profitable and growing, their factory production lines were hit hard by the recent COVID-19 pandemic, resulting in the companies being in the red for several years. After a series of heated internal debates and tough negotiations with customers on the best approach to righting the businesses, we reached an agreement to transfer the businesses. This was thanks in part to various encounters and connections and some fortunate timing. Though this is not exactly the result we were hoping for, growth in the global market is our company policy, so we will continue to take on new challenges in the future.
I deeply regret the inconvenience to stakeholders caused by the extraordinary losses incurred due to the aforementioned deal. Particularly unfortunate from my point of view is the fact that ROE (return on equity) dropped significantly from the double digits to the single digits (7.8%) although there were unavoidable circumstances. As you know, ROE is an indicator of how efficiently a company earns profits, and we place great importance on this indicator. We have maintained a double-digit figure for many years, so this drop to the single-digit level was a great shock to us. Now that we have let go of these unstable subsidiaries, however, we expect the effects of our structural improvements, which so far have been limited to operating profit, will now extent to net profit. Further, I expect this improved structure will smoothly lead to higher EPS. We think this will bring a sense of security to market participants. As for the decreased ROE, we hope to not just bring it back to double digits, but to soon approach record high levels.
Q2: Can you outline the essence and mission of the new Mid-Term Management Plan that started in FY2024 for us?
FY2024 is the first fiscal year of the current Mid-Term Management Plan (MMP), which covers a three-year period ending at the end of FY2026. As for our overall goals for this period, the net sales of the aforementioned transferred subsidiaries were 35 billion yen per year, so we aim to achieve record-high net sales in FY2026 after making up for the decline in sales over the three-year period. In terms of profitability, we have positioned this period as a time to establish a structure that will enable us to consistently achieve operating profit ratio of at least 13%. This is a rather challenging goal, as not many automotive suppliers achieve operating profit ratio this high. That said, we aim to achieve this goal every year, and we are off to a good start, having achieved an operating profit ratio of 13.8% in Q1 FY2024 (April to June). Of course, we expect a great deal of uncertainty in the form of future automobile production volume, the Chinese economy, exchange rate trends, and other factors. So, we cannot afford to be complacent in Q2 and beyond.
As to the second part of your question, the big mission of the new MMP is investment in growth. Our current business model, the manufacture and sale of plastic fasteners for the automotive industry, is solid, profitable, and performing steadily. This strength, which was built up by our predecessors, is likely to continue. In order to further enhance our corporate value, however, we need growth above and beyond our normal organic growth. We are building up the funds needed to achieve this from our annual profits. Investing in a completely different field entails a high risk, so we are in the process of exploring a wide range of growth investments, including materials and services within the mobility-related field. This may seem contradictory, given what I have just said, but we may also be able to leverage Nifco's unique technology in markets other than mobility.
However, we will not be directing all of our profits to growth investments. As in the past, we will also direct them to Nifco stakeholders in the form of dividends and other returns to investors. We will continue to pursue a two-pronged approach to management of enhancing corporate value by directing profits to both growth investments and stakeholder returns.
Q3: Tell us about your roles and aspirations as CFO, CSO, and Head of Management Control in relation to the MMP.
Though I have different functions and roles as CFO, CSO, and Head of Management Control, I try to see the whole picture without being overly conscious of the distinction between the roles. This is because being well-rounded and having the balance are essential in management. The MMP I talked about earlier is important, but equally important is having a long-term perspective extending past that three-year period and working to achieve results that exceed stakeholders' expectations, therefor enhancing corporate value. Our goal is to provide overall social value by meeting expectations on both the financial and ESG fronts.
Q4: What are your thoughts about the relationship between ESG management, finance, and growth and investment strategies?
In management, finance and ESG cannot be discussed separately. They are one and the same. As a company, the most important thing is to increase sales, earn profits, and achieve financial targets. At the same time, if a company does not make its social value and presence known through ESG activities, it will not gain the sympathy of stakeholders. Similarly, employees will have a hard time taking pride in the company, making it hard to recruit people.
We are in the business of making sales proposals primarily to automobile manufacturers, but the ultimate consumers of our clients’ products are becoming increasingly environmentally-minded. In terms of the "S" (social) in ESG, we have raised wages in line with the performance of our employees even during Japan’s so-called “lost three decades” of deflation. We have also returned shares to our employees in line with our business performance through our employee stock ownership program. I believe this has made employees more aware of our business performance, causing them to share the same perspective as our shareholders. We will continue to return profits to our employees, through which we hope to create a virtuous cycle in which both our employees and the company grows.
On the environmental front, I would like to mention that we use plastics derived from natural resources. Though materials are often seen as an environmental issue in and of themselves, we will continue to invest in technologies and other means to not waste any of the high-performance engineering plastics we purchase, and instead turn them into products. Meanwhile, the automotive industry as a whole is investing in the R&D of bioplastics, biodegradable plastics, and other materials derived from non-fossil resources. These efforts have in turn led to ESG investments.
Q5: What sort of value are you looking to provide to stakeholders in the future? What will be your approach to providing this value?
We will utilize our strong current business model to steadily generate cash and return it to our shareholders and other stakeholders. At the same time, we will pursue sustainable management by allocating a portion of profits to new growth investments and continuing to do so. By continuing these efforts, we aim to enhance our corporate value.
We look to provide three main types of shareholder returns: dividends, share buybacks, and enhancement of corporate value. Our policy is to stably and steadily increase dividends. To assure fairness to all investors, we do not currently offer any special shareholder benefits.
We hope that our stakeholders can empathize with Nifco's existence and social value. A company is a living thing. We have good times and bad. In either case, we will strive to carefully communicate with and provide information to our stakeholders to keep them informed of our situation, as well as the measures we are taking to improve it.