We achieve sustainable growth by increasing profits and improving capital efficiency backed by our financial strength, and deliver more returns to our shareholders.
Financial goals and shareholder returns policy
In order to maximize cash flow from our businesses, invest in ongoing growth and deliver steady returns to our shareholders, management needs to focus on capital efficiency. We set ROIC and ROE as management indicators in addition to net sales, operating margin and operating margin ratio in Vision 2022, our mid-term business plan drawn up in fiscal 2018 to strengthen profitability and improve capital efficiency.
Mid-Term Management Plan
|Net Sales||¥3,600 billion|
|Operating Income||¥230 billion|
|Operating Margin Ratio||6.4%|
|ROIC||9% or more|
|ROE||8% or more|
We are maintaining a strong financial structure at a level consistent with the aim of achieving a capital-to-asset ratio of 50%. This enables us to achieve sustainable growth with profit increases and improvements in capital efficiency backed by financial strength and deliver more returns to our shareholders.
Dividend payout ratio
Results for fiscal 2019
Fiscal 2019 saw a decrease in the production of automobiles and the sale of smartphones, along with a decrease in optical fiber cable prices, a high yen and a drop in copper prices. This was, of course, exacerbated by the sharp deceleration of economic activities due to COVID-19 in the fourth quarter. As a result, our consolidated sales for the period fell to \3,107.0 billion (down 2.2%). Despite our utmost efforts to reduce costs globally, profits suffered due to the decrease in sales, along with an increase in depreciation for future business, a decrease in prices in the automotive industry, an increase in cost when production establishment for some products and rapid decrease in production due to COVID-19. As a result, we fell below the previous fiscal year in all of our key metrics, with operating income of \127.2 billion (down 23.5%), ordinary income of \130.5 billion (down 30.8%) and \72.7 billion in profit attributable to owners of the parent company (down 38.4%).
Outlook for fiscal 2020
With severe outbreaks of COVID-19 around the world, we have had to stop operations at multiple production bases. Our customers have also been seriously impacted, resulting in low order numbers, particularly in onboard products for vehicles. At the beginning of the year, it was completely unclear what fiscal 2020 held for us as a business. However, demand rapidly recovered from the second quarter onward, and we were able to keep up with the increase in orders both from a production and a cost perspective. Emergency investments in facilities and compression and delays of expenses were also successful thanks to the contributions of everyone in the company. As a result, by the end of the second quarter, our profits had recovered to almost the same level as the same period last year.
The second half of fiscal 2020 will be a critical period for getting our business performance back on track. We will reap the results of the past measures and make a concerted effort to achieve VISION 2022.
Initiatives to improve capital efficiency
Implementation of activities to improve ROIC
We are implementing activities to improve ROIC throughout the company as part of our initiatives to improve capital efficiency. Each division sets ROIC targets and uses an ROIC tree as a tool in its activities to improve ROIC. Activities are divided into three categories—expansion of sales (Category A), cost reduction (Category B) and improvement of asset efficiency (Category C)—and each division sets KPIs(Key Performance Indicators) for its businesses. Divisions report on initiatives they have taken to improve ROIC and KPIs they have set in their ROIC tree during management conferences. They then monitor the degree to which the KPIs have been accomplished and discuss solutions to issues at department meetings such as monthly results meetings. We had always been working to reduce inventory and debt, but by using the ROIC tree and linking it to KPIs that can be applied at a site level, we are now able to provide employees with a better understanding of the effects and significance of our efforts, resulting in more effective PDCA cycles.
For example, in divisions requiring large investments in process industry equipment, indexes such as machine load factor (actual running time of facilities / baseline running time of facilities) and wastage factor are prioritized as KPIs in the ROIC tree. Results by product type are assessed and issues and solutions are discussed weekly. By focusing on machine load factor and wastage factor, which have the greatest impact on these divisions' results, these divisions have created a positive spiral where they are able to improve their plant turnover, which enables them to operate with less inventory. We have a variety of businesses, and as this method enables each business division to set the most appropriate KPIs and endeavor to accomplish the targets, we can carry out our businesses more effectively.
Initiatives to improve the efficiency of fund operations
To improve our capital efficiency, we have built a cash management system (CMS*), which facilitates effective use of capital within the group to keep outside interest-bearing debt down.
Our CMS was first introduced in our group companies in Japan before being expanded to the USA, Europe, China and other Asian countries as our businesses expanded. We allocate funding across countries or regions when capital is scarce or abundant in a particular country or region, enabling more efficient use of capital throughout the group.
* A system to facilitate efficient use of capital through integrated management of cash equivalents and debts in group companies and adjustment of surpluses and deficiencies that occur in group companies through capital loans and funding within the group.
Capital investment management
The following PDCA-based management cycle is used to make the right decisions about capital investment and to detect and share issues.
1. Capital budget management
Our divisions make capital investment plans according to their mid-term management plans. An overall capital investment plan for the whole company is set each year based on the figures given in our divisions' plans, taking into account our overall cash flow.
2. Discussions and decisions about capital investment
Individual capital investment are requested within the scope of our capital investment budget. As a general rule, they are only approved if they exceed the hurdle rates for ROI (return on investment) and IRR (internal rate of return) set for the applicable business and investment category.
If a capital investment is approved, it is executed according to the reported plan.
4. Tracing of outcome of plant investment
We measure the actual ROI on past capital investments and analyze the degree to which it deviates from the plan. This shows us whether the investment paid off. Factors behind a failure to meet the plan will be analyzed and reported, and the success factors and failures will be shared within the company so that they can be utilized in the consideration of future capital investments.