Medium-Term Business Plan
Shortly after the start of fiscal 2017, Tosoh announced a three-year, medium-term business plan that guides the company through its 2019 fiscal year. The plan builds on management’s dual commodities and specialties approach to consistently generate value for Tosoh’s customers, investors, and other stakeholders.
This feature presents the highlights and results of the plan and of the strategies the company is employing in its commodity and specialty operations to meet the plan’s targets and stabilize profitability. It is based on information available at the time of writing. So be advised that changes in economic conditions and that other, unknown factors in Japan and internationally could cause actual results to differ significantly from any projections presented.
Tosoh’s medium-term business plan—which is entering its second year in fiscal 2018—calls for net sales of ¥750.0 billion, operating income of ¥85.0 billion, an operating income ratio and a return of equity (ROE) of more than 10.0% each, and an equity ratio above 50.0% by the company’s fiscal 2019 year-end. Substantially improved terms of trade, however, enabled Tosoh to meet all but the target for net sales in fiscal 2017, fully two years ahead of schedule.
Plan Overview
The medium-term business plan has three policies. The first involves a management focus on balanced efforts to strengthen Tosoh’s commodity and specialty businesses. Tosoh is optimizing its production capacities to make its commodity products more competitive and profitable. It is also investing in R&D and mergers and acquisitions (M&A) to expand its capabilities in high-growth potential specialty products.
The plan’s second policy is to maintain and strengthen Tosoh’s financial position to support a flexible investment strategy for growth. And the third policy emphasizes safety reforms by developing safe, stable operating technologies and implementing improvements that eliminate safety problems and incidents.
The plan calls for ¥130.0 billion in capital spending plus ¥30.0 billion more pegged for M&A over the three years from 2017-2019. Tosoh has already increased its zirconia production capacity in Japan and its high-silica zeolite production capacity in Malaysia. It has also begun investing to increase the efficiency of its bromine production and power generation facilities. The company will further invest to expand its production capacity for Toyopearl separation and purification media and to achieve other of the growth strategy objectives of its medium-term business plan. It will do so, however, taking in account changing economic conditions.
Business Positioning
Tosoh’s business is positioned on management’s commitment to a dual emphasis on commodities and specialties. This entails robust portfolios of commodity and specialty products such that an upturn in one protects the company from fluctuations in the other, thereby enhancing corporate value through balanced growth.
Tosoh’s commodities operations generate profits and cash flows that underpin its business. And Tosoh will continue to ensure that it sources highly competitive high-quality feedstocks for its commodities products and that it equips its commodities operations with state-of-the-art technologies. Amid swings in business that adversely affect profits, Tosoh will, for example, take advantage of continuing firm demand for basic raw materials.
The company’s focus in specialty products includes pursuing higher earnings to drive growth and maintaining high profitability while developing products. Tosoh expects lead times of around 10 years from development to profitability.
Financial Progress and Targets
The medium-term plan was compiled using then-available information. For that reason, Tosoh’s results may differ from the plan’s targets because of unforeseen events and changes in economic conditions in Japan and overseas.
Operating income in the year to March 31, 2017, totaled ¥111.2 billion, far exceeding the target of ¥85.0 billion for the year to March 31, 2019. This was because the market for the commodity products produced by the Petrochemical and Chlor-alkali Groups was much more favorable than envisaged in the plan.
Also in fiscal 2017, Tosoh set a profitability record due largely to a surge in commodities profits. And its ROE surpassed 20.0%, well above the more than 10.0% targeted for year-end fiscal 2019. Tosoh’s net sales for fiscal 2017, of ¥743.0 billion, were below the fiscal 2019 year-end target but fully ¥23.0 billion above the ¥720.0 billion target for fiscal 2017.
Tosoh’s goal for fiscal years 2018 and 2019 remains to build a business structure that can withstand changing external conditions to meet financial targets. Tosoh seeks steady revenues and a further increase in operating income, which went from ¥69.4 billion in fiscal 2016 to ¥72.0 billion in fiscal 2017. That number is expected to reach ¥100.0 billion in fiscal 2018 and to then drop to ¥85.0 billion by fiscal 2019.
The objective is an operating income ratio of more than 10.0%, up 0.8 percentage points over fiscal 2016. This requires raising the operating income ratios for commodity products 2.1 percentage points, to 8.6%, and for specialty products 3.0 percentage points, to 21.7%. By fiscal 2017 year-end, Tosoh had already exceeded those targets and is on pace to continue doing so.
Management anticipates a slightly stronger yen in fiscal 2019 and assumes exchange rates of ¥110.0 to the US dollar and of ¥120.0 to the euro. Management also assumes a domestic naphtha price for fiscal 2019 of ¥40,000.0 per kiloliter, an increase of ¥2,775.0 over fiscal 2016.
Tosoh spent ¥37.8 billion on capital investments in 2017 and plans to invest an additional ¥92.2 billion in fiscal 2018 and fiscal 2019. Two policies guide the company’s capital expenditures. The first is to invest in renewal and productivity improvements that maintain and improve supply stability and competiveness in commodity products. The second is to boost investment in specialty products, increasing the production capacities of growth businesses; leveraging R&D with universities, start-up ventures, and other partners; and acquiring bioscience and other firms to broaden Tosoh’s business scope.
Capital expenditures to increase production capacities prioritize high-silica zeolite (HSZ), zirconia, Toyopearl separation and purification media operations, polyvinyl chloride (PVC) operations in the Philippines, and functional polymer and functional urethane operations. Additional investment will go to enhance Tosoh’s power generating efficiencies.
Financial Position and Shareholder Returns
Tosoh has already surpassed the medium-term plan’s fiscal 2019 year-end aim of an equity ratio exceeding 50.0%. In fiscal 2017, the company realized an equity ratio of 52.8%, a gain of 6.5% over the previous year. Tosoh continues, meanwhile, to reduce its interest-bearing debt.
Tosoh likewise is delivering on its policy of paying stable dividends and of determining dividends based on comprehensive assessments of performance, free cash flow, and business development potential. In a May 10, 2017, meeting, Tosoh’s Board of Directors (BOD) decided that dividends of surplus will be issued to shareholders of record as of March 31, 2017. This raised fiscal 2017 year-end dividends from the interim ¥7.5 per share to ¥16.5 per share. Over the medium and long terms, Tosoh will target a payout ratio of 30.0%, above fiscal 2017’s 20.6%.
Balanced Growth
The medium-term business plan builds through fiscal 2019 on Tosoh’s competitive edge globally in supplying diverse basic chemicals and functional and advanced materials. The company will continue to balance large-volume commodity operations with high-value-added specialty operations to bolster revenues and earnings in good and bad operating conditions.
Tosoh’s operational structure—with chlor-alkali and petrochemicals on the commodity side and advanced materials, bioscience technologies, and organic chemicals on the specialty side—helps it weather the inevitable downturns and rapid changes in business environment experienced by its commodity operations. That structure also enables it to secure high margins from participating in the world’s most technology-intensive industries.
Specialty Operations Expansion
Tosoh has increasingly come to rely on its specialty operations to shore up its profitability when the cash-generating capabilities of its commodity operations lag. Specialty products regularly contribute a substantial portion of Tosoh’s consolidated net sales, and this is especially vital amid tough years mainly for their chlor-alkali- and petrochemical-based commodity counterparts.
The company is working to achieve a March 2019 operating income target of ¥40.0 billion in its specialty operations. It is differentiating and heightening the added value of its specialty products and expanding its sales of strategic products. And it is on pace to reach its target, having hit ¥35.4 billion in operating income for fiscal 2017, which is ¥3.5 billion over the planned ¥31.9 billion target set for the year under review.
Tosoh’s capital spending on its specialty operations is in line with the plan to date and is focused on expanding investment in growth businesses and business fields through R&D (including collaboration with academia and venture companies) and M&A (especially life science companies). And management will make timely decisions based on an understanding of the risks and synergies involved.
Until recently, specialties accounted for around a mere 20.0% of the company’s net sales. That increased to 23.7% in fiscal 2017, and a similar figure is expected for year-end fiscal 2019. Specialty products are even more important as profit drivers. They represented 31.8% of operating income in fiscal 2017 and should remain around that level, if not higher, through fiscal 2019.
Tosoh, meanwhile, hopes to expand its R&D especially in collaboration with academia and venture companies. It will complement its tie-ups with increased mergers and acquisitions, ideally with life science companies. It is also renewing the main building and the R&D infrastructure at its Nanyo Complex, construction on which should conclude in spring 2018 and fall 2019, respectively. The company is likewise renewing the R&D infrastructure at its Yokkaichi Complex, and that work is slated to end in spring 2019.
In fiscal 2017, the company expanded the production capacities for a number of its specialties products. It increased its commercial manufacturing of automated immunoassay analyzer (AIA) reagents in November 2016. And it raised zirconia production capacity at the Yokkaichi Complex in March 2017. In addition, it commenced commercial operations at its newly constructed HSZ plant in Malaysia in the spring of 2017.
Commodity Operations Profitability
Commodity products are a core Tosoh business and, like the company’s specialty products, are being optimized. They continue to earn the lion’s share of consolidated net sales, but they are sensitive to market changes. The latter is especially true for chlor-alkali, a longtime core Tosoh product group. Tosoh will improve the profitability of its Chlor-alkali Group by enhancing the group’s ability to deal with market pressures and to control costs; by adjusting the group’s product mix; and by furthering the integration, efficiency, and effectiveness of the group’s vinyl isocyanate chain.
Operating income from Tosoh’s commodity businesses increased to ¥47.9 billion for fiscal 2017 because lower feedstock prices improved terms of trade and pushed up product prices. Tosoh’s profit targets for its commodity operations will be upwardly revised if favorable market conditions persist. But Tosoh aims to meet its profit targets even if the terms of trade worsen, as anticipated, by focusing on implementing its strategy for growth.
Tosoh is focusing investment on renewal of facilities and increased efficiency to sustain and strengthen its ability to provide a competitive and stable supply of commodity products. Among its Chlor-alkali Group’s products, Tosoh is intent on raising its production capacity for vinyl chloride monomer (VCM). This will ensure an abundant and stable supply of VCM to meet increased production capacity at Tosoh’s domestic and overseas PVC production facilities. Tosoh’s PVC business will, in turn, capitalize on the stability and abundance of VCM supply by boosting sales of PVC to customers worldwide.
Tosoh Group company Philippine Resins Industries, Inc. (PRII), headquartered in Makati City, the Philippines, is preparing to increase its PVC production capacity with the construction of additional PVC manufacturing facilities in February 2017 at a cost of ¥4.2 billion. Upon completion, in December 2018, the new facilities are expected to add 110,000 metric tons a year to and thereby double PRII’s PVC production capacity. Commercial operations are to start in January 2019 and to contribute to establishing a stable supply of PVC to meet growing demand in the Philippines and elsewhere in Asia.
Caustic soda is central to Tosoh’s operations. The company was, after all, founded in 1935 as Toyo Soda Manufacturing Co., Ltd. Tosoh’s ongoing production of caustic soda should benefit from the medium-term plan’s aim of full electrolysis operating rates at the Nanyo and Yokkaichi Complexes. The higher production of caustic soda that results should strengthen profitability through heightened sales of soda and chlorine derivatives.
Other commodity operations that Tosoh will strengthen include the Petrochemical Group’s olefin operations. The company intends on raising the operating rate of the naphtha cracker at its Yokkaichi Complex, which contributes to the manufacture of VCM, PVC, and olefins, by installing a gas turbine there by spring 2020. In addition, Tosoh will work to heighten the responsiveness and flexibility of its olefin manufacturing and sales system.
Tosoh’s emphasis, meanwhile, for the Petrochemical Group’s polymer operations is the further development of high-value-added functional and specialized polyethylene products. This includes improved engineering grades of polyphenylene sulfide (PPS) resins and better, non-contaminating grades of chloroprene rubber (CR). As well, the polymer operations will increase sales of their advanced and specialty grades of functional polymers, especially chlorosulfonated polyethylene (CSM), of which Tosoh is the world’s leading producer.
Commodities and Specialties Innovation
Tosoh supports innovation in its commodity and specialty operations through leading-edge technology and R&D. That support enables these operations to generate next-generation products for the advancement of civilization, including increasingly versatile and functional products for niche applications.
The company has developed filler for low molecular weight antibody purification, an analytical column for antibody drugs, a coating-type organic electroluminescence material, a high-performance gas barrier material, a conductive polymer material, a high-performance heavy metal treatment agent for wastewater, and a two-color sintered body zirconia.
Tosoh hopes to bring its R&D resources to bear more fully than ever on short-term development initiatives for products and technologies related to organic, inorganic, polymer, and polyurethane materials. Its latest R&D reorganization makes possible enhanced R&D for Tosoh’s three long-term priorities: life sciences, energy and environmental conservation, and electronic materials. The commanding focus that these priorities have in specialty operations reflects Tosoh’s shifting of its specialty operations from a supporting role—whereby they shore up profits when the business cycle for commodity operations takes a downturn—to a leading role as a driver of the company’s business.
The progress of Tosoh’s efforts in this respect is evident in its establishment of a US-based team of technology and venture investment experts. They work with Tosoh researchers to gather information on new technology and M&A opportunities. Tosoh has also invested in a research fund to strengthen its ability to source technical information. And the company is transforming its Yokkaichi Complex into a center for petrochemical and polymer product development efforts.
Amid market shifts, Tosoh has faced the challenge of managing increasingly frequent crises while keeping its business plans on course. Each of Tosoh’s groups and divisions faces different issues but overall are united by the strategy to expand the specialty businesses, to reinforce the commodity operations, and to thereby ensure Tosoh’s continued growth and ability to fulfill its commitments to its stakeholders and society. That strategy is well expressed in Tosoh’s medium-term business plan for the three years from fiscal 2017 through fiscal 2019, achieving the aims of which will set Tosoh on a sound footing well into the future.