Message from the Head of Finance
The Importance of a Sound Financial Foundation: Learning from the Financial Crisis
My primary mission as head of finance is to ensure the timely supply of sufficient business funds to implement growth strategies in any environment, which is a prerequisite for sustainable corporate growth. A solid financial foundation is required to achieve this goal while a weak financial foundation does not allow bold strategic investment in a business even if it is on a growth track. My many years in charge of accounting and finance have taught me this important lesson.
The road to the present has not always been smooth since we have had to face a variety of crises and challenges. In particular, the collapse of the bubble economy in the early 1990s caused a major decline in the Tosoh Group’s performance at a time when we had made significant management investment under our medium-term business plan (FY1986-1991).
Faced with a crisis of corporate survival, we made employment adjustments, drastically cut fixed costs and reorganized unprofitable businesses to extricate the Tosoh Group from these adverse circumstances. In the years that followed, we executed a variety of initiatives to rebuild the Company, consequently recording an operating income in excess of ¥50 billion in 2004. Since then, we have evolved significantly under a dual management strategy, striving to reduce interest-bearing debt to the greatest extent possible, which has resulted in a stronger and sounder financial foundation.
Reinforcement of Financial Foundation
Looking back, I feel that we are now in an extremely favorable financial position. In fiscal 2022, we achieved record highs in the Tosoh Group’s consolidated net sales and operating income while the operating income ratio and ROE also grew to unprecedented levels, partly on the back of soaring prices in the market for chlor-alkali products.
Under our previous medium-term business plan from fiscal 2020 to 2022, cumulative operating cash flow for the three-year period increased to approximately ¥300 billion and capital investment amounted to ¥160 billion, exceeding our initial plan by ¥20 billion. Dividends per share rose by ¥24 during the period of the plan and we repurchased shares totaling approximately ¥10 billion as part of our efforts to enhance shareholder returns. We also continued to repay interest-bearing debt, with the balance reduced to approximately ¥92 billion by the end of fiscal 2022. As a result, the equity ratio exceeded 65% and the net debt to equity ratio stood at -0.10, culminating in virtually debt-free management. These figures are exceptional in comparison with our industry peers, enabling us to achieve the Tosoh Group’s goal to strengthen our financial foundation.
Past 30-Year Performance
|
FY1992 |
FY2002 |
FY2012 |
FY2022 |
| Net sales (billions of yen) |
389.9 |
427.2 |
687.1 |
918.6 |
| Operating income |
12.9 |
15.6 |
23.7 |
144.0 |
| Interest-bearing debt |
406.1 |
332.1 |
343.6 |
91.9 |
| Equity ratio (%) |
15.1 |
15.8 |
24.1 |
65.2 |
In light of these circumstances, we have shifted focus from a defensive to a more proactive approach aimed at enhancing corporate value premised on a robust financial structure. We plan to make capital investment totaling ¥200 billion over the three years of our new medium-term business plan that will commence in fiscal 2023, up ¥40 billion over the previous plan.
The basis of our growth strategy remains dual management under which we promote the Commodities, where we have a solid track record, and the Specialties, which features high added value, in a balanced manner. The biggest difference will be a greater focus on decarbonization.
With future market trends uncertain in the Commodities, which is characterized by energy-intensive production, it is essential to maintain this business as a profitable venture while focusing on decarbonization. In contrast, in the Specialties, where greenhouse gas (GHG) emissions are relatively low during production, the objective is to boost profitability. Our target is to increase operating income from just under ¥60 billion to ¥100 billion in both fields by 2030. We recognize that it is necessary to allocate funds for this growth investment.
Proactive Approach Under the New Medium-term Business Plan
Of the ¥200 billion earmarked for capital investment in the new medium-term business plan, we plan to invest approximately ¥80 billion over the three-year period in the Specialties to increase production capacity, first for bromine, for which we boast top production volume in Japan, as well as separation and purification media and advanced materials products such as zirconia powder and silica glass. In addition to regular capital investment, we will invest ¥30 billion toward decarbonization, which will include upgrading to biomass fuel boilers, installing additional gas turbines and introducing CO2 feedstock conversion equipment.
We also plan to invest even more vigorously in R&D to cultivate future products and technologies with a basic policy of investing heavily in the three critical areas of life sciences, electronic materials, and environment and energy.
Moreover, we will continue to explore opportunities in the bioscience field and other sectors with an eye to growth through M&A. Under the previous medium-term business plan, we set aside approximately ¥30 billion for M&A. In the new plan, rather than set a specific budget, if we find a target company that matches our growth strategy, we will look closely into the viability of acquiring it.
Detailed Consideration of Investment Projects
When considering the appropriateness of each investment project, we look closely at whether we can achieve a return on the investment within a certain number of years and whether the internal rate of return is expected to exceed the cost of capital.
However, for investment projects requiring large-scale capital investment but with stable demand expected over the long term, as with the Chlor-alkali business, investment decisions may be based on a slightly longer time frame. Conversely, for investment projects for products with a short life cycle such as in the Specialties businesses, we will focus closely on the relationship between risk and return, specifically whether we can secure high profitability within a short period.
Maintain Stable Dividends and Enhance Shareholder Returns
The Tosoh Group’s basic policy is to continue paying stable dividends with shareholder returns positioned as one of our key capital policies. The year-end dividend for fiscal 2022 was ¥50 per share. Combined with an interim dividend of ¥30 per share, the annual dividend amounted to ¥80 per share.
We aim for ongoing stable dividends targeting a payout ratio of 30% for the three years of the new medium-term business plan. We will take a flexible approach to share repurchases in consideration of the level of free cash flow.
Cash Management in Preparation for Unforeseen Circumstances
As of the end of fiscal 2022, cash and deposits were approximately ¥160 billion and net cash after deducting interest-bearing debt totaled ¥70 billion for the Tosoh Group. While some may say we are overly cash-rich, we are also faced with a variety of business risks.
Working capital has increased sharply in recent times due to soaring raw material and fuel prices, and there are concerns that the situation in Ukraine will deteriorate while we are on the brink of a global recession. A certain degree of financial buffer is therefore necessary in preparation for such eventualities.
As I mentioned earlier, we will keep a close eye on whether our budget for capital investment and R&D related to decarbonization is sufficient, considering that we also need to prepare funds for M&A aimed at further growth.
Enhance Corporate Value Over the Medium and Long Term
A critical management challenge is to increase corporate value over the long term. Our basic policy is to allocate the funds necessary to continuously enhance corporate value in comprehensive consideration of financial risks and growth strategy and direct any surplus cash flow to shareholder returns such as by increasing dividends and repurchasing shares.
I would like to ask all stakeholders for your continued understanding and support as we work to drive growth for the Tosoh Group from a medium- and long-term perspective.
Satoru Yonezawa
Executive Vice President