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CFO Message
Updated on 2 December, 2024
Review of FY2023 and Future Goals
Under the medium-term management plan "VISION 2025," we aim to not only further strengthen our business foundation by improving performance in order to manage our share price more consciously, but also to improve capital efficiency by enhancing shareholder returns and implementing financial and equity strategies, while promoting sustainability management to maximize corporate value and set a basic strategy of achieving a P/B ratio of more than 1.0 at the earliest possible date.
In FY2023, the first year of the plan, we achieved revenue of 359.5 billion yen, core operating income of 19.7 billion yen (core operating income margin of 5.5%), ROE of 12.2%, ROIC of 8.9% and ratio of equity attributable to owners of the parent company to total assets of 36.2%, significantly exceeding the earnings forecast announced at the beginning of the fiscal year, and successfully achieved the majority of the numerical targets for FY2025, the final year of "VISION 2025."
In addition, the Company has been proactive in returning value to shareholders, including carrying out acquisition of treasury shares twice, and as a result, its P/B ratio is expected to remain above 1.0x as of the end of March 2024.
"VISION 2025" has gotten off to a good start, but exceeding a P/B ratio of 1.0 is not our final goal. We will continue to strive to increase our corporate value.
To achieve this, we will promote further growth in growth-driving business by strengthening investment, and promote early improvements in capital efficiency by accelerating structural reforms in restructuring businesses. We will also aim to further increase our P/B ratio by achieving results in FY2025 that exceed the targets envisaged in "VISION 2025."
Price book-value ratio (P/B ratio) trends
Actions to achieve management that is conscious of capital cost and share price
In "VISION 2025," we have set targets for FY2025, the final year of the plan, of an ROE of 10% or more, debt equity ratio (D/E ratio) of 0.6 or less, and ratio of equity attributable to owners of the parent company to total assets of 35% or more. We are further promoting the improvements to our business structure that we have been working on under the previous mid-term business plan, "VISION 2023." Furthermore, in order to realize management that is conscious of capital costs and share price, we are implementing more proactive shareholder return measures and improving capital efficiency by adding ROIC as a new financial indicator.
We define ROIC as "(after-tax core operating income + equity method profit/loss) ÷ average of invested capital (shareholders' equity + interest-bearing debts) during the period." In addition to the company-wide ROIC target, we have set simplified ROIC targets for each business division and established a system for managing ROIC budgets and actuals on a divisional basis. This will enable each division to ascertain its own capital costs and establish activities to improve capital efficiency, with the aim of achieving an ROIC of 9% or more by FY2025.
Specifically, each division will understand where it stands against the hurdle rate and consider what needs to be done to improve ROIC, and based on that, the CEO and CFO will then regularly evaluate the business portfolio. In the process, we will verify whether the results are as expected and, if not, what the reasons are and we will then make appropriate resource investments based on capital allocation to achieve our ROIC targets, and if necessary, we will also reorganize our business portfolio.
Hedging foreign exchange risk to avoid profit/loss impact
As the Group operates its business globally, its revenue and core operating income are subject to the effects of exchange rate fluctuations. In order to mitigate the impact of this exchange rate, we are promoting the reshoring of production from overseas to Japan and increasing the overseas sales ratio, primarily in the Communications Systems Business. Previously, a 1 yen depreciation of the yen against the US dollar would result in a loss of approximately 300 million yen, but currently this loss has been reduced to approximately 150 million yen.
In order to avoid (hedge) the impact of such exchange rate fluctuations on earnings, we conclude exchange contracts. The purpose of exchange contracts is to stabilize earnings by reducing the impact of exchange rate fluctuations. For orders such as ones in the OEM Business in the M&T Sector, we conclude exchange contracts at the time orders are confirmed. For the Communications Systems Business in the S&S Sector and the Aftermarket Business in the M&T Sector, we conclude contracts about one year ahead on a regular basis.
This means that even if there is a large immediate change in the exchange rate, there will be little impact on earnings during the period of those exchange contracts. By taking measures against foreign exchange during that period, including changing production locations and taking price measures, we hedge future foreign exchange risks.
Shareholder return policy
In formulating "VISION 2025," we changed our shareholder return policy based on the expectations of shareholders and investors, as well as the Company's business environment and status of equity.
Under the new shareholder return policy, we will flexibly acquire treasury shares while balancing the utilization of equity for medium- to long-term profit growth and the effect of improvement of capital efficiency, in addition to the existing dividends. In so doing, we will change the guidelines for shareholder return from the conventional dividend payout ratio to the total payout ratio, and set the target for the total payout ratio at 30 to 40%, in order to enhance shareholder return more than ever. For the time being, we plan to allocate approximately 40% of the total return to dividends and approximately 60% to acquisition of treasury share.
Based on this concept, the dividend for FY2022 was 12 yen in total, including 7 yen of the ordinary dividend and 5 yen of the special dividend resulting from the highest-ever business performance for the period since the management integration in 2008 and the gains on the transfer of non-current assets. In addition, we acquired treasury shares worth approximately 4 billion yen, resulting in a total return of approximately 6 billion yen, and the total payout ratio to profit attributable to owners of the parent company for FY2022 was approximately 37%.
In addition, for FY2023, we had initially planned to pay an ordinary dividend of 8 yen, however, due to favorable business performance, we acquired treasury shares worth approximately 2.5 billion yen and increased the final dividend to 12 yen. As a result, the total return amount for FY2023 will be approximately 4.3 billion yen, and the total payout ratio to profit attributable to owners of the parent company will be approximately 33%. As a result of implementing these shareholder return measures, the total amount of returns achieved so far during the "VISION 2025" period has reached approximately 10.3 billion yen.
Dividends for FY2024 are planned to be increased by 1 yen to 13 yen, of which 5 yen will be paid as an interim dividend.
Shareholder Return Policy
• Return policy: Total payout ratio of approx. 30 to 40%
• Dividends: Aim for stable dividends and continuous dividend increase
• Acquisition of treasury shares: Agile implementation within the limit of the total payout ratio while maintaining financial soundness and ensuring investment in growth businesses
Shareholder Return Ratio
Changes in dividends per share (yen)
Actual shareholder return
| Timing | Details | Amount | Source |
|---|---|---|---|
| May 2023 | Dividend for FY2022 | Approx. 2 billion yen (12 yen per share) |
Profit in FY2022 |
| June 2023 | Share repurchase | Approx. 4 billion yen | Profit in FY2022 |
| December 2023 | Acquisition of treasury share | Approx. 2.5 billion yen | Profit in FY2023 |
| May 2024 | Dividend for FY2023 | Approx. 1.8 billion yen (12 yen per share) |
Profit in FY2023 |
Capital allocation optimization
Under "VISION 2025" we will continue to focus on generating cash flow and ensure an effective outflow of cash after making the use of funds clear.
Inflows of cash over 3 years are expected to be 100 billion yen, including cash of about 10 billion yen resulting from the sale of businesses and assets, in addition to about 90 billion yen in operating cash flow. The results for FY2023 are off to a good start, with operating cash flow of 33.2 billion yen and income from asset sales and other sources of 6.1 billion yen.
In terms of cash outflows over the three-year period, we plan to use approximately 65 billion yen for growth investments necessary to expand and maintain our existing businesses, and approximately 35 billion yen for strategic investments. The actual results for FY2023 are 19.5 billion yen for growth investments, 2.6 billion yen for strategic investments such as new investments for the construction of new headquarters buildings and capital increases in affiliated companies, 9 billion yen for shareholder returns, and 6.3 billion yen for long-term borrowings.
The Company's strategic investment targets are 15 to 20 billion yen for investment in new businesses, 10 to 13 billion yen for shareholder returns, and 5 to 10 billion yen for loan repayments, but currently shareholder returns are being implemented first. Going forward, we plan to make necessary investments for growth, including M&A, focusing primarily on the growth-driving businesses in our business portfolio, and we are currently compiling a list of projects for this purpose. In order to finalize the project, the CFO hosts an investment and loan review committee that examines the return on investment, confirms the risks, and other issues from various angles. The investment is then carried out after an institutional decision is made in accordance with the prescribed procedures.
Capital Allocation Concept
Tax Policy Disclosure
Based on our corporate philosophy, the Group strives to ensure high profitability and fulfill its social responsibilities as a company, thereby achieving sustainable growth and improving its corporate value over the medium to long term. We believe this can be achieved through compliance with laws, company policies, social customs, and good business ethics.
Based on this approach, we have never engaged in tax evasion using so-called tax havens, and we have published the following tax policy and will continue to strive to pay taxes fairly.
