Nippon Kayaku Group Integrated Report 2024 Online

I love historical novels, and am especially fascinated by the ways of life of characters who lived in ages past, from the Spring and Autumn and Warring States periods in Chinese history, and the subsequent Qin and Han dynasties, to the Three Kingdoms. There is so much we can learn from history books such as Juuhachi Shiryaku (Eighteen History Outlines) and Records of the Three Kingdoms through the knowledge and actions of people who lived through turbulent periods. I am extremely interested in and drawn to the true nature of humanity, as depicted in the story telling of the intellectual and negotiating battles of Wu Zixu (of the Wu kingdom) and Fan Li (of the Yue kingdom), who supported their respective kings in the power struggle between King Fuchai of Wu and King Goujian of Yue, who are well known by the Chinese proverb “Gashin Shotan” (enduring unspeakable hardships for the sake of vengeance).

　Wu Zixu, who excelled at politics and diplomacy, lost his standing with King Fuchai due to a clever trick by Fan Li, and was forced to commit suicide. Wu Zixu, who strove for the expansion of Wu, had misjudged the character of his king. It was not long afterwards that the Wu kingdom, bereaved of Wu Zixu, would be destroyed. In contrast, Fan Li, a key figure in the victory of Yue, retired from his service under King Goujian of Yue, became a merchant after changing his name, and amassed enormous wealth. Fan Li escaped before his king, who was often very paranoid of others, became wary of even himself, and “boiled the hound once the rabbit is caught, and put the bow away once all the swans have been shot” (examples of how unnecessary things are quickly disposed of).

　I keenly felt that looking at others with a level-head was so important that it could save lives, and I believe we can learn from the lessons in the ways of life of the people of ancient China, which have been passed on through the ages and across countries, and apply them to our business world.

Now I would like to report the current status of the Nippon Kayaku Group. In the four-year Medium-term Business Plan KAYAKU Vision 2025 (KV25) from FY2022 to FY2025, the first fiscal year started off strong with net sales and operating income both exceeding the Plan, but in FY2023, net sales were 201.8 billion yen, 5.2 billion yen less than planned, and operating income landed at 7.3 billion yen, a large 12.7 billion yen below the Plan. For net sales, the Mobility & Imaging and Life Science Business Unit generally performed well, but declining semiconductor market conditions caused the Fine Chemicals Business Unit to experience a large decrease. And for operating income, increasing manufacturing costs from soaring raw material costs in all segments, and a growth investment of 6 billion yen in license fees for new drug candidates in the Pharmaceuticals Business (Life Science Business Unit) impacted performance. In addition to net sales and operating income, while the ROE target of 8% and the company-wide ROIC of 10% were set as management indicators, actual results hovered at 1.6% and 1.5%, respectively. Those were mainly due to underachievement in operating income target.

　In the remaining fiscal years of KV25, our plan is to raise FY2024՚s net sales target of 210.0 billion yen to 230.0 billion yen in the final fiscal year of FY2025, and for operating income, we are aiming to lift FY2024՚s 12.5 billion yen to 26.5 billion yen in FY2025. When considering the differences from current conditions, we expect that considerable effort will be required to reach the income target for FY2025, and that we will be delayed in reaching the target by about one year.

　In KV25, we set the improvement of operating income ratio, which has been trending downward for some time, as one of our management issues, and set the target of the final fiscal year as a passing point to solve this issue. However, these kinds of conditions have arisen as of FY2023, the 2nd year of the Medium-term Business Plan, and we apologize to our stakeholders for the great concern this has caused.

　Fortunately, semiconductor market conditions have been showing signs of recovering since FY2024, and we expect the upswing in automotive production to continue as well. In the Fine Chemicals Business Unit, we are supplying epoxy resins for semiconductors without delays, and exploring a wide range of business opportunities for related products. In the Mobility & Imaging Business Unit, we are focusing on expanding into HUD Sun-Guard Film in addition to automotive safety components, and striving to make as much profit as possible.

Statements and references regarding performance in this document are under the results and outlooks announced in the financial results briefing materials for the fiscal year ending March 31, 2024.

Currently^*1, Nippon Kayaku՚s PBR is around 0.8, which is said to be undervalued by the stock market. We have received feedback stating how difficult it is to understand the positioning and future prospects of several Business Units and product lines, therefore we would like to tell Nippon Kayaku՚s growth story in an easy-to-understand and satisfactory way while continuing dialogs with all shareholders and investors, and strive to maintain a stable PBR higher than one.

　In the past, we responded to TSE՚s request for “Action to Implement Management That is Conscious of Cost of Capital and Stock Price” and focused on “strengthening earning power” and “increasing capital efficiency” as issues, which we explained through financial results briefings and other meetings. To strengthen earning power, we have expanded product lines where long-term market growth is expected in each business unit, planned continual launch and development of new products, and clarified our business portfolio in terms of revitalizing and handling businesses that need to improve profitability. I will mention this again later in the message.

　We are conducting various measures to improve capital efficiency. In the past, we explained that we would like to reach ROE targets by increasing profits through business activities, but moving forward, we will work towards comprehensive improvements in line with capital policies for buying treasury shares while considering economic trends and the business environment. Company-wide ROIC is expected to swing upwards alongside profits improving in FY2024, but this is still not enough to reach targets. During KV25, we will aim to reduce cash and equivalents to below 45.0 billion yen, monitor ROIC for each business, reduce inventory and accounts receivable, incorporate ROIC trees into measures for operating units, and aim to make improvements as one unified company. Further, we will aim to reduce cross-shareholdings to less than 10% of net assets during KV25.

　We also place a high priority on returns to shareholders, and announced our return policy at the start of the Medium-term Business Plan, as well as concrete policies during the implementation of the Plan. Medium- to long-term dividend payout ratio is set at 40% or more, and during KV25, we will maintain dividends at 45 yen or more per share as an increase from FY2023 dividends. Further, we bought 3 billion yen of treasury shares in FY2024 as a part of the return policy which considers equity control. After KV25, we intend to continue to consider treasury share purchase, including share cancellations.

　Moving forward, we will quickly and accurately respond to everyone՚s feedback, proactively pursue initiatives that follow policies to strengthen earnings and improve capital efficiency, and strive to enhance company information disclosure so that it is useful and easy-to-understand.

Market conditions like the semiconductor recession and soaring raw material prices greatly impacted our results in FY2023, but moving forward, the Nippon Kayaku Group is aiming to become a corporation with high resilience that is not easily affected by these kinds of market conditions. Using the Fine Chemicals Business Unit which experienced a slump as an example, it is believed that improving conditions will be difficult if we continue to rely solely on semiconductor epoxy resins which are main products in the Functional Materials Business. It is necessary that we focus on marketing rather than merely meeting the most recent needs, and devise business management not easily influenced by market conditions, like enhancing the lineup to meet a diverse range of needs in semiconductors over the future. In order to do this, we need to, for example, continuously launch new products even if it is on a small scale, and increase new business opportunities to connect to existing businesses. Fostering a workplace culture of always taking on new challenges is currently believed to be the most important issue for Nippon Kayaku.

　In the past, we transformed the industrial-use explosives business into the Safety Systems (automotive safety components) Business, and entered an industry where high standards in speed and quality in various aspects are required as a supplier. When I was previously involved with sales at Safety Systems Business, customers always commented “Nippon Kayaku is such a nice, laid-back company.” This was because the speed of our clocks that measured work progress was slower compared to that of the automotive industry, and it was this way of working that caused such sarcastic and berating comments that questioned if we could survive in the future. I was very grateful for the advice and worked hard to reform our corporate organization to adopt the speed of the automotive industry. As a result, we were able to greatly change the awareness of the entire Safety Systems Business, and truly feel that we have finally come to be approved by customers.

　After becoming President, I have strongly promoted company-wide awareness reform activities to eliminate unreasonableness, waste, and inconsistency (referred to as the 3Ms [Muri, Muda, Mura] in Japanese) under the name “A3 Activities.” We are promoting changes for a better Nippon Kayaku that does things like revitalizes the organization through segment reorganization, has dialogue with shareholders/investors and provides easy-to-understand information to the capital market, and properly responds to sustainability issues; and we are making efforts to quickly become a “nice company” where customers say so because we are energetic and not because we are laid-back.

The 200 billion yen in consolidated sales of the Nippon Kayaku Group is comprised of products and product lines that sell from hundreds of millions to billions of yen. We found niche markets that were difficult for major companies to compete in, and grew by making our basic strategy “technology integration and niche strategies” and expanding. Moving forward, we would like to flexibly adapt to changing needs and survive as a corporation needed by the world.

　However, looking back at the group in recent years, I feel it has become difficult to create new “technology integration and niche strategies” like how automotive safety components came from industrial-use explosives and optical films for polarizers came from dyes. In other words, one could say that current products are being provided within the area of responsibility of each business from start to finish without much passion. If these conditions continue, the personnel and organization will become rigid, and we will not be able to demonstrate our strengths. Therefore, we reorganized segments in June 2023, from four businesses that continued for over 20 years, to three new businesses with high potential for product lines and business synergies.

　The Mobility & Imaging Business Unit adds the Polatechno Business, which handles automotive dye-type polarizers, to the Safety Systems Business which is expected to see long-term growth in automotive safety components. We will be the first to obtain information about new display devices to include in vehicles while focusing on the electrification of automobiles and the spread of self-driving in the future, explore new uses for dye-type polarizers, and propose components that utilize specialized optics technologies. Further, we will raise profitability by utilizing our efficient production methods cultivated in production of automotive safety components and our expertise on reducing costs to improve the competitiveness of polatechno products.

　The Fine Chemicals Business Unit consists of the Functional Materials Business, Color Materials Business, and Catalysts Business. For Functional Materials, we will pursue operation and sales strategies in line with semiconductor manufacturing equipment and semiconductor cleaners in addition to semiconductor epoxy resins, the main products. For Color Materials, focusing on industrial-use inkjet inks for digital printers where growth is expected, we will make efforts in expansions under a development structure that also includes printer and printer head manufacturers to form a trinity. For Catalysts, we will strive to be the first to develop new catalysts for hydrogen production while refining our competitiveness in niche units like the direct sale of catalysts for acrylic acid and methacrylic acid production. In addition to close-to-the-customer operations, a strength of this Business Unit, we will work hard to widen our marketing field of view and strengthen the business.

　The Pharmaceuticals Business and Agrochemicals Business which are under the Life Science Business Unit are similar in that they are not easily impacted by market conditions when compared to other businesses, but they take a long time to develop new drugs/chemicals. In the Pharmaceuticals Business, we are currently transforming from a system that makes generic drugs and biosimilars the main products, which are impacted by yearly National Health Insurance price revisions, to a system that looks at introduced and company- developed drugs, and adds new drugs with high profitability. In the Agrochemicals Business, in order to increase profitability, we will make efforts in effective and efficient research and development through DX in ingredient development and sharing intellectual property strategies with the aim of developing new medical ingredients to follow Flometoquin, which was launched in 2018.

　The Technology Unit is a new organization that was established by combining the Research & Development Group and the Technical Operation Group. The Unit promotes research and development across the company, and promotes upgrading production locations to smart factories, as well as research and production DX. Further, in the Environment and Energy areas, the Unit will take on a mission to create new products and businesses by leveraging the collective knowledge of our group. The Technology Unit is an important organization responsible for the creation of new businesses and products across the company in order for the Nippon Kayaku Group to achieve significant and steady growth.

In response to the request by TSE for “Action to Implement Management That is Conscious of Cost of Capital and Stock Price,” we announced the Nippon Kayaku Group’s business portfolio in May 2024 in order to show how each product line is positioned in the new three Business Units.

　In the portfolio, product lines are separated into four quadrants. We positioned semiconductor-related products (FC) and inflators (MI) in “Important businesses” that concentrate management resources, and HUD polarizers (MI) and catalysts for hydrogen production (FC) in “Novel and future prospects businesses.” Consumer inkjet colorants (FC) and generic anti-cancer drugs (LS) fall under “Foundation businesses,” which is an area where we make efforts to maximize cash generation by maintaining current profit and minimizing management resources.

• FC: Fine Chemicals Business Unit
• MI: Mobility & Imaging Business Unit
• LS: Life Science Business Unit

　How we handle “Earning power amelioration” businesses might be where the characteristics of the group are most apparent. For product lines placed here, instead of immediately abandoning them, we thoroughly explore components such as “technology integration” and renewability by exploring new applications over a certain period, and this also includes synergies within new Business Units and collaborations with outside companies. There are various examples of product lines we renewed through this process, such as “semiconductor epoxy resins” where we avoided competition with other commodities and found a way to take advantage of quality-oriented applications, “dye-type polarizers” which were created by combining our dichroic dyes and Arisawa Mfg.’s production technologies, and “automotive safety components” made by changing industrial-use explosives into high added value products. Thus, product lines in “Earning power amelioration” businesses have aspects that demonstrate our “technology integration and niche strategies.”

　However, it goes without saying that we decide to withdraw product lines in which we are unable to find a new path for after such considerations. Most recently, for product groups that will ultimately be categorized in “Earning power amelioration” such as some products in the Agrochemicals Business in FY2023, we will reorganize and make adjustments to be less than 2% of net sales, so that they do not occupy a large portion of the portfolio.

　In order to improve corporate value, we are making efforts while focusing on creation of new businesses and products, mitigation of climate change, DX, business process re-engineering, and work style reform as five priority tasks under KV25 as company-wide projects. Creation of new businesses and products, which has high added value and acts as a source of profit generation, is extremely important to us.

　In recent years, our group become involved in several innovative and high-potential development themes like solar cells using pigment properties as well as drug delivery systems. Recently, however, other than a limited number of themes such as “safety devices for drone,” the number of research and development themes that the entire company focuses on has been declining. We think that this is largely due to the many times personnel felt crushed after having to discontinue a theme they were focusing on, which has made them reluctant to take on new challenges. Much like a business structure becoming rigid, if research and development embodying “technology integration and niche strategies” atrophy, themes to propel the next generation of business will dry up and make it very difficult for us to survive in the future.

　Methods in research and development are also changing alongside the times. The key is not to rely solely on one extremely good invention, but rather to have comprehensive team abilities both internally and externally, and to systematically pursue marketing and intellectual property strategies. In projects for creation of new businesses and products, we are incorporating aspects that have been ignored in the past, and the Technology Unit is taking the lead in pursuing various activities in order to progress research and development that is realistic while feeling cutting-edge.

　For example, we are proactively searching for new themes by doing things like assigning personnel to communities where industry-government-academia innovators gather, having interviews at pitch events and with individual startups, periodically holding cross-sectoral meetings for new business and product planning, and investing in venture capital. Continually doing these has landed us on several themes using technologies from the Fine Chemicals Business Unit for the “Environment and Energy” areas where focus is placed on by the Technology Unit.

　Specifically, we are collaborating with companies such as AZUL Energy, which develops organic catalysts that can be used in metal-air batteries and fuel cells, and iPEACE223, which owns catalyst technologies to produce propylene from bio materials, and started working on themes that aim to make products out of each of those technologies. We will also participate in a consortium led by the Tokyo Institute of Technology (now the Institute of Science Tokyo) that aims to realize a hydrogen energy-based society, and contribute to the realization of a water electrolysis system by developing an anion exchange membrane that utilizes our technologies.

　Moving forward, we would like to apply knowledge from the Mobility & Imaging and Life Science Business Unit and continue to create new themes that utilize their characteristics.

Human capital management, which maximizes the value of human resources to increase corporate value, is currently attracting attention. I think everyone is on board with the idea that “a company’s birth starts with the support of people,” but if asked what is the value of human resources and the essence of human capital, the answers may differ depending on who is answering or their position. The use of human capital such as helpers, house guests, and travelers in the Spring and Autumn and Warring States periods would be scolded as excess capital in our era.

　Now that I belong to the Nippon Kayaku Group and play a role in shaping our future, for the company, I see human capital as the relationships that center on each individual employee. While individual professional skills and knowledge are of course important, I believe that utilizing each individual’s position, personality, and strengths and expanding good relationships within and outside the company enhances the productivity of the organization one belongs to, and as a result, the company’s organization will become stronger.

　For example, in the pharmaceutical sales I experienced when I first joined the company, it was important to pay close attention to each stakeholder, like the doctors, pharmacists, and managers of the hospital and build good relationships with them in order to achieve good results. Also, when I was working in the Safety Systems Business, I believe maintaining good relations with customers through the negotiating skills and sales sense of personnel had no small impact on the results. Even in my current position of representing the company, we cannot pursue change and reform without good relationships with stakeholders and employees who give us suggestions. I believe that the human capital of the group, in addition to individual qualities and relationships, should be viewed from a perspective of how much each individual employee is able to contribute to corporate activities.

In the FY2023 effectiveness assessment of the Board of Directors, “utilization of human capital” was identified as an important issue, and the company re-established its human resource development policy. In this policy, it states that the ideal human resource sought by the company is proactively independent, filled with a desire to take on challenges, and has a global and open sense of values. Also, in the FY2024 effectiveness assessment, we chose utilization of human capital as an important issue, and continue to plan practical measures in line with the policy.

　The basic parts in the Nippon Kayaku Group’s human resource strategy are no different from the general approach of strongly providing an environment that is easy and rewarding to work in. In diversity promotions, we hosted the large-scale kick-off event “KAYAKU / ZenKatsu^*2” over a half-day period from the action plan based on the Act on the Promotion of Women’s Active Engagement in Professional Life in August 2024 as a part of initiatives to promote participation of women, and I myself also attended as one who was responsible for realizing the event’s goal of increasing the number of female managers and further expanding participation.

　In addition, the development and enhancement of global human resources is an urgent issue for the group, as overseas sales account for a large proportion of our Mobility & Imaging and Fine Chemicals Business Unit. We are striving to improve our ability to promote overseas business by combining multiple measures, like making a list of employees with a strong desire to go abroad, strengthening workforce by hiring new graduates, mid-career workers, and locals, English conversation training, overseas work training and on-the-job training.

　To foster a culture where one can take on challenges, there needs to be an environment where everyone can have honest discussions that elicit ideas and motivations every day, and any harassment only serves to get in the way of improving corporate value. Every year we give compliance surveys and compliance training using e-learning as a way of ensuring psychological safety and promoting its understanding.

　In addition to continuing the initiatives above, we will focus on matters such as reformation of the human resource system to make work more rewarding, initiatives to place the right person in the right job based on their wishes, and measures to establish an awareness of cost and ROIC improvement, and strive to develop human resources that can build good relationships with their surroundings, with “independent,” “challenges,” and “global” as keywords.