Under the Medium-term Management Plan VISION 2030 stage1, the GunzeGroup’s financial strategy is to improve GVA by balancing investments ingrowth businesses and sustainable investments in such areas as the environment with reductions in capital costs, while maintaining a solid financial foundation. I strongly believe that business divisions must strengthen the profitability management of invested capital and promote measures aimed at reducing unprofitable capital.As stock markets become even more discerning toward companies with low stock prices, and the need to improve return on capital, I also recognize that efforts to promote the certainty of earnings growth potential will become even more important.
Message from Finance & Accounting Department
Engaging in Capital Cost-focusedManagement to Improve GVA andGenerate Free Cash Flow
Evaluation of Fiscal 2022 Results
On a consolidated basis, Gunze reported net sales of 136 billion yen, up 9.4% compared with the previous fiscal year and in line with forecasts. From a profit perspective, operating income came in at 5.8 billion yen. Despite a 0.9 billion yen increase compared with the previous fiscal year, this was 0.2billion yen lower than forecasts. Ordinary income totaled 6 billion yen, up 0.6 billion yen year on year and 2.1 billion yen compared with forecasts. Net income was 4.5 billion yen, up1.5 billion yen year on year, and 0.8 billion yen compared with forecasts.
All businesses were impacted by soaring raw material and fuel prices. The apparel business was also affected by rising import costs due to the sharp depreciation of the yen.Despite this difficult operating environment, the Company Was successful in securing an increase in operating income year on year. In specific terms, half of the roughly 10 billion yen negative impact attributable to such external factors as difficulties in procuring raw materials owing to the global shortage in semiconductors and surging transportation costs was offset by price pass-on measures mainly in the plastic films field. Earnings were also boosted by increased sales in the engineering plastics and medical devices and efforts to reduce costs through such endeavors as lowering procurement costs and improving productivity.
By segment, the functional solutions business accounted for the vast majority of profit on the back of record high earnings of 8.9 billion yen, up 0.9 billion yen compared with the previous fiscal year. In contrast, and despite a year-on-year improvement of 0.3 billion yen, the apparel business incurred operating loss of 0.2 billion yen. In its lifestyle creations business, Gunze reported an increase in profit of more than 0.2 billion yen compared with the previous fiscal year. This Was attributable to contributions from the shopping center business and the development of a factory site premise in Naga City, Yamagata Prefecture.In fields where profitability is an issue, the film business in the electronic components field was transferred to Daicel Corporation and production terminated at a plant in China In the leg wear field in order to optimize production capacity.Losses subsequent to the aforementioned initiatives were passed during fiscal 2021. As such, there is no major impact on extraordinary income and losses. As a result, operating income fell slightly below forecasts. Other indicators, on the other hand, met forecasts announced at the beginning of the year.
Fiscal 2023 Forecasts
While there are signs that social and economic activities in general are returning to normal with authorities in Japan Reclassifying COVID-19 to a Class 5 category, high raw material and fuel prices and difficulties in procuring certain raw materials are expected to continue.In addition, the business environment remains uncertain due to concerns of an economic recession in the U.S. Under these circumstances, we will implement price revisions in response to rising raw material prices, improve productivity through various measures, including steps to improve yields and promote automation, enhance cost competitiveness by optimizing the global production system, and expand our raw material procurement network, without relying on a significant increase in sales outside growth fields in fiscal 2023.Moreover, we have factored into our earnings forecasts efforts to create new value by strengthening our ability to address market needs, including consolidating our organization in the medical field and streamlining the sales structure in the apparel business.
Gunze has disclosed details of its decision to separate the medical business, which is positioned as a driver of growth,from the functional solutions business from 2023. Through Such factors as the expansion of new businesses, revenue is projected to increase (109.5% compared with the previous fiscal year). On the earnings front, profit is estimated to climb 0.2 billion yen. As far as the functional solutions business after separation of the medical business is concerned, we are also anticipating a year-on-year increase in revenue (103.8%compared with the previous fiscal year) and an improvement in profit of slightly less than 0.3 billion yen on the back of such factors as the market launch of environmentally responsible products in the plastics field, the start of full-scale operations at the Moriyama Circular Factory™, and growth in the Group's market share of non-OA products in the engineering plastics field. Despite an anticipated downturn in the lifestyle creations business (90% compared with the previous fiscal year), owing to the impact of the previous year’s Nagari Project, plans are in place to increase profit by slightly less than 0.1 billion yen due to the expected increase in customers from the renewal of commercial facilities and expansion of the school business in the sports club field.
In overall terms, net sales are forecast to total 140 billion yen(102.9% compared with the previous fiscal year), operating income 7.5 billion yen (an increase of slightly less than 1.7billion yen year on year), and net income 4.8 billion yen (an increase of slightly less than 0.3 billion yen year on year).
Progress of Financial Strategies under the Medium-term Management PlanVISION 2030 stage1
To enhance our corporate value over the medium to long term, we undertook capital investments of approximately 10billion yen in fiscal 2022, including such environment-related investments as the Moriyama Circular Factory™ and growth investments. By funding these investments through such means as the sale of cross-held stocks and idle assets as well as cash and deposits held, we are maintaining a solid financial foundation by limiting the increase in interest-bearing debt to 4.3 billion yen and preventing a decline in our equity ratio.
As far as environment-related investments are concerned, we allocated long-term funds procured through general syndicate green loans to ESG initiatives evaluated in the course of future cash flow plan considerations. Despite an environment in which interest rates are exhibiting an upward trend, we were successful in procuring funds under more favorable terms and conditions than conventional procurement methods by securing loans at low interest rates from financial institutions that endorsed the Gunze Group’s management and other policies. In addition, our debt cost has remained low as a result of efforts to raise interest-bearing debt through the flexible issuance and redemption of commercial paper.
GVA
The Gunze Group’s cost of capital is calculated using the commonly used Capital Asset Pricing Model (CAPM). During The period of the Medium-term Management Plan VISION2030 stage1, the cost of shareholders’ equity and Group Wide Weighted Average Cost of Capital (WACC) have been set at 6.32% and 5.15%, respectively. Recognizing the critical need to identify the return on capital of each business segment in order to strengthen the business portfolio and enhance corporate value, each business division also sets its own WACC. From a WACC by business divisions perspective,it is difficult to select multiple companies with similar business sectors and business sizes. Accordingly, we utilize the average β value and D/E ratio of multiple companies whose principal businesses are in the same fields based on theNikkei Needs industry classification.
While GVA for fiscal 2022, based on such capital costs, came in at a Group-wide loss of 2.3 billion yen, this reflects a year on-year improvement of 0.3 billion yen. Moving forward,GVA is projected to improve 1.2 billion yen in fiscal 2023 owing to further growth in operating income and a reduction in invested capital. We are steadily improving our return of capital in a bid to secure positive Group-wide GVA in fiscal 2024.While positive in the functional solutions and medical businesses, GVA is negative in the apparel and lifestyle creations businesses. As far as GVA positive divisions are concerned,we will work to further improve profitability by managing your return on invested capital (ROIC). Focusing on the steadfast implementation of structural reforms, we will return deficit GVA divisions to profitability at quickly as possible.Gunze is targeting operating income of 10 billion yen in fiscal 2024. While we expect initial plans in the apparel field will be difficult to achieve, owing to changes in the market environment, trends are already exceeding initial plans in the engineering plastics field and medical business. Accounting For each of these factors, we are confident that targets will be achieved on a Group-wide basis.In addition to profit growth, we recognize the need to reduce invested capital. For example, the Group-wide CashConversion Cycle (CCC) lasted 173 days in fiscal 2022, a slight improvement compared with the previous fiscal year, the number of inventory turnover days deteriorated slightly.Despite the impact of efforts to address difficulties in procuring raw materials, fluctuations in foreign currency exchange rates, and soaring raw material and fuel prices, we believe there is room for improvement compared to the level prior toCOVID-19.
As part of the Group’s CCC improvement measures, we began deploying the GVA tree during the fiscal 2023 budget process. In principal committee reporting materials, we breakdown GVA into a tree format by major component to manage the progress of GVA budgets for each division. Our goals are to increase awareness toward costs as they apply to assets thereby promoting improvements by identifying the amount when major assets, including accounts receivable,inventories, and fixed assets, are converted to costs, and the subsequent impact on GVA.In addition, we undertook the sales of cross-held stocks totaling 3.2 billion yen in fiscal 2022. As a result, the market value of cross-held stocks as a percentage of total net assets decreased from 9.9% as of the end of fiscal 2021 to 8.7% as of the end of fiscal 2022. Looking ahead, we will work to further reduce cross-held stocks while evaluating the significance of our holdings.While efforts to promote investments aimed at increasing production in the engineering plastics field and medical business are progressing at a pace faster than originally planned,we expect to achieve our invested capital targets as a result of the aforementioned initiatives.From fiscal 2022, we have made the degree of GVA target achievement an important KPI in determining performance-linked compensation for Directors and corporate officers. This initiative aims to promote increased awareness toward GVA management.
GVA / ROE Results and Forecasts(Unit: Billions of yen)
|
FY2018 (fiscal year ended March 2019) |
FY2019 (fiscal year ended March 2020) |
FY2020 (fiscal year ended March 2021) |
FY2021 (fiscal year ended March 2022) |
FY2022 (fiscal year ended March 2023) |
FY2023 Forecast (fiscal year ending March 2024) |
FY2024 Target (fiscal year ending March 2025) |
|
|---|---|---|---|---|---|---|---|
| Operating Income | 66 | 67 | 46 | 48 | 58 | 75 | 100 |
| Invested Capital | 1,373 | 1,342 | 1,327 | 1,258 | 1,331 | 1,291 | 1,350 |
| GVA※ | -19 | -16 | -31 | -26 | -23 | -11 | Companywide returned to profitability |
| ROE | 3.7% | 4.0% | 1.9% | 2.6% | 3.9% | 4.15% | 6.32% or higher |
- Gunze Value Added (GVA) = (NOPAT + dividends) - (period-end invested capital (total assets - non-interest-bearing debt)) x WACC
Performance Indicator Tree for GVA Improvement
Market Evaluation and Shareholder Returns Strategy In March 2023, the Tokyo Stock Exchange issued a release on the implementation of management that is conscious of the cost of capital and stock prices. With respect to companies listed on the Prime and Standard Markets, companies withPrice Book-value ratios (PBRs) below 1x and companies with issues relating to their return on capital and growth potential, in particular, are requested to take action. The GunzeGroup’s PBR was 0.7x, as of the end of fiscal 2022, below the benchmark of 1x. PBR is calculated by multiplying Return onEquity (ROE) by the Price Earnings Ratio (PER). Against thePrime Market PER average that trended above 15 times in fiscal 2022, the Gunze Group’s cost of shareholders’ equity fell below this level on its ROE of 3.9%. Taking the aforementioned into consideration, we recognize the need to address this issue. While the potential exists to reduce the denominator (total equity) in the short term through the large-scale purchase of treasury stock and dividend increases, the stock market in general is looking for continuous growth in the numerator (earnings). Guided by our shareholder return policy, we will maintain our total return ratio at 100% until ROEexceeds the cost of shareholders’ equity, where the existing dividend is based on a Dividend on Equity (DOE) Ratio of at least 2.2% and the remainder is returned to shareholders through the purchase of treasury stock, during the period of the Medium-term Management Plan VISION 2030 stage1.This policy is a clear indication of our intention to provide a stable and continuous return of profits to shareholders,maintain a constant level of total equity, and improve our return on capital through earnings growth. In line with these criteria, we set the dividend per share for fiscal 2022 at 147 yen, and forecast a dividend per share of 150 yen for fiscal2023.
Dividend per Share, Dividend Payout Ratio
Treasury Stock
Enhancing Corporate Value by Promoting the Medium-term Management Plan Under the Medium-term Management Plan VISION 2030 stage 1, the functional solutions business is expected to drive earnings growth, particularly in the plastics and engineering plastics fields. In the plastics field, we will also work to create sustainable corporate value through the start of full-scale operations at the Moriyama Circular Factory™. In the medical business, we will accelerate the pace of business expansion through proactive investments, beginning with efforts to increase production at our Ayabe Plant, and new product sales growth.Moreover, we will improve earnings by implementing structural reforms in the apparel business and strengthening management with a focus on profitability in the lifestyle creations business.Through these means, we will definitively achieve all of theGroup’s targets for fiscal 2024, including operating income of 10 billion yen and an ROE of 6.32%. We will also work to secure an ROE of 8% or higher as quickly as possible.Looking ahead, in addition to promoting capital cost-focused management, we will compare and analyze the stock market's assessment as reflected in the Company’s stock price with our own estimated theoretical stock prices and take appropriate countermeasures. In addition to the income approach method based on the free cash flow plan of each business, we will calculate and verify the Company’s business value using the market approach method based on each business profit plan.Through appropriate corporate communications and IR activities, we will work to have the stock market recognize the previously mentioned growth scenario aimed at achieving the return on capital target. In this manner, we will maintain and improve our PER, which we believe will lead to the creation of corporate value with a PBR in excess of 1x.
Internal Corporate Communications Efforts to Instill GreaterAwareness Toward Cost of Capital-based Management
Booklet published to instill greater awareness toward cost of capital-based managementIn order for employees to better understand the concept and details of the Group’s cost of capital-based management, we have taken steps to explain and promote the importance ofGVA, a management indicator, a total of 10 times using the intranet and internal newsletters since fiscal 2020. In doing so, we have worked to instill greater awareness toward cost of capital-based management and to unify all employees behind the Group’s endeavors.
Furthermore, we took steps to issue a series of easy-to-understand booklets to help employees better comprehend the connection between daily operations and cost of capital-based management and the individual tasks to be undertaken to improve GVA. This initiative was made in response to calls to document the Group’s management policies in paper form. After completing this series, we conducted a survey and posted feedback, including details of the level of understanding, on the intranet. We will continue to make cost of capital-based management more familiar to employees. By deepening their understanding, we would expect employees will increasingly put cost of capital-based management into practice in their work.
Furthermore, we took steps to issue a series of easy-to-understand booklets to help employees better comprehend the connection between daily operations and cost of capital-based management and the individual tasks to be undertaken to improve GVA. This initiative was made in response to calls to document the Group’s management policies in paper form. After completing this series, we conducted a survey and posted feedback, including details of the level of understanding, on the intranet. We will continue to make cost of capital-based management more familiar to employees. By deepening their understanding, we would expect employees will increasingly put cost of capital-based management into practice in their work.