CFO message
We will increase the corporate value of our Group by working on a balanced approach to growth strategies, structural reforms, and financial strategies.
Cash Allocation Policy and initiatives for Sustainable Growth
Takayuki Uchida
The Group is working to complete its Sixth Medium-Term Business Plan (hereinafter, the Sixth Medium-term Plan), which will end in fiscal year 2026. The Sixth Medium-term Plan was originally planned to run from fiscal year 2021 to fiscal year 2024. However, the plan was revised in 2022 in response to the extremely severe business environment, which saw a significant increase in procurement costs due to soaring raw material prices and the weakening yen, as well as logistics and utility costs remaining high. The current Sixth Medium-term Plan has three major pillars: growth strategy, structural reform, and financial strategy. By working on these in a well-balanced manner, we hope to not only achieve our numerical targets, but also to develop our business with an eye on the future.
In terms of cash allocation during the Sixth Medium-Term Management Plan, we plan to achieve an internal cash flow from operating activities of 18 billion yen. In contrast, operating cash flow for fiscal year 2023 is expected to improve significantly to 22.5 billion yen. While we have benefited from the softening of raw material soybean and canola prices, this is also the result of thorough business management to ensure a firm spread between sales prices and raw material prices, based on the experience of struggling performance in fiscal years 2021 and 2022. Specifically, we have begun to check our performance forecasts on a monthly basis, earlier than in the past, and incorporate products with insufficient spreads into our sales action plans. We believe that in fiscal year 2023 we have been able to establish a system for detailed response in order to firmly secure fair prices and profit levels across the board.
Next, regarding external fund raising. Our basic stance is to raise funds within the scope that allows us to maintain our current rating, and there has been no change from the policy we communicated in our previous integrated report. The D/E ratio is assumed to be 0.5 times, and if there is a promising new project that will significantly contribute to increasing our corporate value, we will invest up to a maximum of 0.7 times. Of course, it is not enough to simply make the D/E ratio 0.5 times or 0.7 times. I think it is important to formulate a plan that does not stop at short-term discussions, but also considers what kind of company we are aiming to be and how we will expand our scale. As our operating cash flow has improved earlier than expected, we believe that the possible range of growth investments, including M&A, has expanded.
Regarding cash-out growth investments, we are considering two main axes. The first is investments to strengthen our unique strength, "Oishisa design". In order to reproduce customer needs in all situations, we will further improve our solution capabilities by breaking down Good taste into elements such as "taste, aroma, and texture" and combining materials such as oils and fats and starches with technology. We will also invest to create new product groups and product categories from that. The second is investments to expand the market. We will invest in business development overseas, especially targeting ASEAN and North America. We expect that business centered on the domestic market alone will be difficult in the future, so it is essential to develop overseas markets. The growth strategy of the sixth medium-term plan calls for accelerating overseas business development, and aims for overseas sales to account for 7% of operating profit in fiscal 2026. It will take some time to see results, but we will actively work on it. Regarding M&A, discussions are underway on the direction and foothold of what we should do to expand our business and expand our market. Due to its nature, it may be difficult to understand from the outside, but we are considering it both domestically and overseas.
We have set an operating profit target of 11 billion yen for fiscal 2026. Considering that we cannot expect significant growth in the domestic market and that our main business is commoditized oils and fats and fats, we believe that it will be difficult to achieve this goal if we continue on the current path. In addition to expanding our overseas business as I mentioned earlier, we also need to work on strengthening the profitability of our existing businesses and implementing fundamental structural reforms. As our indirect divisions have become relatively heavy, we will simultaneously review these areas and increase Plant operating rates to create a leaner structure. Our stance is that the 11 billion yen operating profit target for fiscal 2026 is merely a milestone, and by achieving this target while also sowing the seeds for the future, we will work to improve our corporate value with an eye to the future.
initiatives to achieve 1x PBR
Our current PBR is by no means at a satisfactory level. There are various factors at play, but even looking at our current financial KPIs, we recognize that there are still some figures that are inferior. For example, our ROE recovered to 7.0% in fiscal 2023, but this was largely due to special factors such as an increase in dividends received, so we believe that we need to build a structure that allows us to consistently achieve a similar level.
To achieve this, it is essential to promote asset efficiency. We need to promote asset efficiency, including restructuring our business portfolio, or review our business from the perspective of whether we are earning money efficiently. Through our initiatives to date, we have been successful in reducing inventory. On the other hand, our fixed asset turnover rate is not particularly high, and our cash conversion cycle is not at a level that we can be proud of. We believe that there are areas where we can improve efficiency by considering various schemes. We will create specific action plans for our existing businesses and work on them honestly. We are not necessarily saying that the way we have done things up until now is correct, but rather we are conscious of always thinking about what should be, and approaching it through healthy discussion. With regard to new businesses, we will consider synergies with existing businesses and make judgments through due diligence based on whether asset efficiency is satisfactory.
The net profit margin is still low at 2.8% in fiscal 2023. We are considering various approaches based on maintaining an appropriate spread in existing businesses. First, we will expand sales of high-value-added products. I believe that even if it is a general-purpose product, if we can receive a high margin through solutions that meet customer needs, that is our added value. We will expand our added value by identifying not only the actual needs of customers, but also their potential needs and deploying our strengths to address them. We would like to increase the probability of creating successful businesses by establishing a financial system that supports the creation of new businesses.
We recognize our cost of equity capital as 6-7%. Our ROE for FY2023 was about the same as our cost of equity capital, but unfortunately, this is not in line with our capabilities at this stage. In addition to working tenaciously toward the target of 8.0% in the Sixth Mid-term Plan, we need to be aware of an ROE that always exceeds our cost of capital, including dealing with discontinuous factors. If there is a business that deviates significantly from that level, management will have to make a decision. That is why we decided to withdraw from Household use margarine and discontinue sales of plant-based cheese this time, despite the pros and cons. Numbers don't lie. I believe that we need to work toward an ROE of 6-7% as a minimum level.
About Sustainable Investing
Looking at the global trend towards sustainability, I think it will only accelerate, not recede. Therefore, as a company, we need to fulfill our responsibilities firmly. Although it may not necessarily be the same, if sustainability is considered a sustainable business model, responding to sustainability will lead to future cost reductions and the creation of new revenue opportunities. The mindset of consumers is also changing considerably. By promoting sustainability, we can expect to gain customer support, and increase brand value and competitive advantage. Although short-term investment effects can be ambiguous, we believe that sustainability investment will definitely result in improved long-term financial performance.
To our stakeholders
By achieving the numerical targets of the Sixth Mid-term Plan, I would like to work hard while encouraging those around me to achieve a PBR of 1 or even go beyond that. A PBR of 1 is not just a numerical target, but I consider it to be a benchmark for measuring whether the stock market trusts our growth as a company. However, it is not enough to simply have a PBR of 1; we will strengthen initiatives from the perspective of whether we are achieving what we are originally aiming for. We would appreciate your continued support.