CFO Message

Mid-Term Management Plan Completing the Fourth Year of ACE-2020

Under the mid-term management plan ACE-2020, we worked on optimizing our business portfolio as part of reform of our profit structure, giving particular attention to Life & Healthcare and Electronics as our focus businesses.

With regard to the Life & Healthcare business, as a biochemical company, we worked on becoming a corporation that could propose businesses more connected to daily life, such as dietary culture or medicine, prior to acquiring Hayashibara Co., Ltd. in 2012. I believe that stance led to the acquisition of Prinova in 2019, and became a tremendously important step during the period of ACE-2020.

On the other hand, the Electronics Business was unfortunately unable to meet its targets. We went through many cycles of trial and error in these four years, but the Electronics Business is now experiencing difficulties at the stage right before it enters the next new lifecycle of business.

The acceleration of global expansion is a necessity for expanding and strengthening our profit structure. At the NAGASE Group, business expansion in Asia has been progressing for a while. However, in Europe and the U.S. business hasn’t expanded to the extent of Asia so that the NAGASE Group could show our presence, despite concentrated efforts particularly in North America. In this sense, the acquisition of Prinova served as a major stepping stone towards expansion of the food ingredients business in North America.

The Manufacturing Business has come to occupy a larger percentage of our earnings every year. As that situation progresses, it will probably be necessary for the NAGASE Group to create a NAGASE Standard to explain our manufacturing criteria. To put it another way, NAGASE is a brand built on great trust; its name alone signifies that it is dependable in terms of technology, finance, and partnership. From now on, we will contemplate the role of the NAGASE Group’s Manufacturing Business while further increasing our level of quality and profitability.

We promote rationalization and improved efficiency of organizations and functions as part of the reform of our corporate culture. One result of this has been the transfer of intra-Group administrative duties to Nagase Business Expert Co., Ltd. (P.19). I feel that there is still a lot of reform that can be done. We will organize a system to generate a steady profit while at the same time providing business and products.

We made advancements to uphold investment discipline. In the past, there were businesses we continued despite being unprofitable. Naturally, from the viewpoint of raising corporate value, we must continue businesses that are worth continuing and quickly decide to withdraw from those that are not. Under ACE-2020, we revised the investment guidelines that serve as a standard for decisions making. Consequently, we are in the process of organizing businesses that require direction and deliberating on each one individually. From now on, as the investment environment grows increasingly challenging, we will actively invest in businesses for which we can confidently envision a future.

Perceiving a Turning Point in the Rapidly Changing Business Environment

Looking back at recent events, the impact of COVID-19’s spread is just as serious as we thought.

When we assess this impact from a medium- to long-term perspective, we see three stages. In the first stage, we assess how much this will impact results, and by what channels we can escape from that impact. In the second stage, we assess when the things that changed due to the pandemic will return to the way they were before and what will happen if they don’t. Then in the third stage, we assess whether the norms of the altered economy will become permanent. As the NAGASE Group, we must consider these three stages as well as future business policies and solutions.

If we draw a comparison to the 2008 financial crisis when problems in the financial system occurred, this time we were forced to implement social distancing measures, which had a huge impact on physical places of business. In other words, this meant that the impact on the real economy was tremendous.

From the perspective of corporate finance, the impact on the cash flows and capital structures of our customers and business partners is also significant. More serious consideration will probably become necessary when conducting business. Naturally, the way we approach investments will also change.

We are now at a generational turning point. Even if we were to take away the impact of COVID-19, this is without a doubt a major turning point. Therefore, the big question now is how the NAGASE Group will lead the way forward. It is also becoming necessary to assess how we will use this experience in the post-coronavirus environment and how we will change things like working styles as well as salary and evaluation systems from the perspective of corporate governance in addition to risk management.

Of course, changes are also opportunities. For instance, IT tools had been a focal point in communication with customers and coworkers. Fortunately, the NAGASE Group has been working on DX (Digital Transformation) since before the COVID-19 pandemic. By clearly perceiving turning points in the rapidly changing business environment and providing solutions with flexible ways of thinking, we will seize business opportunities.

Raising the Corporate Value of the NAGASE Group

Utilize Global Governance to Maximize Synergy

Our overseas business expanded significantly through the acquisition of Prinova in fiscal 2019. Locally hired employees currently make up over half of our workforce.

Faced with these conditions, pursuing a universally standardized governance system and maximizing Group synergies is becoming a key issue. Under ACE-2020, we worked more on organizational development in China and the U.S. in addition to revising our original Japanese governance system to enhance regional control. Actual efforts have only just begun, but we are steadily moving forward.

During Prinova’s integration into the NAGASE Group, we carried out high-quality PMI (Post-Merger Integration) and fostered understanding and trust in our respective cultures. Prinova also become accustomed to the NAGASE Group’s way of thinking. Even now, we are working to achieve more advanced synergy while engaging in daily conversation. We hope that Prinova will utilize its own product lineup and platforms in Europe and the U.S. and make advances in the fields of sports nutrition, infant nutrition and food for seniors.

Aiming for Capital Cost Management that Fits the NAGASE Group

Under ACE-2020, we added ROIC (Return on Invested Capital) to the index. By introducing ROIC, we aim to transition into management aware of the cost of capital by having executive management thoroughly discuss capital costs.

We at NAGASE are considering actively expanding businesses with high ROIC. However, businesses in the NAGASE Group are built on a sturdy customer base over many years. Therefore, even in the case of a business with low ROIC, we will not simply withdraw but rather incorporate the business into the expansion of a new business by using the existing customer base.

Numerical Targets under ACE-2020

Launching Sustainability Management

Emphasizing Balance between ROE and ESG

Under ACE-2020, the target ROE has been set at above 6%. Although we reached 6% in the fiscal year ended March 31, 2019, ROE has currently fallen below 6% once again. We intend to make another effort in the next midterm management plan period starting from fiscal 2021.

However, achieving 6% ROE is not the only goal we have set our sights on. It goes without saying that continual raises in corporate value are critical. We think that the NAGASE Group’s ROE will naturally improve if corporate value rises, boosted by our earning power.

Meanwhile, sustainability management is also important. In June 2020, we launched the Sustainability Committee, and began full-scale sustainability management.

When it comes to sustainability management, an ESG perspective is critical. I think it is fair to say that a thought process which values not only financial but social benefits will become more widespread as a result of this current pandemic. To the NAGASE Group, the continual pursuit of social value is no doubt important. We intend to continue sincere efforts toward ESG.

For the management of the NAGASE Group, both ROE and ESG are important elements. From now on, it will be especially important to distribute management resources appropriately while considering the balance between both of these things. The NAGASE Group intends to continue boldly striving to create new value and businesses and raise corporate value while enhancing sustainability management.