Message from the President
01．Reflecting on My First Year as President
Over this past year, I have gained a renewed appreciation of the relationships between the Kanematsu Group and its stakeholders; it has thus been an extremely valuable time for me. My resolve when I took office--to make sure that all our employees and their families can take pride in Kanematsu, to increase Kanematsu's enterprise value so that it can better contribute to society, and to ensure that the Kanematsu Group contributes to the world economy--has not changed. In particular, I think that the pride each employee of Kanematsu and the Group has in being part of the Kanematsu Group will help each individual take to heart their mission of fulfilling our social responsibilities.
This year, I have seen firsthand how full of energy and vigor our employees are. I think that this is a sign of the Kanematsu Group's large growth potential. I was also once again impressed by the depth of the connections and trust that the Group has built with its many business partners and associates over the years. This a major strength, and I feel that it means the Kanematsu Group is of use to its business partners and, consequently, to society.
As I see it, my role as president is to lay out the path to growth and to build efficient business models. A trading company must constantly be creating new businesses. To that end, by enhancing our educational systems and developing our people, I think that I must lead the way toward the creation of businesses that offer new added value.
02．Where Kanematsu Stands and the Challenges Ahead
As a trading company, Kanematsu carries out corporate activities with the understanding that its mission is to contribute to society by creating businesses. While we do not invest in natural resources, we have a unique business portfolio that spans a wide range of business fields. Leveraging this strength, I believe that Kanematsu can develop businesses that no one else can.
Technology is evolving, driving changes in the needs of society and ways of living, and Japan's population and markets are shrinking--it is clear that traditional trading businesses are at a major turning point. Kanematsu's business model is rooted in trading, the foundation of a trading company. Going forward, we will need to carefully read market trends while making greater efforts to find new businesses rooted in advanced technologies, such as AI and IoT. By expanding its business fields, I hope that Kanematsu will become a corporate group that encompasses numerous highly specialized business areas. The one universal management issue for any trading company is business creation. The key is to maintain a keen sensitivity to product cycles, technological innovation, and market shifts in order to find the seeds of growth and continuously create new businesses. Imagination and ingenuity are crucial.
The long process of rebuilding our management base has somewhat taken the edge off the speed of Kanematsu's business creation. This is now a challenge we face. To create new businesses, we are therefore working to foster passion in order to bring out each and every employee's imagination and ingenuity and by doing so reinvigorate Kanematsu's corporate culture with an entrepreneurial spirit. This will also help us precisely understand conditions around us, including changes in markets and needs.
Having stabilized our revenues and finances, we are now switching gears toward greater investment in growth, but we must ensure that neither management nor employees become complacent or careless. Political and economic conditions in Japan and around the world are changing at a dizzying pace, while markets constantly fluctuate, significantly impacting business. We must make sure that every individual is alert and vigilant, lest we be tripped up. At the same time, enhancing human resource development is vital, as inadequate education creates risk.
At the start of fiscal 2019, the year ending March 31, 2019, we launched future 135, our medium-term vision for the coming six years. Under this vision, we aim to increase profit through the sustained growth of core businesses as well as by increasing business scale and added value through business investment. We have created future 135 to reflect the Kanematsu Group's orientation toward and commitment to growth.
03．Fiscal 2018 Performance
In fiscal 2018, the year ended March 31, 2018, many Japanese companies recorded strong results, bolstered by favorable economic conditions in Japan and abroad. Within the Kanematsu Group, the ICT solutions business, which maintained its focus on highly specialized fields, the mobile business, which saw greater than expected effects from the integration of subsidiaries, and the oilfield tubing business, which recovered on the back of a rise in crude oil prices, did especially well. As a result, both revenue and profit increased year on year, and profit for the year attributable to owners of the Parent rose 102.7% year on year to ¥16.3 billion.
Reflecting the recording of retained earnings, total equity attributable to owners of the Parent climbed to ¥116.0 billion. As a result, Kanematsu's financial position remained sound, with the equity ratio at 22.3% and the net D/E ratio at 0.5.
I think that these achievements are the result of the Groupwide strategies we have been implementing. However, we have only just begun down the path to growth. Political instability overseas is increasing, and the unexpected could happen at any time. Looking at our current position the starting line, we will be even more vigilant as we move steadily forward.
04．Looking Back at Our Early Completion of VISION-130
Under VISION-130, our previous medium-term vision, launched in April 2014, we aimed for consolidated net income of ¥15.0 billion in fiscal 2019, the final year of vision. However, in fiscal 2018, we recorded consolidated net income of ¥16.3 billion, reaching our target ahead of schedule. I think that a key factor behind this achievement was the impact of consolidated management. In particular, within the Electronics & Devices Division, the ICT solutions business and mobile business have seen marked growth over the past several years while maintaining high profitability. In the mobile business, we made the major acquisition of mobile phone sales company Diamondtelecom, Inc. in 2016 and merged it with Kanematsu subsidiary Kanematsu Communications Ltd. in 2017. The results of this integration have been even greater than expected. This is an excellent example of a successful implementation of our consolidated management structure, with Kanematsu acting as controller and Group companies handling the supply chain and front-line business. In this kind of collaboration, Kanematsu supplies the ingredients, while the Group companies turn the ingredients into well-crafted dishes and serve them to customers.
In this way, under VISION-130, we made real progress in the areas that we decided to focus on and achieved results in fields where we had been working to increase revenues. While there will always be ups and downs in individual businesses, by not investing in natural resources, we have achieved a stable revenue structure. Furthermore, our financial structure is also stable, as illustrated by our indicators, such as an ROE of 15.1%, a net D/E ratio of 0.5, and an equity ratio of 22.3%. We know that a revenue structure that is even more resilient to fluctuations in the market environment will be indispensable to meet the challenges ahead, and we are prepared to work toward its establishment.
05．Review by Segment under VISION-130
In the Electronics & Devices segment, Kanematsu Electronics Ltd. worked to provide services with expert knowledge, know-how, and added value to further increase profitability in its ICT solutions business. The high level of expertise in this business and consolidated management structure worked well, contributing greatly to results. Furthermore, in the mobile business, as mentioned above, the merger of Kanematsu Communications and Diamondtelecom not only contributed to scale expansion, but produced greater than-expected synergies, making steady headway toward increased market share.
The Foods & Grain segment is a stable part of the Group's earnings base. In particular, the food business requires the kind of added value that comes from the application of imagination and ingenuity and is a field where Kanematsu's unique attributes can really shine. Meanwhile, the feedstuff business is an area that presents opportunities to steadily increase revenue using the know-how built up over the Company's long history, and I can confidently say that it plays an important part in Japan's food market. Honing one's market discernment and know-how to figure out how best to hedge against the risks of market fluctuation--a key aspect of business in food commodities and an area where Kanematsu's extensive experience is invaluable--is one of the great pleasures of business. At the same time, climate change is prompting market locations to shift, so securing new suppliers going forward is important.
In the Steel, Materials & Plant segment, consolidated management with affiliates is one of our strengths, as is the Division's business coordination spanning multiple fields. Performance in the North American oilfield tubing business improved greatly thanks to the increase in crude oil prices in fiscal 2018, and we were able to effectively use our strengths in the functional chemicals business and other highly specialized fields, contributing to revenue expansion.
In the Motor Vehicles & Aerospace segment, our strength is in our proposal- and problem solving-based business model that leverages abundant information resources to address regional characteristics and customer needs. Business expansion in next-generation automobile markets, such as those related to network connectivity (so-called connected cars) and self-driving vehicles, as well as entry into the space business are progressing smoothly.
In technological support, which was designated as an area for innovation under the previous vision, we expect growth in such areas as the security business in the run up to the 2020 Tokyo Olympics and Paralympics.
VISION-130 Targets and Results
06．The future 135 Medium-Term Vision-- A Plan for Growth
Our targets for fiscal 2024, the sixth and final year of the future 135 medium-term vision, are consolidated net income of ¥25 billion, ROE of 13%-15%, and a total payout ratio of 25%-30%. Our aim of achieving sustainable growth is unchanged.
Moreover, we aim to contribute to society by returning increased revenues to our stakeholders. We want Kanematsu to be a useful, indispensable part of society. With that in mind, we regard the targets of the medium-term vision not as our ultimate destination, but as milestones along the road of sustained growth.
In the 2000s, as the Kanematsu Group was advancing business selection and concentration, it rebuilt its financial foundation by reducing its assets and interest-bearing debt. However, I think that we have gone a little too far in paring down our assets and businesses. At such times, the entrepreneurial spirit of management and employees gets worn down, and have I worried that we might lose sight of Kanematsu's reason for existing as a trading company. Since becoming president last year, however, I have seen firsthand the fi re in our employees and business partners, and I feel strongly that the time has come for us to reclaim the entrepreneurial spirit of our founding.
While maintaining and strengthening the sound financial base we have established, we will focus on more deeply developing our areas of strength and work to build businesses using innovative new technologies. By doing so, we will aggressively advance business expansion and creation. To do this, we must realize effective corporate governance to ensure exacting oversight in business management and investment as well as a corporate culture in which imagination and ingenuity are a constant while constructing mechanisms to achieve business creation.
07．Priority Initiatives under future 135
I. The first priority initiative under future 135 is "Sustainable growth in fundamental businesses and the expansion of the revenue base through business investments." Our existing businesses will remain the foundation of the Kanematsu Group's revenue, and we will continue working toward sustained, steady growth in these businesses. The feedstuff business, which plays an important part in food supply in Japan, is a good example. Going forward, as technologies evolve and needs change, some businesses will fade away, while other, new businesses emerge; in such an environment, I think that imagination and ingenuity will be particularly crucial to expansion in existing businesses. Technological innovation may bring more opportunities for investment in efficiencies and other areas. To make sure we don't drop the ball, we will advance collaboration between businesses and expand our revenue base through appropriate investment and M&A in areas where we have deep insight. Th time span of the new vision, six years, is rather long. Each business must therefore set goals, such as, for example, doubling revenue in existing fields, and consider what is necessary to meet those goals as we move forward.
II. Second, "Response to technical innovation." as exemplified by such technologies as IoT and AI, will be indispensable as we build the Kanematsu Group's future. Across all business fields, the application and integration of IoT and other new technologies are advancing, creating needs for structural innovation. In this environment, the Electronics & Devices Division is focusing on offering high-value added business models using new technologies.
Going forward, trading companies will need to create added value that transcends individual business areas. We will promote the coordination of businesses that possess cutting-edge technologies with other businesses and our partners, further reinforcing business creation through broad-reaching collaboration across business areas. From the current fiscal year, we have created the position of Chief Officer of Technologies and Business Collaboration, and we are working to accelerate the creation of new businesses and develop them into pillars of growth by harnessing technological innovation. By building new businesses in step with changes in society, the Kanematsu Group aims to fulfill its mission.
III. Third is "Establishment of management infrastructure for achieving sustainable growth." We recognize that people are the foundation of all we do, and, accordingly, there are many things we must work on. First, we urgently need to cultivate management personnel. To this end, we are creating new training programs and enhancing other educational measures aimed at raising the quality of our employees. At the same time, we are implementing measures to raise employee satisfaction as well as work style reforms. Each individual has different values, so it is extremely difficult to create something that everyone will be 100% satisfied with. It is important, however, that we create frameworks in which employees can find meaning in their work and enjoy the use of their imagination and ingenuity and then operate such frameworks while enhancing communication. Furthermore, as we work toward global business expansion, we are aiming to increase the number of specialized operating companies in key overseas markets. To this end, we are working to enhance our internal systems. We plan to complete these initiatives during the first half of the medium-term vision. In addition, we will implement systems to quantitatively assess our management situation and related risks.
08．Growth Strategy by Business
Under future 135, in addition to the ongoing growth of existing businesses, we will target additional growth by making investments aimed at expanding the revenue base and capturing added value. Expansion of the revenue base through business investments is aimed at growing our customer base, markets, and market share. These are Groupwide goals, but at the moment, in addition to investing in the Electronics & Devices Division, which encompasses numerous highly competitive business areas, I think that the machinery and chemicals businesses in the Steel, Materials & Plant Division, where we still have underutilized strength, need a boost. Main areas for achieving growth by capturing added value include such areas as feedstuff, foods, and steel, where we will add new functions to existing businesses.
Looking at individual businesses, in the ICT solutions business we will continue aiming for sustained growth leveraging our strengths. We position this business as a stable revenue base. In the electronic components and semiconductor business and the system devices business, we will reorganize existing businesses to capture added value. In the mobile business, having achieved positive results through M&A under the previous medium-term vision, we will utilize our knowhow to advance scale expansion and work toward greater efficiency by enhancing the profitability of stores. In the Foods & Grain segment, we will work to expand the revenue base of the meat product business and identify sources of additional added value that we can more deeply develop in the value chain infrastructure we have built in Asian food markets. In the Steel, Materials & Plant segment, including the steel, machinery, plant, energy, and chemicals fields, investment in scale expansion will be crucial. We will work with even greater speed to build up operations in this segment as a business pillar for the coming era. In the Motor Vehicles & Aerospace segment, we will expand the earnings base of the aircraft components business and, in space-related businesses, expand areas in which we have strength and cultivate fields where we understand customer needs.
Furthermore, we will accelerate investment in innovation aimed at sowing the seeds of the future, realizing cross-division collaboration focused on cutting-edge technologies, such as AI and IoT, to create new businesses.
While we aim for ongoing growth, every investment will come be carefully scrutinized to ensure that no investment becomes a burden down the line. To this end, we will rigorously apply our investment standards to investment decisions while proactively selecting our fields of specialization and honing the precision of our aim.
09．Our Management Base
We are strengthening our corporate governance in stages. From fiscal 2019, we have introduced a performance-linked stock compensation plan for directors. By more closely linking director compensation with corporate performance and stock price, we aim to increase directors' awareness of shareholder and investor value. In addition, Kanematsu has three outside directors, each with different areas of expertise. Our directors engage in active discussion rooted in their own experience, and I think our Board of Directors functions efficiently as a result.
As indicated in the priority initiatives of the future 135 medium-term vision, the present shortage in management personnel is matter of urgent concern, and we are working to strategically nurture the personnel needed fill this need. Respect for diversity is deeply embedded in the bedrock of the Kanematsu Group. I think that the Group has the necessary resources and conditions, including the aforementioned respect for diversity, to develop the diverse human resources it needs. We plan to implement management training not just for current executives, but for young employees early in their careers, regardless of gender, on varying scales as appropriate. Winning the trust of our business partners, so that they feel comfortable letting Kanematsu handle their business management, is a guidepost to aim for in determining what Kanematsu should look like as a trading company going forward.
One of Kanematsu's Corporate Principles is fulfilling our corporate social responsibilities by building a sound, flourishing business. We aim to take a broad view of international society and strive to solve social problems through our businesses, thereby contributing to society. Informed by the United Nations' Sustainable Development Goals (SDGs), we will encourage development in areas rooted in social issues and problem solving within fields unique to Kanematsu, where other trading companies do not operate. By discovering and meeting needs in these areas, we will develop businesses, creating employment and impacting our business partners and the consumers they interface with. Considered in these terms, our social responsibility is readily apparent.
Going forward, we will continue striving to increase our enterprise value and contribute to society in ways that only Kanematsu can.
10．Fiscal 2019 Outlook and Message to Stakeholders
In fiscal 2019, we are planning for revenues of ¥760.0 billion, up 6.3% year on year, operating profit of ¥30.0 billion, up 14.7%, and prof t for the year attributable to owners of the Parent of ¥16.5 billion, up 1.1%.
The Kanematsu Group regards providing returns to shareholders as one of its most important tasks. Since resuming the payment of dividends in fiscal 2014, we have increased dividend payments each year. Under future 135, we have established a target total payout ratio of 25%-30%. We will continue to balance careful decision making with aggressive investment as we move into a steady growth trajectory and endeavor to consistently fulfill our responsibilities to shareholders.
Going forward, the Kanematsu Group will carve out a path to major growth. We plan to make investments backed by our stable financial base and based always on thorough risk assessment. From there, we will boldly move forward and return the fruits of our endeavors to our stakeholders. I promise to carry out diligent, firmly grounded management while working to increase Kanematsu's enterprise value to live up to the expectations of our stakeholders.