CFO Message
Latest Update : Sept.30, 2024
We have set a target of 2.5 trillion yen in net sales and 250 billion yen in operating income for the fiscal year ending March 2029, and all group companies are working to attain those targets. To demonstrate to our stakeholders that achieving 250 billion yen in operating profit is feasible when we reach 2.5 trillion yen in net sales, we will continue to expand growth and improve profitability through the execution of each business strategy as in the past, and we will place even greater emphasis on achieving our operating margin target of a minimum of 10%.
In executing this, I believe that I can make full use of my accumulated experience in hands-on involvement in business operations, including management, overseas assignments, and numerous business integrations since I joined the Company. Our efforts to increase profitability hinge on linking the qualitative information obtained on-site with quantitative information. For example, by instantly capturing indicators such as product inventory counts at a site with declining utilization rates, you are then able to understand the issue and derive a solution. I intend to harness information from front-line operations and implement detailed measures to enhance profitability.
To enhance corporate value over the medium to long term, we will set various financial disciplines in our financial strategy and capital policy, thoroughly strengthen our financial position, and greatly improve our ability to generate cash. In addition, we will strengthen our financial position by appropriately managing the cash generated through the establishment of a cash allocation policy, while simultaneously providing returns to shareholders that satisfy investors. Furthermore, in considering our medium- to long-term portfolio, we will consider ROIC and other costs of capital, and will identify appropriate businesses in which to invest, dependent on their profitability. We will maximize investment efficiency and optimize management resource allocation to increase corporate and shareholder value.
Financial strategy and capital policy
Capital efficiency and EPS growth rate
Concerning profitability, we have set ROE of 15% or more and EPS growth rate of 15% or more (10-year CAGR) as our target KPIs. Having made "strengthening our financial position" a basic policy, the MinebeaMitsumi Group has taken various steps, including engaging in efficient capital investment, asset management, and reducing interest-bearing debt.
The Company's ROE for the fiscal year ended March 2024 was 8.1%, which represents a decrease from the previous year. Going forward, we will seek to get ROE back on track toward the 15% threshold. ROIC was 5.3%, temporarily below the hurdle rate of 8%, and we will implement measures to improve this as well. EPS for the fiscal year ended March 2024 was 133.05 yen. In the fiscal year ending March 2029, we are poised to achieve the operating income of 250 billion yen and an EPS growth rate CAGR of 15% or more.
At the same time, in addition to growth through global M&A by leveraging organic growth and high cash-generating capacity, we will focus on capturing new business opportunities, such as the development of products that contribute to resolving social issues. In so doing, we will increase profitability and improve growth, maximize our ability to generate cash, and further strengthen our financial position.
Cash-generating ability
In the fiscal year ended March 2024, the Company achieved net sales of 1,402.1 billion yen and operating income of 73.5 billion yen. We attained a new record high in net sales, but operating income was lower than that of the previous fiscal year. Nevertheless, we anticipate a record-high EBITDA result of 167.0 billion yen in the fiscal year ending March 2025 due to ongoing capital expenditures undertaken based on prudent assessment of recoverability. We project that net interest-bearing debt will amount to 215.0 billion yen in the fiscal year ending March 2025. The Company's ability to generate cash has steadily improved, allowing us to expand our business while maintaining net interest-bearing debt at appropriate levels.
Cash allocation and stability of the financial base
Cash allocation
50% of generated operating cash flows are to be allocated to capital expenditure to drive organic growth.
Of the remaining 50%, while half will be allocated to appropriate and flexible shareholder returns, we are proactively considering options to carry out effective M&As using the other half, together with borrowings, premised on the notion of maintaining financial discipline such that the net debt-to-equity ratio falls within the 0.2 times range.
Capital expenditures and shareholder returns
Based on this medium- to long-term policy, capital expenditure for the fiscal year ended March 2024 amounted to 83.6 billion yen, mainly for renewal investment. During the fiscal year ending March 2025, our plans call for capital expenditure of 80 billion yen, primarily for investments in semiconductor-related facilities.
After a comprehensive review of the business environment, MinebeaMitsumi aims to continue paying out stable dividends, targeting a dividend payout ratio of around 20% on a consolidated basis, in principle, to strengthen shareholder returns.
In the fiscal year ended March 2024, annual dividends per share amounted to 40 yen, unchanged from the 40 yen dividend per share of the previous fiscal year. From the fiscal year ending March 2025 onward, we will be flexible in our review options for increasing dividends in line with profit growth.
As for shareholder returns, the Company will provide dividends and carry out share buybacks under a similar policy.
Security of the financial base
We believe that accelerating the pace of business expansion while simultaneously ensuring the stability of our financial base is of the utmost importance. We have received very favorable (A+) credit ratings from two credit rating agencies - Rating and Investment Information, Inc. (R&I) and Japan Credit Rating Agency, Ltd. (JCR).
Although our equity ratio may vary in the short term depending on status of M&A implementation, we aim to achieve a stable financial base by maintaining an equity ratio of at least 50% over the medium to long term.
Current business environment
In the fiscal year ended March 2024, we were compelled to make downward revisions twice due to discrepancies between the Company's estimates and actual external factors. Based on the presumption that improving the bottom line is essential in such situations, we achieved a certain level of success toward such objectives and have set the stage for the next fiscal period.
In the fiscal year ending March 2025, the Company resolutely seeks to achieve targets that include net sales of 1.56 trillion yen, operating income of 103 billion yen, and operating margin of 6.6%. In Precision Technologies (PT), progress is being made in optimizing levels of high value-added products in the inventories of customers in the ball bearing business, which has increased the likelihood of growth accompanying further market recovery. In the aircraft market, we have been taking steps to resolve supply chain issues involving rod ends and fasteners for aircraft. In Motor, Lighting & Sensing (MLS), we will benefit from the recovery in the market for HDD motors, while also aiming to bring about further content growth in highly profitable automotive motors. In Semiconductors & Electronics (SE), we aim to expand the scale of our business further while focusing on profitability in the analog semiconductor business, which has undergone business integration. In Access Solutions (AS), we seek to increase profitability through early market entry with our INTEGRATED products and value-added products.
Midterm Business Plan for further growth
In May 2024, the Company released its new Midterm Business Plan, which serves as a concrete roadmap for achieving further growth in pursuit of its long-term targets for the fiscal year ending March 2029. In the Midterm Business Plan, we set our targets at net sales of 1.62 trillion yen and operating income of 125 billion yen for the fiscal year ending March 2026, and at net sales of 1.73 trillion yen and operating income of 150 billion yen for the fiscal year ending March 2027.
We are largely on track to achieve the 2.5 trillion yen net sales target for the fiscal year ending March 2029, with organic growth poised to reach approximately 2 trillion yen. It will be possible for us to achieve net sales of 2.5 trillion yen if we conclude one M&A that is similar in size to that arranged with MITSUMI ELECTRIC, which was subject to business integration in 2017. To achieve operating income of 250 billion yen, we will focus on expanding sales of high-margin products. We will engage in initiatives focused on high-margin products such as analog semiconductors, in addition to bearings and motors. Through the business integration of Minebea Power Semiconductor Device, analog semiconductors now constitute the second-ranking product in the Company's Eight Spear strategy, up from the third-ranking product previously.
Initiatives for improving profitability
The Company's efforts to improve profitability include cost reduction and lowering the materials cost ratio and the factory overhead ratio. We are also focusing on transforming fixed costs into variable costs, thereby increasing profitability through greater flexibility in cost management. Furthermore, although we have carried out numerous M&As, including large-scale M&As over the last several years, the Company's S.G.&A. expense ratio has remained in the 11% range, which reveals plenty of room for improvement. Labor costs account for approximately half of our S.G.&A. expenses, followed by logistics costs and outsourcing expenses. Given that, we regard this as one of our key management issues and we are moving forward with a 2% S.G.&A. expense ratio reduction target, which is to be achieved, in part, by increasing white collar productivity and improving transport efficiency.
I am well aware that more than anything else the prospect of increasing profitability hinges on the efforts of each and every one of our Group employees. Because of this, I communicate with our employees daily to reinforce initiatives aimed at improving and increasing our profit margins.
Management for value creation
The MinebeaMitsumi Group has established a hurdle rate of 8% for investment decisions, 2% higher than the estimated cost of capital of 6%. We are working to improve capital efficiency by understanding the cost of capital for each business and implementing appropriate financial strategies. In support of efforts to achieve net sales of 2.5 trillion yen and operating income of 250 billion yen, the Company benchmarks return on equity (ROE) and return on invested capital (ROIC), which are used as indicators of profitability for each business. The Company conducts R&D, M&As, and business withdrawal by checking whether or not the target profitability exceeds its capital cost and verifying the current status and outlook of individual businesses.
Our approach to increasing profitability of individual businesses has involved improving profit margins and reducing invested capital using a reverse ROIC tree approach. By enhancing profitability of each business portfolio, we strive to optimize invested capital on a Company-wide basis. Despite focusing on improving profitability under this policy, ROIC for the fiscal year ended March 2024 decreased relative to the previous fiscal year to 5.3%, partly due to a decrease in operating income.
We will continue to create business strategies and operate our businesses in alignment with initiatives for achieving sustainable growth and increasing corporate value over the medium to long term. In our efforts to increase corporate value, we will engage in risk management practices for reducing capital cost and implement financial strategy which helps enhance our products' competitive strengths. Moreover, to ensure an optimum business portfolio, we hold management meetings twice per year to discuss business continuity of those businesses that fall short of the hurdle rate.
Business portfolio strategy
Focusing on growth of net sales and ROIC by business segment, we view the current state and the potential of the Company's business portfolio as indicated below:
With regard to invested capital, we seek to optimize management resources in the fields of A to D, which are defined in the figure below. We plan to use capital expenditures efficiently while utilizing grants and other funds to do this. We will also focus on controlling inventories and other assets on a business segment basis to maintain working capital within an appropriate range.
Precision Technologies (PT)
In Precision Technologies (PT), we expect an increase in net sales due to various factors, including recovery of the data center market, shift to electrified vehicle types and high functionality in the automobile market, growth for medical and other applications, including high value-added products, and recovery in the aircraft market. We expect to recover bearing production and sales volumes through continual productivity improvement and other initiatives to increase production capacity. We aim to improve PT's profit margin and position it as a core business of the Company.
Motor, Lighting & Sensing (MLS)
In Motor, Lighting & Sensing (MLS), we are aiming for top-line growth with motors as our growth driver, and we expect further growth for automotive products that are high-end global niche products with high profitability, and improvement in the product mix due to recovery in the HDD market. In electronic devices, we expect the backlight business for smartphone applications, a sub-core business, to wind down. Still, we are targeting expanded revenue for other applications, mainly automotive use. In motors, we aim to achieve an operating margin of 10% or higher for the fiscal year ending March 2027 and are working on improving profitability overall to establish motors as a growth driver.
Semiconductors & Electronics (SE)
In Semiconductors & Electronics (SE), we will promote PMI activities with Minebea Power Semiconductor Device, which has undergone business integration, in the analog semiconductors business, a core business, and strive to achieve further growth. We are repositioning analog semiconductors as the second spear in our Eight Spear strategy, following bearings, and aim for an operating margin of 30% by the fiscal year ending March 2029. We aim to improve profitability for our sub-core businesses, optical devices and mechanical components, while utilizing our high production capacity.
Access Solutions (AS)
In Access Solutions (AS), we will aim for an operating margin of 10% by introducing new INTEGRATED products and high value-added products into the market. Through structural reforms and other measures, we have achieved a turnaround in European and American businesses that we integrated through M&A, thereby improving profitability. We will continue this momentum into the future. Moreover, the contribution to profits from automotive devices is progressing steadily. We will use the various solutions we currently possess.
Risk management
Due to such factors as the shift towards a decarbonized society and heightened geopolitical risk, the business environment in which the Company operates is changing rapidly on a day-to-day basis. To respond to such changes quickly and appropriately, we must strengthen our defensive approach to risk management and take an aggressive approach to maximizing profit.
The Representative Director, Chairman CEO of MinebeaMitsumi is responsible for risk management and works with the Risk Management Committee to make important decisions. It is also the committee's role to assume specific risks and action plans for such risks and conduct continuous monitoring of the situation. As the CFO, I focus on recognizing and forecasting our business environment, analyzing the impact of individual events on our business and performance, examining the likelihood of occurrence, urgency and impact of risks and opportunities, and formulating strategies and measures. I also execute those strategies and measures in a concrete and steady manner.
One of the most urgent issues facing the MinebeaMitsumi Group concerns business continuity planning (BCP). We are focused on developing and strengthening disaster prevention manuals and BCP's for sites we have identified with substantial water related risks, including flood or drought.
Another area of risk involves cyber-security. We are addressing the significant information security challenge by establishing and strengthening systems meant to deter and prevent cyberattacks. Specific measures in this regard have included establishing an automated monitoring and anomaly detection network for PCs and servers used daily across the entire Company, including its overseas production sites, and the implementation of an incident response system that promptly addresses any reported anomalies or threats. Moreover, the Group has a specialized team for handling threat analysis, enabling us to mount a rapid response that fully encompasses threat detection, analysis, and countermeasures.
Concerning economic security, we have implemented internal regulations to respond promptly to the strengthening of economic sanctions and export control regulations in various countries and to take a more strategic approach to expanding the business while managing risks related to transactions subject to economic security concerns.
Environmental management
In November 2022, the Company issued its first series of green bonds to fund the production of high-quality bearings that contribute to more significant power savings and groundbreaking precision, research and development, and procurement of decarbonized power sources. The Company will achieve its environmental targets by taking on the carbon neutrality challenge and promoting MMI Beyond Zero. In recent years, we have been focusing on adopting renewable energy in Japan and abroad particularly at the Company's core plants overseas, and we will continue to further promote initiatives to realize a sustainable global environment.
Engagement with stakeholders
I work closely with the IR division, holding numerous meetings with investors and shareholders to explain our proactive business and financial strategies aimed at achieving further Company growth. The CEO and I, as the COO & CFO, take an agile approach to discussing the feedback we receive with the administration and business divisions, fostering a culture where such feedback is actively applied to our management strategy. For instance, we received questions regarding the results of our M&A strategy, which constitutes one of our key growth strategies, and how the strategy has increased our corporate value. In response to this, we disclosed our track record in our presentation materials released during our earnings briefing for the fiscal year ended March 2024.
In addition, we believe that strengthening investments in non-financial capital, such as human capital, manufactured capital, and intellectual capital, and integrating them with financial capital, will enhance both corporate and shareholder value. We have been conversing with investors about our management strategy including non-financial capital, and in July 2024, we held a small meeting between institutional investors and Outside Directors. In particular, the Outside Directors conveyed to investors that discussions about human capital in the Board of Directors meetings, which had been somewhat lacking before, are increasing.
Moreover, we hold annual meetings with our investors and shareholders regarding the information contained in our Integrated Report, thereby enabling us to receive candid feedback that helps us make management improvements. We will continue to realize improvements in corporate and shareholder value through open exchange of views with our stakeholders. Going forward, we hope our investors and shareholders will continue looking forward to MinebeaMitsumi's unwavering focus on its substantial potential for growth and profitability.
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