Mitsubishi Chemical HoldingsTHE KAITEKI COMPANY

Message from the CFO

Toward strengthening“return control” in addition to“risk control”

Q1. Please tell us about the aims and pillars of the financial strategy in the medium-term management plan APTSIS 20.

A1. Establishing a stable and robust financial base

*Over the medium-to long-term, we would like to expand our corporate value in a sustainable fashion and meet our commitments to shareholders and all stakeholders.
In APTSIS 15 (fiscal 2011 to 2015), our previous medium-term management plan, we managed to develop the foundations for sustained growth by expanding the business scale through M&A activities and by conducting structural reforms in businesses with fluctuating revenue. Under APTSIS 20, our medium-term management plan that runs from fiscal 2016 to 2020, we are focusing on growth and profitability in the Performance Products domain and Health Care domain, and we are in a stage of transition to an even higher corporate value. Our main goals are ROE of 10% or higher, core operating income of ¥380 billion and net profit of ¥180 billion. We are seeking to expand our corporate value based on a stable and robust financial base even after fiscal 2020, which is the final year of the current medium-term management plan.
In APTSIS 20, we clarified the role of MCHC. Specifically, MCHC determines business strategy, devises and manages medium-to long-term management plans, and allocates resources based on them. For portfolio management, by incorporating ROIC Indices in each business domain in addition to growth potential and the core operating margin on revenue (return on sales, or ROS), we aim to strengthen our portfolio while improving profitability (MOE*1) through the appropriate allocation of resources.
Not only by investing in and developing the Performance Products and Health Care domains, both of which contribute high growth and profitability, but by demonstrating business synergy thanks to the integration of the three companies (MCC, MPI and MRC) and improving operational efficiency through workstyle reforms, we will raise profitability and meet the goals laid out in APTSIS 20. We will also make use of the cash earned from operations in a well-balanced manner, allocating it in investing in sustainable growth for the future, improving the financial base, and offering appropriate and stable shareholder return. For the investment strategy in APTSIS 20, some ¥1.7 trillion for capital expenditures (including ¥500 billion investment in maintaining and updating equipment) and for investment in growth through M&A is planned.
Specific financial targets aimed at bolstering our financial position are as follows.

*1

Stands for “Management of Economics,” one of the three axes of KAITEKI Management. This axis aims to enhance economic value, as represented by business performance, through the management with a focus on the efficient allocation of capital.

Q2. Please explain the progress of APTSIS 20.

A2. Steadily improving KPIs

Results of fiscal 2016

For core operating income*2, which was introduced upon the application of IFRS from fiscal 2016, we posted a record ¥307.5 billion, while ROS was 9.1%. Net profit attributable to owners of the parent also significantly increased to ¥156.3 billion (increased ¥104.9 billion year-on-year). In terms of Key Performance Indicator (KPI) results, we recorded ROE of 15.1%(+9.9% year-on-year), net D/E ratio of 1.06 times (-0.11 year-on-year), and ratio of equity attributable to owners of the parent(equivalent to shareholders’ equity ratio in J-GAAP) of 24.5%(+1.5% year-on-year), showing improvement across all these financial metrics compared to the previous year.
Noting that while ROE achieved a significant improvement up to 15.1% in fiscal 2016, there were special factors involved, including a temporary reduction in tax expenses, we will continue to actively pursue measures aimed at expanding stable earnings.
In terms of cash flow, although we undertook ¥206.5 billion of investments, we managed to maintain free cash flow of ¥103.7 billion in real terms. Based on this, we endeavor to improve our financial position.

Outlook for fiscal 2017

In the fiscal 2017 outlook we announced at the beginning of the term, the expected core operating income is ¥310 billion (an increase of ¥2.5 billion year-on-year) and the expected net profit attributable to owners of the parent is
¥137 billion (-¥19.3 billion year-on-year).
In the Performance Products segment, though we expect higher earnings in optical films, PET films, carbon fiber and alumina fiber and so on, as these are areas where we have boosted production capacity. At the same time we estimate a contraction of sale and purchase difference due to rising raw material costs associated with some products and a higher burden of common administrative expenses. Meanwhile, in the Chemicals segment, we expect steady performance thanks to the contribution of the new Middle Eastern plant for our MMA business scheduled to go online in the middle of the year, and as a result of solving problems which occurred at the domestic petrochemical plant in the previous period.
In terms of fiscal 2017 KPIs, we expect to hit ROS of 8.5%(-0.6% year-on-year), maintaining a level above the 8% target laid out in the medium-term management plan, along with ROE of 12% and net D/E ratio of 1.0 times.

Change in Consolidated Performance

*

Change in Consolidated Financial Indicators

*

*2

To ascertain ordinary operating income and loss, expenses associated with structural reforms and income/loss resulting from extraordinary factors such as disasters are deducted to derive “core operating income.” Core operating income is used as an indicator in the external explanation and business administration.

*3,4

Figures pertaining to non-continuing businesses for March 2016 IFRS and March 2017 have been deducted.

Q3. Please explain the details about “strengthening the portfolio.”

A3. Toward strengthening “return control” in addition to “risk control”

Strengthening Management Structure

To coincide with the establishment of Mitsubishi Chemical Corporation following the integration of the three chemical companies in April 2017, we have made changes to the management structure of the Board of Directors and Corporate Executive Officers Committee of MCHC to clarify the roles of MCHC and each operating company. MCHC also set up strategy offices for each of the four segments(Performance Products Strategy Office, Industrial Materials Strategy Office, Industrial Gases Strategy Office, Healthcare Strategy Office), as well as the Emerging Technology and Business Development Office involved with the development of next-generation businesses such as IoT and AI, and the commercialization of cutting-edge technologies.
Through these changes, MCHC will bolster its portfolio management by devising medium-term strategies for each business domain, further enhancing its monitoring of the medium-term management plan, and allocating resources appropriately. Under this strengthened management structure, each operating company can focus on carrying out business activities based on its basic strategy.
In the Performance Products segment, we are pursuing growth and high profitability including synergy effects. For the Chemicals segment, we aim to boost profits by developing greater stability and functionality. In the Industrial Gases segment, in addition to stable growth, we are looking to expand into the performance domain. In the Health Care segment, we will accelerate growth, including expansion in the U.S.

Strengthening Portfolio Management

As noted above, we clarified the roles of MCHC and the operating companies as “business management” and “business execution,” respectively, and to increase management speed further, we have delegated a great deal of authority to the operating companies.
We reduced the numbers of SBUs we manage from about 60 to 30. Each SBU was reallocated into four quadrants (nextgeneration businesses, growth businesses, cash-generating businesses and businesses to be restructured). We will adopt management indicators (sales growth rate, ROS, ROIC) that reflect each business domain to enable fine-grained business management and allocate resources more appropriately. In terms of ROIC management, we will set target figures by domain and manage them as KPIs for improving profit margin. We also include revenue in growth businesses KPI and free cash flow in cash-generating businesses KPI. In the past, we tended to focus on unprofitable businesses as problems, but moving forward, low-profit businesses whose ROIC falls below weighed average capital cost (WACC) will certainly be examined.
We biannually perform numerical investigations and evaluations on progress of action plans and investment plan of the medium-term management plan and management indicators. As for unachieved targets, we discuss in-depth the necessity of structural reforms and then review our portfolio and resource allocation accordingly.
Based on such reinforcement of management structure and portfolio, we endeavor to strengthen the return control system in addition to the traditional risk control system.

Management Roadmap Toward Achieving the Medium-term Management Plan: Portfolio Management

Positioning of each business and affiliate companies based on domain-specific indicators
Implementation of regular monitoring to accelerate resource allocation and portfolio optimization

*

Q4. Please specify your measures aimed at improved capital efficiency.

A4. Toward more advanced utilization of capital

In APTSIS 20, to improve capital efficiency we have aimed to squeeze out 300 to 500 billion yen in capital by reducing working capital and selling off assets such as cross-shareholdings reduction. We would like to use the funds obtained through improved capital efficiency in a well-balanced manner, allocating them in investments for future growth, improving financial base, and offering shareholders return.
One of our specific measures for capital efficiency is the global roll-out of cash management system (CMS). We will expand the system, which has been deployed in Japan to date, to the sites in the U.S., Europe and Asia, in an effort to develop more advanced capital utilization. One of the primary purposes of the global roll-out is to pool and control the cash uniformly in each region so that governance function of subsidiaries can perform through cash. CMS was introduced in Europe from fiscal 2016. It will be introduced in the U.S. from fiscal 2017 and in Asia, where cash is managed across multiple currencies, we plan to achieve unified management around fiscal 2020. Ultimately, by working to globally centralize the management of these four regions, we will aim to achieve even greater efficiency.

Kenkichi Kosakai
Representative Corporate Executive Officer,
Deputy CEO, Chief Financial Officer
Sep.2017