Message from the CFO

We are further enhancing our asset efficiency and refortifying the financial base to raise corporate value —our KAITEKI value

Hidefumi Date

Managing Corporate Executive Officer
Chief Financial Officer

In the current circumstances, we will focus on further strengthening our financial base in fiscal 2020

Under the current medium-term management plan APTSIS 20, we are putting more emphasis than I ever have as CFO on raising ROE and improving ROIC management to establish efficient profit generation.

To improve our low asset efficiency, which was producing ROE of roughly 5%, we created a system enabling us to focus on profitability and agile management by initiating balance sheet management for each business domain and applying the ROIC tree to visualize each domain’s invested capital. In addition, we shortened the cash conversion cycle (CCC), set up a four-region Europe-North America-Japan-Asia cash management system (CMS), and regularly reviewed the purpose of asset holdings and sold unnecessary assets. In the three years since its inception, we have achieved asset efficiency of approximately ¥450 billion, already surpassing the initial five-year target of ¥300 billion. Through these measures, we have constructed a system that has enabled us to consistently maintain ROE above 10% since fiscal 2016.

In fiscal 2019, however, the impacts of the trade friction between the United States and China and the COVID-19 pandemic led us to record core operating income of ¥194.8 billion and net income attributable to owners of the parent of ¥54.1 billion. We expect business conditions to continue to be severe in fiscal 2020, making it unlikely we will be able to attain the KPI set in APTSIS 20.

Our net debt-to-equity ratio swelled to 1.79 times upon making Mitsubishi Tanabe Pharma Corporation a wholly owned subsidiary at the end of March 2020. While actively and flexibly responding to the changing financial conditions during the COVID-19 pandemic, we will continue working to bring the net debt-to-equity ratio down to under 1.0 times as quickly as possible.

Changes in consolidated financial indicators

Graph: “Ratio of equity attributable to owners of the parent” FY2015 23.0%, FY2016 24.5%, FY2017 27.3%, FY2018 24.7%, FY2019 22.8%, Target for FY2020 29%. “ROE” FY2015 5.2%, FY2016 15.1%, FY2017 17.8%, FY2018 12.7%, FY2019 4.2%, Target for FY2020 13%. “Net D/E ratio” FY2015 1.17times, FY2016 1.06times, FY2017 0.89times, FY2018 1.26times, FY2019 1.79times, Target for FY2020 1.0times

Efforts for asset efficiency

Diagram: Shorten the cash conversion cycle (CCC), Action plan benchmarks; FY2016 About 99days -> FY2019 About 91days (8% improvement) -> Target for FY2020 About 89days (10% improvement). Establish a cash management system (CMS) in four regions (Europe, North America, Japan and Asia). Sell assets with lowered ownership value by regularly verifying their value.

Portfolio management with balanced risk-return and incorporating social issues

To ensure a full reemergence in fiscal 2021, it is essential that we strengthen our capital efficiency by building up our cash flow as much as possible and quickly put our business on a growth track.

In fiscal 2017, we initiated a global structure that delegates substantial authority to our operating companies around the world. While pursuing the management indicators of sales revenue growth rate, ROS, and ROIC, the system facilitates quick decision-making catered to each specific business region and business portfolio management that fully leverages our technological advantages and business models.

In our role as a holding company, we are also focused on guiding post-merger integration (PMI)* to enhance the value of the Mitsubishi Chemical Holdings (MCHC) Group. Following a merger, we hold meetings to review the PMI status and continuously verify that the anticipated synergies are materializing. In the three years since the fiscal 2017 integration of the three chemical operating companies and creation of the new Mitsubishi Chemical Corporation, the synergies from business collaboration and growth generated some ¥13.8 billion, while savings from streamlining amounted to ¥17.9 billion.

Our acquisition of a European firm in the industrial gas field gave us a broad-based business foundation in four regions—Japan, the US, Europe, and Asia-Oceania. We are further strengthening the Nippon Sanso Holdings Group management by giving the business headquarters in each region greater authority to make business decisions.

Portfolio management will be guided by the medium- to long-term basic management strategy KAITEKI Vision 30 (KV30). Business portfolio decisions will therefore seek to control risk while also controlling return by examining growth potential from various perspectives.

In the past, we were focused on rehabilitating low-profit businesses where ROIC was less than the weighted average cost of capital (WACC). We will now consider reorganizing or restructuring a business even if it is currently profitable by taking a broader view of its future growth potential and examining its business efficiency, including intangible assets like a company’s position in the overall industry, its technology portfolio, and its synergy creation system.

We will also consider the risk-return in terms of social issues and business domains designated in our KAITEKI Management or KV30 that the MCHC Group has committed to contribute to solve these issues.

Post-merger integration (PMI) is the three-stage integration process after M&A of management integration, business integration, and awareness integration.

Resource allocation and shareholder return policy

Our approach to resource allocation has not changed fundamentally from when we announced APTSIS 20 in 2015. We seek to maintain an appropriate balance with equal weighting on investing in growth businesses, providing ample shareholder returns, and strengthening our financial position.

I have always believed that the higher the accountability, the lower the cost of capital for a company, and consider it my duty to provide and explain concrete measures related to financial and non-financial information. Mitsubishi Chemical Holdings Corporation’s efforts in this area have been increasingly recognized in recent years, and the Company has been selected as a constituent in a socially responsible investment (SRI) index.

The current business conditions and uncertain outlook make it increasingly difficult to continue fulfilling our responsibility to provide full accountability. In fiscal 2020, our top priority will be managing our business portfolio in relation to the COVID-19 pandemic, and our focus will be on reconsidering investment plans for projects that are not urgent for growth and on reducing costs.

Our shareholder return policy is to preserve an appropriate balance between investing for growth and strengthening our financial position, and we remain committed to maintaining a stable dividend and to providing a medium-term consolidated payout ratio of 30%.

However, considering the overall current situation and business outlook, we have regretfully decided to reduce the fiscal 2019 year-end dividend from the initial plan of ¥20 per share to ¥12 per share and plan to distribute ¥24 per share in fiscal 2020.

I will continue fulfilling my duties as CFO by providing full accountability to our shareholders and all stakeholders and by lowering corporate risk and capital costs to enhance our corporate value.

Shareholder returns

Hidefumi Date
Managing Corporate Executive Officer
Chief Financial Officer

Oct. 2020