Nichirei : Strategy and Resource Allocation (180KB/4 pages)PDF

Financial Strategy

Strategy and Resource Allocation

We will conduct effective strategies to enhance our corporate value.

Takumi Taguchi

Director, Executive Officer

Supervising Corporate Internal Audit, Business

Management, Strategic Planning, IT Planning,

Legal Affairs, Human Resources Strategy &

General Affairs, Finance, Accounting & Tax and

Group Communication

Performance in FY2021

My responsibility in increasing Nichirei's economic and social value is to objectively analyze the Group's competitiveness, formulate a management strategy from business strategies based on that analysis, and reflect that management strategy in our budget and other quantitative plans. Aside from creating plans, I am also aware of the need to consider the kind of corporate organization we should create to enable us to successfully implement those plans.

• In FY2021, Group sales decreased compared with the previous fiscal year due to the impact of the COVID-19 pandemic. However, even though we incurred depreciation expenses from capital expenditures for future growth and for bolstering our business foundation, consolidated profit increased year on year, exceeding our initial plan. Factors contributing to this result were the enhancements to our customer base we have been making, cutbacks in expenses, and our promotion of greater operating efficiency. In the processed foods business, although demand has fallen for commercial- use frozen foods for food service and other sectors due to the pandemic, sales of household-use frozen foods were strong as we accurately captured growing demand and diversifying needs. Overall, the business was able to maintain a balance even when the state of emergency restricted people's movements and contacts.
• In the temperature-controlled logistics business, as rising electricity charges, higher personnel expenses due to a labor shortage and other factors drive costs up, the integration of our storage and transportation operations has improved profitability and enables us to provide high-quality services to customers. Logistics is not simply transporting cargo; providing a variety of incidental services is crucial. For example, our cross- docking (XD) business collects goods from each manufacturer in a batch, then sorts and transports them to individual stores, so manufacturers do not have to ship to each store as they used to. Such steady efforts to maintain businesses that are useful to all have improved the Nichirei Group's ability to generate cash.

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FY2021 Consolidated Results
		Capital Efficiency					Growth
ROE	10.9%			Net sales ¥572,757 million
REP1	¥10,167 million			EBITDA	¥52,618 million
		Financial Soundness					Shareholder Returns
D/E ratio	0.5 times		DOE2		Annual
					3.4% perdividendsshare ¥50per share
Notes: 1.	Retained Economic Profit. Our original indicator showing profit after	deduction of capital costs.
2.	Dividend on equity ratio

Strategy Financial Story Creation Value Strategy Management

Planned Capital Expenditures in the Final Year of our Medium-term Business Plan WeWill 2021

Our current medium-term business plan forecasts around ¥40 billion per year in cash from operating activities for approximately ¥120 billion over the three- year period. Approximately ¥100 billion of this amount is to be allocated to capital expenditures (50% for growth investments; 30% for infrastructure enhancement, business innovation and new development; and 20% for rationalization and maintenance), and approximately ¥20 billion for investments and loans, including shareholder returns and funding. As of the end of the plan's second year, capital expenditures totaled ¥65 billion.

• We may appear to have fallen slightly behind our initial plan in FY2021 due to revisions to our investments in response to the conditions caused by the COVID-19 pandemic. However, we have changed the details and reordered the priorities of the aforementioned capital expenditure categories, enabling us to incorporate items

that had been slated for the next medium-term business plan into our FY2022 plans. With planned capital expenditures for FY2022 exceeding our record high of ¥40 billion for a single year, the total amount for the three-year period from FY2020 to FY2022 is set to be generally in line with our initial plan.

• Capital expenditures in FY2022 include projects with the "new normal" and overseas expansion in mind, centered as before on the processed food and logistics businesses. Capital expenditures in the processed food business will total ¥18.9 billion, consisting mainly of construction of a new production facility for innovative products, expansion of production lines for main categories, upgrades to make equipment eco-friendly and upgrades of aging equipment. Capital expenditures in the logistics business will total ¥19.8 billion, primarily for the addition of refrigerated warehouses in Europe and bolstering of the business foundation, including digitalization of warehouse operations.

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Strategy and Resource Allocation

Shareholder Returns and Capital Efficiency

Dividends are our foremost priority in providing returns to shareholders. We use the consolidated dividend on equity ratio (DOE) as our yardstick for stable annual dividend increases as we accumulate profits in shareholders' equity. Stock buybacks are another measure for providing returns to shareholders, but we have not conducted one since FY2018, because we have been prioritizing the allocation of cash to investments for growth and infrastructure enhancement.

• The consolidated balance sheet as of March 31, 2021 shows a debt-to-equity ratio (D/E ratio) below 0.5, which would normally indicate our capacity to take on a bit more leverage. However, as mentioned previously, planned capital expenditures for FY2022 will exceed ¥40 billion. We also expect to use M&A and alliances to expand overseas operations and create new businesses. To maintain a financial position that allows us to raise

funds flexibly for such purposes, we intend to maintain a single A flat credit rating for long-term debt.

• Regarding capital costs, we are aware that cost of equity capital is 6-7% for the market overall. We use Retained Economic Profit (REP), an original indicator obtained by subtracting capital costs from net operating profit after tax (NOPAT), as one of our key performance

indicators. We calculate REP for the Group and for each business. Moreover, we have been able to maintain the current medium-term business plan target for ROE of 10% or higher. In the next plan we intend to introduce KPIs that contribute to capital efficiency, such as return on invested capital (ROIC), to enhance management of our business portfolio.

Current Initiatives and Future Issues in Overseas Operations

Each of our businesses has leveraged its strengths to expand overseas independently, and overseas sales are currently approximately ¥80 billion, based on frozen food sales in North America and storage, transportation and delivery in Europe. We are aiming for ¥300 billion in FY2031, but I think that will be quite difficult to achieve through organic growth alone. M&A and alliances are effective means to achieve this target, but they are limited by the absence of intra-Group synergy at each location.

• We have a processing base in Vietnam for marine products, which are shipped to Japan for sale. Since demand for marine products is growing worldwide, we should also be able to expand sales in other countries and regions. In Europe, many frozen foods are more like ingredients than finished products, and there are companies there that make a business of finding

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ingredient sources and selling those ingredients under different brand names by country or region.

• There are countries and regions where there is still room for growth in the field of food and health. We consider it a management task to integrate the core competencies we have cultivated in food processing and production and logistics to create a business model that helps to resolve social issues from a global perspective. If we can do that, our overseas businesses should continue to roll out profitably.

Financial and Non-financial KPIs for Management

For financial KPIs, the current medium-term business plan emphasizes EBITDA for profit growth and ROE for capital efficiency. We have set EBITDA as an indicator to monitor whether increasing the allocation of resources to investments for growth and other capital expenditures is leading to the generation of cash. Evaluation of directors and executive officers for performance-linked compensation consists of three indicators: net sales, EBITDA and REP. We disclose targets (performance forecasts) and results by segment for each of these items, with degree of achievement of the EBITDA target given the highest weighting.

  As for non-financial KPIs, in 2020 we identified five material matters for achieving our long-term management goals toward 2030, and in 2021 we set Group targets (measures and KPIs) for each material matter. Going forward, we will work together with our businesses to formulate and monitor specific action plans to achieve the Group targets. For instance, we will establish action plans for each three-yearmedium-term business plan period as a way of setting objectives.

• Among these material matters, I believe that "Creating value in food and health" and "Strengthening food processing and production technology capabilities; enhancing logistics services" will drive growth for the Group. Various non-financial assets are linked to food and logistics, which are the two cornerstones of our business, and one such asset is human resources. For the material matter "Securing and developing diverse human resources," we have set Group KPIs that reflect the commitment of top management to double our investment in human resource development, increase

the targeted ratio of female officers and managers, and achieve diversity among our core talent.

• Nichirei Group employees have gained a reputation outside the Group for being truly earnest and straightforward. I am very happy about that, but I feel that they have not yet been able to fully display their outstanding qualities at an individual level. To bring those qualities to the fore, we have established an innovation management system and have started initiatives to provide wide-ranging employee training that promotes thinking about creating new economic and social value.

Enhancing Corporate Value Going Forward

I stated earlier that dividends are our foremost priority in providing shareholder returns. We will continue to pay stable dividends with DOE as our yardstick and expect to buy back Company shares while considering the balance between our debt rating and capital efficiency. Shareholders also expect an increase in corporate value in terms of stock price. Until now, the focus has been on financial indicators such as profit growth, but attention to ESG has recently picked up, with particular emphasis on initiatives for the environment (E) and society (S). The issues for Nichirei are what the effects will be of incorporating these elements into our business model and how we can develop them into businesses.

• Moreover, I believe that such initiatives will positively impact capital costs. Stock prices will reflect not only the elements specified in corporate finance theory such as leverage, but also sustainability and ESG, and the results will be linked to the cost of capital. Increasing our reputation for ESG will also raise public awareness of the Nichirei brand, positively affecting the engagement of Nichirei Group employees.
• In conclusion, enhancing corporate value will require the creation of a corporate culture in which each of our four operating companies can create value by sharing the extensive know-how they have generated through their diversity. I intend to continue working to deploy Group synergy as we increase the value of our four operating companies.

Strategy Financial Story Creation Value Strategy Management

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