Message from the President & CEO
Massage from the Integrated Report
The frequency of events held in person has increased as the impact of COVID-19 has gradually dissipated. What are your thoughts on the many changes that have occurred as a result of the pandemic?
There are indeed signs that life is slowly returning to normal. This is especially so after the government’s decision to downgrade the legal status of the pandemic to a category V infectious disease from May 2023. On a personal note, I have participated in a growing number of face-to-face events. I have in fact seen how seriously managers and their subordinates view the need to engage in challenging action during such in-house events as town hall style meetings with the president and top management in 2023. This has reinforced the importance of in-person communication. Seeing firsthand people’s facial expressions and reactions while gaining a feel for the mood of deliberations are defining features of face-to-face communication. Having said this, I do not personally see the need to engage entirely in in-person communication. Without forgetting the lessons learned from COVID-19, I think it is more important to search for the optimal balance of efficiency and productivity, including work-life balance.
How do you rate the previous Medium-term Management Plan?
SEKISUI CHEMICAL Group positioned the previous Medium-term Management Plan as a first step toward realizing its Long-term Vision and as an engine in its bid to secure sustainable growth. Looking back, results throughout fiscal 2022 were mixed. In the first half, operating profit exceeded plans prompting expectations that the Group was well within reach of achieving its goal of ¥100 billion. In the second half, however, operating profit fell below plans. In addition to the prolonged slump in market conditions reflecting surplus inventories of products and components in the Electronics field, this was largely due to the drop in consumer confidence in the housing sector on the back of inflation. As a result, operating profit fell below the target set under the previous Medium-term Management Plan, coming in at ¥91.7 billion. Despite this mixed performance, I recognize that we were able to secure an increase in sales and profit, surpassing the levels recorded in fiscal 2019 prior to the pandemic. Moreover, EBITDA, an indicator of the Group’s earning power hit a record high at ¥142.1 billion.The fact that we were able to increase our earning power despite the harsh operating environment, including COVID-19, the prolonged shortage of semiconductors, and sharp rise in raw material and fuel prices, is testament to the collective efforts and resolve of all SEKISUI CHEMICAL Group employees to undertake structural reforms and pass on higher costs to product prices. In addition, the Group announced details of its Strategic Area Map as a compass for realizing its Long-term Vision in April 2022. Looking at this Map in more detail, the steady bio-refinery, perovskite solar cell, and other progress made in areas that we have positioned as new innovation domains is providing a certain amount of new business drive as we prepare for long-term growth. From an in-house perspective, I feel that front-line employees are becoming increasingly aware that their efforts are contributing to society. I also believe that ESG management-based business operations are becoming more prevalent. SEKISUI CHEMICAL Group’s goal is to become a sustainable company. Against this backdrop, the Company’s management has received the recognition of certain external organizations. In specific terms, SEKISUI CHEMICAL CO., LTD. was selected as one of the 2023 Global 100 Most Sustainable Corporations in the World index for a sixth consecutive year.
What thoughts were put into the Drive 2.0 Medium-term Management Plan as a means to realize the Vision 2030 Long-term Vision?
SEKISUI CHEMICAL Group announced details of its Long-term Vision in 2020, the year I was appointed president & CEO, as an expression of its ideal vision in 2030. Looking ahead, I suspect uncertainty will continue to cloud the business environment, as exemplified by the global outbreak of COVID-19. Against this backdrop, I recognize the inherent risk that the Group’s business may take a sudden turn for the worse in the event of a major unforeseen circumstance should it continue to draw up management strategies that are only an extension of its existing businesses. SEKISUI CHEMICAL Group’s Long-term Vision, Vision 2030, is therefore a rallying call for the entire Group to share with a healthy sense of crisis. Under the banner of this Vision, we will work toward continuous growth while generating further change. In a bid to achieve our stated goals, we launched the Medium-term Management Plan, Drive 2.0, as an important 2nd phase from fiscal 2023. This Medium-term Management Plan is positioned at the heart of efforts to realize our Long-term Vision.
First and foremost, I would hope that Drive 2.0 firmly clarifies the Group’s growth path to all stakeholders. Recognizing the need to implement structural reforms in response to the pandemic, growth investments were limited under the previous Medium-term Management Plan. I am therefore concerned that our Long-term Vision for 2030 may appear to deviate slightly from our current situation in the eyes of stakeholders.
I am acutely aware of the need to foster expectations toward growth based on a trust in management, and then improving capital and profit efficiency to increase corporate value. Of equal importance is the need to foster expectations, not only from outside the Group, but also among Group employees. Under Drive 2.0, we will nurture expectations toward growth by accelerating the creation of new business areas while improving capital efficiency through growth in existing businesses based on efforts to strengthen the ESG management platform.
Can you provide us with an overview of the Drive 2.0 Medium-term Management Plan and numerical targets.
SEKISUI CHEMICAL Group has set the goal of securing record high sales and profit under the Drive 2.0 Medium-term Management Plan. In specific terms, we have identified targets for net sales, operating profit, and net income of ¥1,410 billion, ¥115 billion, and ¥82 billion, respectively. These targets reflect certain underlying assumptions regarding the external environment, including a partial recovery in the market and steady efforts to revise selling prices in similar fashion to the previous Medium-term Management Plan in response to the continued surge in raw material costs. In addition, we have set the sales target for Products to Enhance Sustainability at over ¥1 trillion as a KPI that embodies the sustainability of our management. Efforts to achieve this target will help drive the Group’s growth while at the same time increasing the amount of the Group’s contribution toward solving social issues. EBITDA, an indicator of earning power, is also projected to increase significantly, to ¥175 billion. Fiscal 2025, the final year of Drive 2.0, is the halfway point toward our Long-term Vision. In achieving our established goals, we will therefore be one step closer to realizing Vision 2030. Recognizing that efforts to consistently exceed an operating profit of ¥100 billion will gain widespread external acceptance while altering conditions from the Group’s perspective, we will work achieve our operating targets as quickly as possible.
A key component of the Group’s financial strategies is to secure the cash necessary to fund investments in growth. In addition to the forecast three-year total of ¥500 billion in operating cash flows, we will work to reduce cross-shareholdings and procure funds through debt to a maximum of ¥400 billion as required. Meanwhile, should the Group indeed increase its debt to this maximum of ¥400 billion, its debt-equity ratio is still estimated to remain below 0.5 times.
Moreover, we will allocate capital in a balanced manner. We will allocate ¥450 billion to strategic investment and ¥150 billion to normal investment of the total ¥600 billion in growth investments. As far as the ¥450 billion in strategic investments is concerned, we will set aside ¥300 billion for M&As, etc. and the remaining ¥150 million to capital expenditures. In addition to investments for growth, we will allocate ¥140 billion to R&D expenditures. From the total of growth investments and R&D expenditures, more than 70% will be allocated on a priority basis to the High Performance Plastics (HPP), Medical, and new businesses, growth fields in the Medium-term Management Plan and Long-term Vision.
Furthermore, SEKISUI CHEMICAL Group will strengthen returns to shareholders. To this end, we have increased the dividend payout ratio target to 40% or higher and will look to flexibly implement share buybacks and cancel treasury shares in line with various circumstances.
Can you elaborate on each strategy under the new Medium-term Management Plan. First, how will you promote existing business growth?
In formulating the new Medium-term Management Plan, we analyzed and evaluated all existing businesses from multifaceted perspectives. This includes profitability, return on invested capital (ROIC), growth potential, strategic positioning, and the amount of the Group’s contribution toward solving social issues. We also clarified Growth Potential Business and businesses that we believe have the most growth potential as businesses and fields that will drive sustainable growth in the future. For example, we have identified as Growth Driving businesses the Mobility field, focusing on high-performance interlayer films as well as heat release and other materials for EVs, and the Performance Materials field, including overseas testing systems and resin sleeper FFUs for railways. Meanwhile, growth driving businesses include the Town and Community Development and Pharmaceutical Sciences Business. These growth driving businesses and businesses that we believe have the most Growth Potential Business are expected to generate more than 90% of the increase in EBITDA target set in Drive 2.0, and is where we will concentrate our management resources.
What specific initiatives will you pursue in the creation of new business areas?
Drawing on its core technology platform, SEKISUI CHEMICAL Group will accelerate steps to commercialize new business areas through internal and external fusion and M&As. We have for example taken steps to develop perovskite solar cells, which are thinner and lighter than conventional silicon-based solar cells from the previous Medium-term Management Plan. This initiative boasts a host of possibilities, including installation on the sides of buildings and in such transportation infrastructure as railroad tracks and airports. SEKISUI CHEMICAL Group’s perovskite solar cells are accordingly attracting substantial inquiries and interest from the Japanese government and local municipalities. I myself visited the Morigasaki Water Reclamation Center, where a demonstration trial with the Tokyo Metropolitan Government is underway. Although the technical hurdles are high, we believe that this project, if realized, will contribute significantly to society in the field of renewable energy. As an endeavor that we believe will evolve into a lucrative business, we will vigorously support the challenge toward early commercialization while further deepening collaborative ties with local governments and other companies.
Can you provide us with specific details of the Group’s efforts to strengthen the ESG management platform.
We adopted an ROIC Spread approach under the previous Medium-term Management Plan to strengthen the ESG management platform. We are paying close attention to increasing our corporate value. In specific terms, this entails controlling non-financial capital costs and expanding the Spread through various means, including curbing such major incidents as misconduct, investing in the environment and human capital domains, and respecting human rights across the entire supply chain while at the same time working to improve ROIC, a key financial indicator. Building on these endeavors, steps have also been taken to ensure effective implementation by incorporating the ROIC Spread in the evaluation of each department’s performance.
We deeply regret the incidence of such issues as nonconformity with building standards in residential complexes and detached houses under these circumstances. Recognizing the extremely grave nature of this incident, we are taking prompt action and implementing thoroughgoing measures to prevent a recurrence, while working to further reduce risks and avoid a similar incident. We believe this will help in regaining the trust of stakeholders and as such will continue to work in unison to strengthen the ESG management platform with integrity.
What are your thoughts on the Company’s efforts to promote innovation and underlying strengths?
Through innovation, SEKISUI CHEMICAL Group draws on its technological strengths while accurately grasping market trends to provide unique, high-quality solutions that address solve social issues. Despite our status as a chemical company, we possess almost none of our own raw materials. Our strength lies in Process Creation which is the ability to select optimal materials in response to customers’ requirements and provide high-value-added solutions. Complementing this strength, we also boast Adaptability in addressing the need to solve social issues in advance.
The Company’s inherent strengths are underpinned by its technology platform. As a pool of core technologies that is common throughout the Group, this platform is key to promoting fusion both internally and externally. One of the Group’s mainstay businesses, for example, is its shatterproof interlayer films used for the windshields of automobiles. Here, PVA/PVB material, fine particle, precise synthesis, and various other technologies enhance the sound and heat insulation performance of the interlayer films, and they are also used in head-up displays (HUDs). Furthermore, the fine particle technology used in the Electronics field for conductive fine particles and heat insulation interlayer films is also applied to the Medical field for the diagnostic reagents used for blood cancers. In this manner, the Group’s core technologies are commonly used in the seemingly different Mobility and Medical fields.
SEKISUI CHEMICAL Group has maintained an uncompromising approach toward addressing the requirements of its customers. This proven track record, grounded in the Group’s technology platform, has helped build strong relationships of trust which are leading to a variety of new opportunities. As a wellspring for the Group’s Process Creation and Adaptability this virtuous cycle is contributing to the creation of a strong intellectual property network for each technology and the foundation of our sustainable growth.
Innovation only occurs when our technologies match prevailing trends and the intrinsic needs of customers. No matter how good a product or service may be, it is unlikely to develop into a business of any consequence if its purpose is self-serving. In our formative years as a company, we failed to consider a matching need when pursuing several businesses. In each instance, our endeavors foundered. Recognizing that the growing selection and concentration approach toward development themes and the ability to capture significant demand by commercializing the right products and services are two sides of the same coin, we are today placing considerable importance on identifying market needs at an early stage and then initiating development. Moving forward, I will continue to encourage employees by constantly promoting this concept.
Have you personally taken up the challenge of creating innovation?
One of my most memorable experiences stems from efforts to improve the quality of interlayer films when a member of the technology section of the Minakuchi Plant. Responding to a customer complaint, we initiated steps to improve the moisture resistance of automotive interlayer films. Believing that our products would be more competitive on a global scale if improvements could be made, I took it upon myself to request a temporary transfer to the Minase research and development facility. Trying all kinds of additives, I took part in discussions with senior staff until late at night and systematically repeated experiments based on the hypotheses made. Through a process of trial and error, we finally developed a formula, which I believe is today the de-facto global standard for interlayer film additives. At the time, the scale of the interlayer film business was still small. Drawing on the Housing Company as a source of development funds, there was considerable pressure to succeed.
Another experience of note was when I was stationed in the United States, the home of the automobile industry, as an interlayer film technical service representative. SEKISUI CHEMICAL Group entered the U.S. cognizant of the fact that its failure to compete in the local market would extend to the rest of the world. Even though the SEKISUI CHEMICAL name was essentially unknown, the extremely fair treatment we enjoyed from business partners was a source of considerable encouragement. We would provide samples to the plants of business partners in the U.S. for evaluation, identify areas for improvement, and then provide additional samples. Properly addressing customers’ requirements was a slow and extremely difficult endeavor. Despite the repetitive nature of this process, I felt a genuine sense of satisfaction and joy with each incremental improvement.
What are your thoughts toward investments in human capital?
Long before the importance of investing in human capital became a popular topic of conversation, we recognized that our employees are precious assets bestowed on us by society and positioned human resources as one of our key materiality issues. Over and above materiality, respect for human capital and human rights throughout the supply chain, including business partners, is the foundation of our business. SEKISUI CHEMICAL Group has identified the goals of doubling both its sales volume (the size of our business) and contribution under its Long-term Vision. We recognize that becoming an energized and engaged company where all employees thrive on challenges is the most important factor in achieving this vision. Moving forward, we will continue to focus on developing human resources to respond to the speed of business growth and change, and on placing the right people in the right place.
From my own perspective, I have made it a point to put forward themes that offer a reasonable degree of challenge when developing subordinates. Through a process of repeated discussion, I have set themes that are within reach if employees put in 110 to 120% effort. The goal here is to put in place an environment in which subordinates can readily accept each challenge and accumulate a track record of successful experiences. Based on the aforementioned, I believe that employees who can get things done and complete each task to the very end will enjoy considerable personal growth and become the Group’s leaders of the future.
SEKISUI CHEMICAL Group took steps to substantially reform its human resources system for the first time in 20 years in 2022 to encourage employees to take on challenges. Once again, for my own part, I will continue to help put in place an environment that encourages employees to take on challenges by actively creating a culture that does not condemn failure. At the same time, I will promote investment in the training and reskilling necessary to meet each challenge.
As I mentioned in my introductory comments, SEKISUI CHEMICAL Group achieved increases in both revenue and earnings despite the difficult business environment in fiscal 2022. As a result, it is important to reward employees who helped produce these results. Moving forward, we have decided to raise wages by more than 4% in fiscal 2023 in the hope that each and every employee will continue to further express a challenging action and make efforts to realize our Long-term Vision.
Can you share with us any personal experiences or episodes regarding reskilling?
The many things I learned from studying statistical quality control after joining the Company were of considerable benefit in my actual work. Statistical quality control is rarely taught in schools. This concept is, however, extremely helpful to engineers in promoting efficient experiments and data processing. In these early days, calculation software did not exist. Inputting and analyzing experimental data were a manual task. Despite the growing automated nature of today’s workplaces, this knowledge remains indispensable to employees involved in engineering and production. Expertise in statistical quality control helps in identifying the causes of problems, pursuing improvement methods, and promoting quality control activities in the workplace.
The Company reacquired SBT certification, which acknowledges companies that have set GHG reduction targets consistent with the Paris Agreement, in 2023. Can you provide us with details of Company’s efforts to address environmental concerns.
SEKISUI CHEMICAL Group has positioned the environment as a key materiality issue. Having engaged in environmental management from an early stage, we are proud to be a member of a leading group of companies recognized for their environmental endeavors. As other companies accelerate their environmental initiatives in response to escalating climate change, we must leverage our position as a top runner in our field to look beyond the status quo and work to continuously contribute to the environment. We were the first company in the chemical industry to obtain SBT certification in 2018. With our GHG emissions reduction rate significantly higher than initially planned, we have further raised our 2030 reduction rate target and reacquired SBT certification. To achieve the target, we will continue to promote the electrification of fuel-consuming facilities as well as the transition to low-carbon fuels. At the same time, we have set the material recycling rate as a new KPI, cognizant of our responsibility as a company that handles plastic products. We intend to promote the recycling of waste by increasing sales of products that contribute to resource recycling and resource conversion and further accelerate the reduction of Scope 3 emissions.
What are your thoughts on the Group’s optimal business portfolio and the allocation of capital?
As a conglomerate that engages in a variety of businesses, there are instances where SEKISUI CHEMICAL Group is valued at a discount. Recognizing the need to allocate capital to growth areas on a priority basis, we believe that our diverse portfolio enables us to create value through synergies between businesses that cannot be achieved through a single business on its own. For example, in our Town and Community Development business, we provide customers with the added value of disaster prevention and mitigation together with safety and security by embedding our disaster-resistant infrastructure and high-performance materials beneath the towns that are lined with the Group’s energy self-sufficient homes. From a financial point of view, maintaining businesses that generate stable cash within the Group’s portfolio also has the advantage of securing resources for continuous investment in growth areas.
SEKISUI CHEMICAL Group’s strategy to vigorously expand its growth investments while utilizing debt as and when required remains unchanged. Against this backdrop, we will undertake appropriate strategic capital investments and M&As in accordance with the Strategic Area Map, which serves as a compass to realize our Long-term Vision.
We recognize that constructive dialogue with our shareholders, investors, and other stakeholders is an extremely important opportunity for us to achieve sustainable growth and enhance our corporate value. We will continue to utilize the opinions and suggestions we receive through this dialogue in our management. As we work toward achieving our established goals, we ask for the continued support and understanding of all stakeholders.