We will strengthen our financial
base in order to achieve both
aggressive growth investment and
shareholder returns.
Managing Executive Officer
Masahiro Ban
2024 in Review
In FY2024, both operating income and ordinary income increased significantly due to the strong performance of our U.S. business, which led the overall performance, and the penetration of price increases in each business, including cement sales prices, in Japan. In addition, due in part to the absence of the extraordinary losses recorded in FY2023 resulting from the withdrawal of business in China, the profit attributable to owners of parent turned to 43.3 billion yen. So, we were able to end FY2024, the final year of the previous medium-term management plan, with a V-shaped recovery.
Our mainstay domestic cement business recorded an operating loss of 1.4 billion yen, but this loss was a 35.6 billion yen improvement compared to FY2023. The profitability of the domestic business has improved significantly due to the increase in cement prices. Overseas, although there is a difficult market environment in Southeast Asia due to deteriorating economic conditions, the cement business as a whole recorded an operating income of 34.2 billion yen, thanks to the contribution of our strong U.S. subsidiary. While continuing to invest in the new production lines in the Philippines, the financial situation also improved due to the increase in operating cash flow resulting from the recovery in business performance, and interest-bearing debt decreased by 33 billion yen year-on-year to 370.5 billion yen.
Forecast for FY2025
For FY2025, we forecast a 73.7 billion yen increase in net sales to 960.0 billion yen, a 27.5 billion yen increase in operating income to 84.0 billion yen, a 24.0 billion yen increase in ordinary income to 83.5 billion yen, and an 18.7 billion yen improvement in profit to 62.0 billion yen compared to the previous fiscal year. The initial plan for the domestic cement business aims to turn profitable with the tailwind of improved domestic supply and demand and rising sales prices in the resource sector. Overseas, we expect business performance to improve not only in the U.S., which is doing well, but also in regions such as Southeast Asia. Although the cement sales volume has been declining both in Japan and the U.S. recently, we believe that there is no significant difference in the overall earnings forecast at this time due to the upward pressure on profits resulting from the weaker yen and stronger dollar in the first half of the fiscal year, as well as the rise in cement and ready-mixed concrete prices in the U.S. As for overseas, it seems that the situation of dependence on the U.S. will continue for the time being, but in Southeast Asia, the new production line in the Philippines has started operation, and we will work to build a system to earn globally in the Pacific Rim.
Summary of the 23 Medium-Term Management Plan
In the 23 Medium-Term Management Plan, which started in FY2022, we set a management target of 11% or more for operating income on net sales and 10% or more for return on equity (ROE) in FY2024, the final year of the plan. But, in the end, we achieved 6.4% and 8.2%, respectively, and were unable to achieve the targets. Although the financial indicators set as guidelines for achieving the management targets also indicated poor results, net sales exceeded the target of 750 billion yen or more, and we were able to achieve an increase in sales to 886.3 billion yen.
During the 23 Medium-Term Management Plan period, the environment surrounding our company was burdened by a decline in domestic cement demand and increases in various costs, such as raw materials and fuel. The background to this includes the spread of COVID-19, Russia's invasion of Ukraine, and soaring coal prices in Australia due to inclement weather. On the other hand, we believe that it was a certain achievement that we were able to end the 23 Medium-Term Management Plan by creating a solid foundation for the next 26 Medium- Term Management Plan, despite the deteriorating business environment, by realizing a price increase for cement, which was not included in the original plan. In terms of financial strategy, we systematically implemented growth investments, such as asset acquisitions in the U.S., renewal of production lines in the Philippines, and capital participation in SBI in Indonesia, and also carried out stable shareholder returns.
26 Medium-Term Management Plan Financial Strategy
Improvement of PBR through achievement of management targets
In the 26 Medium-Term Management Plan, which started this fiscal year, we have set management targets of 10% or more for both operating income on net sales and ROE in FY2027. The formula for calculating ROE can be broken down into net profit margin on sales, total asset turnover, and financial leverage, but as a capital-intensive industry, our company has a high ratio of non-current assets, and there is not much fluctuation in total asset turnover and financial leverage. Net profit margin, which is highly correlated with ROE, is linked to operating income, so we have set a target for operating income as a management indicator to improve profitability. As a guideline for achieving the targets, we have also set numerical targets of net sales of 1 trillion yen or more and operating income of 100 billion yen or more. We will promote measures to achieve our targets through a global strategy that revitalizes our domestic business by raising cement prices to increase profitability, and builds a system to earn income overseas, mainly in the U.S., while also expanding into Southeast Asia.
The promotion of the 26 Medium-Term Management Plan will also lead to the early realization of a price-to-book ratio (PBR) exceeding 1x. Since 2023, there has been growing interest among investors and managers in resolving the PBR if below 1x, and our company also had a period last year when it remained in the 0.6x range. However, it improved to over 0.8x at the time before the stock market crash in August, which exceeded Black Monday. During this period, in addition to the overall rise in the stock market, we believe that our own efforts, such as the implementation of share repurchases and the increase in cement prices, contributed to the rise in stock prices. Cement emits a large amount of CO2 in the manufacturing process, so in recent years, the negative image of climate change has also affected stock prices. Recently, however, the evaluation of medium- to long-term carbon neutrality efforts, such as the use of blended cement, has progressed, and we believe this is also one of the factors that has improved PBR.
Theoretically, PBR will exceed 1x when ROE exceeds the cost of capital. In our case, analysis of past data suggests that ROE exceeding 10% will likely result in PBR exceeding 1x as well. First, we will strive to lower the cost of capital by ensuring understanding of our business through dissemination of information related to carbon neutrality, etc. Furthermore, by implementing measures to improve profitability and bringing ROE to a level of 10% or higher, we believe that we can achieve a PBR exceeding 1x along with the achievement of the targets of the 26 Medium-Term Management Plan.
Cash Allocation and Key Strategies
In the 26 Medium-Term Management Plan, we anticipate a cumulative operating cash flow of 400 billion yen over the three years up to FY2027 as a premise for cash allocation. Of this, 150 billion yen will be allocated to growth investments such as expanding sales of blended cement in the U.S. market and developing carbon neutral technologies. In addition, as a key strategy to strengthen our business foundation, we plan to allocate 20 billion yen to strengthen plant facilities, such as renewing large-scale key machinery, and 50 billion yen to strengthen quarries for the Shin-Tsukumi Quarry (Oita Prefecture) and development of Mount Kurohime summit (Niigata Prefecture). Furthermore, 140 billion yen will be required for normal maintenance investments. In recent years, the unit cost of investment projects has also been rising, and from a financial strategy perspective, it is important to select the optimal financing for growth investments. In recent years, it has been possible to raise funds in Japanese yen at ultra-low interest rates and invest overseas, but in the future, the financial market will become a "world with interest rates," and it will be necessary to plan investments and recoveries that match local interest rates for each region.
Appropriate price increases for cement continue to be a key strategy. We achieved a price increase of total 5,000 yen per tonne in 2022, and in May 2024, we announced a price increase of 2,000 yen from April 2025. We believe that the appropriate price is the level at which we can recover fixed costs with the money earned from manufacturing and selling cement, and carry out the cycle of shareholder returns and investment for the future. The cement industry is a sector that is easily affected by economic sentiment, but in order to be evaluated as a company that can earn stable profits even if the business environment changes, it is essential to realize appropriate cement prices. By creating a track record in FY2024, we were also able to establish a flow of announcing price increases one year in advance and proceeding with negotiations. So I hope that price revisions, including the process, will become more common in the future.
Carbon neutrality is also an important strategy, but with a longer-term vision in mind, we will first focus on technological development during the three years of the 26 Medium-Term Management Plan. We are estimating the technical costs of CO2 capture, CCU, CCS, etc., but the cost of oxygen required for the C2SP Kiln and hydrogen required for methanation also has a large impact. We believe that it is not only necessary for our company but for other companies to also advance technological development. Towards carbon neutrality in 2050, we will promote the commercialization of our own innovative technological development by realizing the carbon neutral model plant of DC Co., Ltd., a cement production subsidiary, in addition to a gradual approach such as promoting the use of blended cement and developing low-CO2 cement.
Introduction and Penetration of ROIC
In the 26 Medium-Term Management Plan, we set a guideline of 7% or more for Return on Invested Capital (ROIC). ROIC is an indicator that measures how much profit was generated from the invested capital, so it has a very important meaning in capitalintensive industries such as ours, where the scale of investment is large. In the 26 Medium-Term Management Plan, we first set ROIC as a guideline for the entire company, but in the future, we will develop a system to introduce it in a framework that goes beyond individual businesses.
Currently, we are developing our cement, mineral resources, and environmental businesses separately in Japan. However, in reality the cement business purchases limestone, the main raw material, from the mineral resources business, and the environmental business uses cement production facilities. The three businesses are closely related in terms of internal transactions, non-current assets, and human capital, and are all developing their business as a trinity. The domestic cement business, which was in the red in the previous fiscal year, is also an indispensable business for the mineral resources business and the environmental business, and we cannot measure our true strength without considering the three businesses as a whole. The quarry developments are exactly the kind of project that will be a source of profit for both the cement and mineral resources businesses, so we would like to instill ROIC management, which is a guideline for the 26 Medium-Term Management Plan, in order to clearly demonstrate the investment effect.
Financial Strategy
In addition to growth investments for business expansion, continuous capital expenditure for maintenance and renewal is essential for our company, which owns large-scale production facilities. In order to support management with stable financing, we believe it is essential to maintain an A issuer rating in our financial strategy. In the current fiscal year, we received a JCR issuer rating of A+ and an R&I rating of A, both of which improved from the previous fiscal year. The improvement in ratings is largely due to the progress made in reducing interest-bearing debt, and the fact that rating agencies understand that we are a company with the means to secure profits and improve finances through the realization of cement price increases. Net debt/ equity ratio (DER), which we emphasize in measuring financial soundness, is currently around 0.5 times the 26 Medium-Term Management Plan guideline. Although it may rise in the short term depending on investment projects in the future, we are establishing a system that can take measures to return to the level of about 0.5x in one to two years in order to maintain an A rating. For example, Taiheiyo Financial & Accounting, a financial subsidiary, has also established a system for mutual financing of surplus funds within the group, and we will consider increasing the target currencies in the future to create a financial structure that does not rely too much on external funds.
Shareholder Returns
Under the 26 Medium-Term Management Plan, our plan for shareholder returns is a total return ratio of 33% or more. As a return policy, we will implement flexible repurchase of treasury shares in addition to an annual dividend of 80 yen or more per share. In the 23 Medium-Term Management Plan, we were able to continue to implement an annual dividend of 70 yen for three terms, including FY2023, when we recorded a net loss for the period. For FY2025, the first year of the 26 Medium-Term Management Plan, we plan to pay a dividend of 80 yen per year, an increase of 10 yen from the previous year. In order to ensure that investors can hold our shares with peace of mind, we will steadily implement the dividend plan, which is a promise to our investors, and work to improve corporate value with awareness of TSR (Total Shareholder Return), which also takes into account stock price fluctuations.
Dialogue with stakeholders
In order to increase opportunities for dialogue with stakeholders, including institutional investors, we are actively facilitating interviews with the president and vice president in addition to regular briefings on financial results. We also plan to hold interviews with Independent Directors. We are strengthening our communication of sustainability information, and since our company's shares have a high percentage of ownership by foreign investors, we will also focus on IR activities overseas. We would also like to increase the number of individual investor shareholders, and we have begun to consider strategies to improve our name recognition.
TSR (Total Shareholder Return)
The ratio of the return (mainly dividends and capital gains) earned on a stock investment divided by the stock price (investment amount), indicates the overall investment return for the shareholder. It is calculated using the closing price at the end of each fiscal year (last day of March) and based on an investment having been made at the closing price on the last day of March 2018.
