Sekisui Chemical aims to thrive as a genuine "premium company" by focusing our management resources on our key strategic business foundations to achieve growth.
"Selection and concentration of a business portfolio with a definite view on growing business areas. " "Differentiation of our products through continuously refined prominent technologies. " Now that the results of these strategies have become steadily apparent and we have become certain of the direction we should take, we need to put our efforts into cultivating the distinctive frontier paths of the Sekisui Chemical Group's three "prominent" division companies. We are also committed to steadily advancing towards our major goal of an operating income ratio greater than 10% in fiscal year 2010.
Review of consolidated results
In fiscal year 2005 the "three excesses" in the Japanese economy-debt, capacity and employment-were mostly resolved, and consumer spending is now increasing, albeit moderately. Looking at trends by industry, the capital expenditures in the automobile industry remained steady, and the IT sector started to recover from a cycle of inventory adjustments. In the housing industry, with low interest rates and the recovery of consumer spending, overall new housing starts increased by 4.7% year on year led by the growth of apartments and housing built for sale with land included. However, difficult business conditions continued as owner-occupied housing starts-the factor with a large effect on our businesses-were own by 4.0% year on year. In addition, we were shackled by rising raw material costs due to soaring oil prices.
Amidst the macro-environment of these favorable and unfavorable elements, the Sekisui Chemical Group achieved growth in both revenue and profit in continuation from the previous fiscal year, based on growth in the High Performance Plastics and Urban Infrastructure & Environmental Products Companies. Our results were year-on-year growth in net sales of 3.3% to ¥885.1 billion, and year-on-year growth in operating income of 10.5% to ¥40.3 billion. Net income was reduced year on year by 9.2% to ¥20.2 billion due mainly to the adoption of the new "impairment of fixed assets" accounting standard.
Review by segment
Looking at the results for fiscal year 2005 by division companies, while the Housing Company planned a shift to a marketing approach promoting our own high-performance housing, the results of pursuing this strategy take time to materialize. As a result, sales declined year on year by 0.4% to ¥427.6 billion and operating income declined year on year by 9.6% to ¥14.7 billion.
In the Urban Infrastructure & Environmental Products (UIEP) Company, soaring oil prices heavily impacted raw material costs, but we made steady progress shifting costs onto product prices and furthermore expanded the highly profitable core business. As a result, sales increased year on year by 4.5% to ¥214.1 billion and operating income also increased year on year by 17.3% to ¥10.4 billion.
In the High Performance Plastics (HPP) Company, sales growth was strong in the IT (IT-related materials) field for fine particles for use in liquid crystal displays and in the AT (automotive materials) field centering on high-performance interlayer films. In particular, strengthened efforts to advance into the global market produced results, and overseas sales grew by 16.6% year on year. As a result, HPP Company sales increased by 10.4% year on year to ¥218.3 billion and operating income increased by 18.6% year on year to ¥17.5 billion.
Our strategy to pursue "prominence" (thorough differentiation) was successful, and each of the three division companies was able to solidly establish a superior competitive business foundation for prominent products and services.
The business environment has been severe for the past few years with increasingly fierce competition in the industry and soaring raw materials prices. Under these circumstances, we have aimed to shift to become a "premium company" with sustainable growth. We have identified areas where we can demonstrate superiority and we have built a highly profitable business structure through specializing in "prominent" products. In the first stage, our midterm management vision "GS21-Premium600" to fiscal year 2005, although operating income turned out to be below our initial target, as a result of company-wide concerted efforts toward restructuring, we are now sure that we know the way to become a "premium company."
Over the last three years each of the three division companies has established a sound competitive advantage by providing new values (products and services) based on their respective unique technologies. The major achievements of this are as follows. The Housing Company has polished its original "unit construction method" and has taken the lead in high-performance housing in the industry, creating a new market for the "zero-utility-cost" house. The Urban Infrastructure & Environmental Products Company has embarked on a full-fledged global business expansion in the field of aged pipe restoration, where latent demand has enlarged, by spreading overseas its unique "Sewage Pipe Renewal (SPR) method" technology that facilitates installation without reducing sewage flow. The High Performance Plastics Company developed the industry's first high-performance interlayer film with sound and solar control, taking advantage of the Company's patented technologies against a backdrop of growing awareness regarding the environmental-friendliness and comfort of cars. The proven excellence and even greater dominance of our products in the field of automobile interlayer films has boosted our share of the global market to 40%.
Evolving toward becoming a "premium company" by fiscal year 2010
For the Sekisui Chemical Group to be able to proudly state that we are a genuine "premium company," we must aim to become a company that can maintain a stable overall operating income ratio of over 10%, based on striking a portfolio balance between our three "prominent" division companies, and not be swayed by specific external environments. To this end, it is essential that we further reform our existing businesses, and at the same time pursue "frontiers of growth" to create new demand.
The absolute requirements for us as we aim to become a "premium company" are that we have two "premiums" in combination: One is "prominence," in other words, that we have our own areas of specialty that we constantly strive to perfect. The other is to achieve high profitability (operating income ratio of over 10%).
Striking a portfolio balance of the three "prominent" division companies
In order to achieve sustainable growth as a "premium company," it is necessary to pursue profitability, growth and stability in a balanced manner. The Group has focused its efforts on building a business portfolio bound by the framework of the three distinctive division companies in order to disperse risk through taking advantage of industrial disparities and global disparities among regions, and from the viewpoint of competitive advantages. Therefore we are now opening up frontiers of growth with these three pillars as the starting point, and we are moving to a stage where we bolster our growth and structure.
(1) Housing Company: Obtain a share commensurate with the strength of its products
The housing market in Japan will be sluggish and the number of housing starts itself cannot be expected to increase greatly in the future, partially due to structural factors which reduce demand such as a declining population and the "graying of society." However when we turn our eyes to the "quality" of housing, there are many issues that need improvement, including the progressive deterioration of houses that have not yet been made earthquake resistant, and the lack of space and poor environment compared to other advanced countries in Europe and in the U.S., so we think that the demand for rebuilding and refurbishing will continue to grow in the future. Furthermore, we can expect that recent expectations for higher interest rates will cause potential demand for rebuilding and first purchases to emerge. In this environment the Housing Company is moving forward with radical qualitative marketing reforms, emphasizing "high-performance" rather than price to our customers with Sekisui Heim-style "high-performance housing" as the biggest differentiation point. By achieving these reforms we aim to recover the number of orders and to maximize the advantages of "high efficiency and high profitability" in our industrialized housing with its 80% factory production rate and so achieve a sharp increase in profits.
(2) High Performance Plastics Company and Urban Infrastructure & Environmental Products Company: Accelerate our strategy centering on growth
While the Housing Company is expanding its revenue by meeting domestic demand, the High Performance Plastics (HPP) Company and the Urban Infrastructure & Environmental Products (UIEP) Company are pursuing a strategy that pivots on "taking the offensive," especially by advancing development into global markets. The HPP Company will aggressively approach a broad geographical area including Asia, Europe and the U.S., with its three strategic business fields at the core: AT (automotive materials), IT (IT-related materials) and MD (medical products). HPP will also concentrate on developing personnel with a global perspective to drive those efforts.
The UIEP Company is expanding its business, especially in China, and in particular in its water supply infrastructure-related business which will be the core area of future growth. Xinjiang Yongchang-Sekisui Composites Co. Ltd., a joint venture established in April 2005 by merging our "prominent" technologies with Yongchang Co., the company with the top share in reinforced plastic composite piping in China, will be the major base for our expansion. The UIEP Company will advance its strategy to actively capture the enormous water-supply infrastructure demand in China.
Positioning the new midterm management vision "GS21-Go! Frontier" (FY2006 to FY2008)
(1) Toward a "premium company": The second three-year plan
The new midterm management vision "GS21-Go! Frontier" follows "GS21-Premium600" and is the second stage for advancing growth to become a genuine "premium company." With new vision, the Group aims for operating income of ¥75.0 billion and an operating income ratio of 7.5% by fiscal year 2008 through "opening up frontiers of growth." Opening up frontiers of growth has two meanings here. The first is to build upon our strongest point and thereby transcend the "boundary" between existing business sectors and undeveloped sectors. That is, to launch into areas that lie next to or on the extension of our business area. The other meaning is opening up hinterlands far away from the boundary, in other words, opening up completely new undeveloped sectors, and creating new businesses that will be necessary for growth in the future. We will cultivate new businesses in areas including housing, water resources and material innovation where the Group has competitive superiority and will develop a new business foundation. To that end we promote innovation in the three areas of the "market," "product development" and "human resources."
Fiscal year 2006 will be a "year to solidify our foothold" as we enter a new stage of growth on the way to becoming a "premium company." We will concentrate all of our strength to establish and expand a solid foundation for high profitability and future growth.
(2) The year we make our strategic moves toward growth: Plans for FY2006
We have positioned fiscal year 2006, the first year of "GS21-Go! Frontier," as a strategic year toward achieving our goals for fiscal year 2008. We will pour our efforts into opening up the aforementioned growth frontier. While we presume that the business environment will continue to be difficult, we will steadily strive to establish a foundation for high profitability, and aim for higher revenues and profit. In practical terms the Group plans for sales of ¥905.0 billion (up 2.2% from fiscal year 2005) and operating income of ¥44.0 billion (up 9.2%). We forecast that raw material prices will continue to climb, but the HPP Company and the UIEP Company are especially making steady progress at shifting the costs to product prices and reducing costs so we are planning to absorb the impact of higher raw material costs. Furthermore the Housing Company will go through a drastic qualitative change in its marketing approach and at the same time will make progress increasing the efficiency of its business by such steps as reassigning personnel, and expects to reduce fixed costs by ¥5.0 billion compared to fiscal year 2005.
The new midterm management vision "GS21-Go! Frontier" is a long-term vision out to fiscal year 2010, aiming to build a "premium company continuously realizing an operating income ratio of 10%." It is also a stage for expanding the growth foundation, so investment for growth is essential for corporate value expansion in the future. Furthermore, a strong financial standing (namely bringing net interest-bearing debt to zero) that provides peace of mind to our stakeholders in an age of rapid change is necessary. However, we recognize the importance of returning profits to our shareholders every period, and we strive to implement stable dividends with a target of a dividend payout ratio of 30% on a consolidated basis. Based on this fundamental policy, we are increasing the annual dividend per share by ¥1 to ¥11 (a dividend payout ratio of 29.1%) for fiscal year 2005, and we hope to implement a "2 increase to "13 in fiscal year 2006.
Only by meeting the expectations of all of our stakeholders can we first sustain growth as a "genuine premium company."
The objective of the Sekisui Chemical Group to become a genuine "premium company" is not just about achieving "high revenues and high growth," but includes making extensive contributions to society and meeting the expectations of society. Here, we will continue our efforts towards CSR management, that is, to stand out in terms of our contribution to the environment, to achieve high CS quality, and to foster human resources to achieve these goals.
Regarding the environment, as a result of adopting advanced environmental corporate management much earlier than other companies, we have received external recognition, including an accredited environmental rating of AA from the review and assessment firm Deloitte Touche Tohmatsu for two consecutive years. Going forward, we, as an "environmentally creative organization," will continue to be an environmentally conscious company in all aspects of our business activities, while aiming to develop products which contribute to the protection of the environment.
In the field of "CS quality management" once again we will return to the very root of manufacturing, that is, our persistence to maximize "quality." We will stand out by perfecting the quality of our products and services, and by strengthening our efforts in order to heighten the degree of customer satisfaction and earn the trust of our customers.
In order to stand out in terms of "CS quality management" and the "environment," human resources who are driven to excellence are more indispensable than anything else. Sekisui Chemical believes that our employees are a precious treasure given in trust by society. The "dedication of employees to prominent products and services" leads to our contribution to society. Sekisui Chemical promotes the establishment of a corporate culture where employees can pursue self-realization.
It is certainly not an easy task to become a "premium company." However, we at the Sekisui Chemical Group will pursue "prominence" even more deeply and extensively in all our operations as we go forward. Based on the major premise of living and prospering together with societies around the globe, we intend to fulfill the expectations of all stakeholders by achieving "high revenue and growth."
We look forward to your continued understanding and support of the Sekisui Chemical Group.
July 2006 Naotake Okubo, President