CFO Message, NTN 2022

CFO Message in NTN Report 2022

Transcript

1. Value Creation Story CFO Message the initially announced forecast. In addition, the net D/E ratio was further lowered as compared to the announced forecast. In a tough external environment with significant fluctuations and instability of top-line revenue, a surge in prices of raw materials, etc., we produced good results by steadily implementing measures that should be taken by the entire NTN Group to reduce variable costs, control fixed costs and address cash flow issues in order to achieve the NTN Revitalization Scenario. <Key points of forecasts for the fiscal year ending March 31, 2023> In the fiscal year ending March 31, 2023, as the outlook continues to be uncertain due to a shortage of semiconductors, the COVID-19 pandemic, the situation in Ukraine and other factors, increases in prices of raw materials, sea freight rates, etc. are expected to be at least twice their increases of the fiscal year ended March 31, 2022. Regarding these abnormal cost increases, the important measures for the current fiscal year are to vigorously promote thorough price pass-on measures and reliably implement measures including variable cost reformation to reduce variable costs and control fixed costs according to the plan as we did in the previous fiscal year. Based on this, we forecast 720.0 billion yen in net sales, 23.0 billion yen in operating income and 10.0 billion yen in profit attributable to owners of parent for the fiscal year ending March 31, 2023, taking into consideration the current weaker-yen environment and global sales decrease factors. As top-line instability continues, we will reduce inventory assets, secure 18.0 billion yen of free cash flow and lower the net D/E ratio according to the plan. In addition, we are to resume dividend payments, beginning with the interim dividends for the current fiscal year, as initially planned in the Revitalization Scenario. Whatever changes occur to the external environment including sales, prices of raw materials, etc., thoroughly implementing the above important measures that should be carried out by the entire NTN Group will lead to maintaining the course for achieving the NTN Revitalization Scenario in the fiscal year ending March 31, 2024. <Year-on-year analysis of profits for the fiscal year ending March 31, 2023> - Breakdown of profit-increasing factors (47.0 billion yen) -  The largest profit-increasing factor for the current fiscal year is the price pass-on measure of 28.8 billion yen. An increase in variable costs of 26.0 billion yen including increase in costs of 33.8 billion yen and a measure to address the issue is to reflect at least 28.8 billion yen in prices during the current fiscal year. However, the 28.8 billion yen amount includes 6.0 billion yen in increased costs for the previous fiscal year for which the implementation of a price pass-on measure is delayed to the current fiscal year. As such, with regard to passing increased costs for the current fiscal year on to prices during the current fiscal year, 22.8 billion yen or 67% of such costs is conservatively set as an achievement level, but our target is still 100%.  On the other hand, unstable top-line revenue is expected to fluctuate significantly in the current fiscal year as well but it is important to continue to thoroughly improve productivity and cut down costs and thereby reliably implement variable cost reduction and fixed cost control measures according to the plan, while reducing inventory assets that increased in the previous fiscal year and aiming for 100% price pass- through in order to, among other purposes, achieve profitability in the automotive business.  Furthermore, as the growth rate in the aftermarket business is small in the current fiscal year, we need to take measures to strengthen our ability to respond to aftermarket demand and add as many sales as possible to the forecasted net sales for the aftermarket business by focusing on expanding inventories for aftermarket services while reducing inventories for OEM.  In parallel with the above activities, we will work to, among other activities, improve the profit ratio of the automotive business and expand the aftermarket business and, at the same time, must ensure the achievement of the NTN Revitalization Scenario in the fiscal year ending March 31, 2024 by accelerating three drastic transformation measures (Pricing Power, Cash Conversion Cycle and Strategic Partnership) in order to revitalize NTN and promote product/business portfolio reformation, production/logistics reformation and Variable Cost Reformation with firm resolve. Results of examining, by using uniform exchange rates, whether forecasts for the fiscal year ending March 31, 2023 are consistent with the course for achieving the NTN Revitalization Scenario in the fiscal year ending March 31, 2024 are shown in the next page. The targets (700.0 billion <Key points of financial results for the fiscal year ended March 31, 2022> For the fiscal year ended March 31, 2022, we announced the initial forecasts of 660.0 billion yen in net sales and 15.0 billion yen in operating income. During the period, however, we revised the forecasts downward to 630.0 billion yen in net sales and 6.0 billion yen in operating income, taking into consideration a much higher-than- expected level of semiconductor shortage and surge in prices of steel and other raw materials in the first half of the year. Despite a higher surge in prices of raw materials and a greater-than-expected rise in personnel expenses in the U.S. due to the COVID-19 pandemic in the revised forecasts, the actual result was that net sales and operating income exceeded what was published in the revised forecasts and came to 642.0 billion yen and 6.9 billion yen, respectively. This was because in a weaker- yen environment, sales slightly exceeded our assumption and we reduced variable costs as planned, thoroughly managed fixed costs and improved selling prices. On the other hand, although there was no choice but to increase inventory assets to a higher level than planned due to a disruption in the supply chains of customers, we attained significant improvement in free cash flows by accelerating sales of cross-held shares and other assets and achieved a substantial increase in net income from a rise in prices of steel materials of 22.0 billion yen and other increase of 4.0 billion yen such as a rise in electricity, gas fees, prices of materials and parts have been factored in. Furthermore, we assume an increase in sea freight rates of 6.0 billion yen and an increase of personnel expenses in U.S. manufacturing companies of 1.8 billion yen due to the COVID-19 pandemic. As a result, costs will increase by 33.8 billion yen in total due to a sharp increase in inflation. In this regard, we aim to pass all of those increased costs on to our customers. However, regarding the recovery of such amounts in the current fiscal year, 28.8 billion yen is planned as a target that must be achieved, factoring in a conservative buffer of 5.0 billion yen.  Net sales for the current fiscal year are expected to increase by 78.0 billion yen year on year to 720.0 billion yen. This amount, however, factors in the impacts of exchange rates (21.8 billion yen) and price pass-on measures (28.8 billion yen) and therefore a sales volume increase on a physical quantity basis is 27.4 billion yen. We expect a profit increase of 12.3 billion yen, which is calculated by multiplying the amount of the sales volume increase by the marginal profit ratio.  In addition, a profit increase due to the weaker yen is projected to be 5.9 billion yen. - Breakdown of profit-decreasing factors (30.8 billion yen) -  Regarding variable costs, an increase of 19.1 billion yen and the corresponding decrease in profits are expected, taking into consideration a rise in prices of steel materials, etc. of 26.0 billion yen and an expected result from our cost reduction activities of 7.0 billion yen including the impact of variable cost reformation. In the previous fiscal year, variable cost-increasing factors, including a rise in prices of steel materials, etc. of 9.6 billion yen and a rise in electricity and gas fees and prices of materials and parts, amounted to 13.5 billion yen. Therefore, in the current fiscal year, we assume an abnormal surge in prices of raw materials that is about twice the increase of the previous fiscal year.  With regard to fixed costs, personnel and other expenses are expected to increase by 11.8 billion yen, resulting in a decline in profits. Of those, a total of 7.8 billion yen resulting from a 6.0 billion yen increase in sea freight rates and a 1.8 billion yen increase in U.S. personnel expenses will be passed on to customers and the remaining amount of 4.0 billion yen is set according to the existing policy to restrain an increase in fixed costs to 15% or less of a sales volume increase of 27.4 billion yen. <Key points of measures to achieve the forecasted results for the fiscal year ending March 31, 2023>  The biggest issue for the current fiscal year is a sharp (billion yen) Inventories 176.8 214.8 200.0 Free Cash Flow 18.5 11.5 18.0 Net D/E ratio 1.6 1.4 1.3 Dividends (¥) 0.0 0.0 5.0 Exchange rate (¥) US$ 106.0 112.3 120.0 EURO 123.7 130.5 135.0 Actual results for the fiscal year ended March 31, 2022 and forecasts for the fiscal year ending March 31, 2023 1 Analysis of the forecasted profits for the fiscal year ending March 31, 2023 and key points of measures to achieve the forecasted profits 2 Relationship between forecasts for the fiscal year ending March 31, 2023 and those for the fiscal year ending March 31, 2024 3 Analysis of Operating Income (2022/3 Results vs 2023/3 Forecast) NTN Revitalization Scenario (Fiscal Year Ending March 2023)  Promotion of sales price increase  Pass increased raw material costs on selling prices  Withdraw from unprofitable products and negotiate for price increase  Reduction of variable costs through variable cost reformation - 1 point in the variable cost ratio  Fixed cost control in the phase of increasing volume  Within 15% of the increase in volume 1. Creating Corporate Value ROIC 5% 2. Strengthen financial position  Net D/E 1.0 3. Realize stable dividends DOE 4% 1. Pricing Power (product/business portfolio reformation) 2. Cash Conversion Cycle (production and logistics reformation) 3. Strategic Partnership (variable cost reformation) Priority Issues for the Current Fiscal Year Revitalization Scenario Definition of Revitalization Acceleration of transformation for revitalization 2022/3 Full year operating income (Results) 6.9 Exchange rates +5.9 Increase in personnel expenses -7.1 Expenses etc. (Depreciation, others) -4.7 2023/3 Full year operating income (Forecast) 23.0 Increase in variable costs -19.1 Breakdown of pro t-increasing factors (47.0) +16.1 Breakdown of pro t-decreasing factors (30.8) Sales price level +28.8 Scale effects +12.3 Toward Establishing a Management Base to Realize Sustainable Growth as a Global Company Even in a very tough management environment, as exemplified by the COVID-19 pandemic, a shortage of semiconductors, the situation in Ukraine and a surge in prices of raw materials, we have been steadily moving forward to revitalize NTN in the fiscal year ending March 31, 2024, while maintaining a course set forth in the NTN Revitalization Scenario. Executive Officer CFO (Chief Financial Officer) Tetsuya Sogo *All figures in billion yen 2021/3 Results 2022/3 Results 2023/3 Forecast Net sales 562.8 642.0 720.0 Operating income -3.1 6.9 23.0 (Operating margin) (-0.6%) (1.1%) (3.2%) Ordinary income -5.7 6.8 20.0 Extraordinary income/loss 4.5 10.8 -3.0 Profit attributable to owners of parent -11.6 7.3 10.0 Consolidated Statements of Operation 49 50 NTN Report NTN Report 2022 2022 Company Data/Investor Information Financial Report SASB Data Business Strategies Sustainability Management About Us Value Creation Story
2. Value Creation Story CFO Message carry out 100% price pass-through with firm resolve.  If this trend continues, profits do not increase and only net sales grow and therefore, the profit ratio declines. However, even if net sales increase due to the price pass-on measures, this does not affect invested capital. Therefore, NTN will take measures to reliably implement stable distribution of dividends with ROIC = 5%, the net D/E ratio = 1.0 and DOE = 4% which is the definition of revitalization of NTN by steadily reducing interest-bearing debt while reliably ensuring operating income.  For your information, interest-bearing debt and equity capital are 370.0 billion yen and 200.0 billion yen as set forth in forecasts for the fiscal year ending March 31, 2023 and we plan to further reduce interest- bearing debt in the fiscal year ending March 31, 2024. However, even if the current level of invested capital (570.0 billion yen) remains unchanged, if 42.0 billion yen of operating income is ensured, the ROIC is calculated to be 5.2% in the formula: (420 x 0.7)/5,700, assuming that the effective tax rate is 30%. Therefore, we can achieve the 5% target in a reliable manner. The overview of the NTN Revitalization Scenario formulated in the fiscal year ended March 31, 2020 was provided in the CFO Message two years ago. Thereafter, in order to respond to significant changes in the external environment, such as the COVID-19 pandemic, a shortage of semiconductors and a surge in prices of raw materials, we took risk hedge measures assuming the worst-case scenario, as exemplified by the securing of 100.0 billion yen of funds including commitment line agreements with our main banks, and the issuance of hybrid bonds worth 50.0 billion yen. In doing so, we focused on thorough fixed cost reduction (42.7 billion yen) in the two-year period until the fiscal year ended March 31, 2021. Since the fiscal year ended March 31, 2022, we have accelerated the three drastic transformation measures described below and have been aiming to reduce interest-bearing debt and resume stable distribution of dividends through free cash flow control while implementing measures to reduce variable costs by approximately 7.0 billion yen per year and control fixed costs according to the sales volume (within 15% of an increase in sales volume). the logistics reformation and introduce the successful practices to overseas sites, thereby steadily minimizing the current gap between our competitors and us. 3) Strategic Partnership (variable cost reformation): The Medium-term Management Plan for the fiscal year ended March 31, 2022 to the fiscal year ending March 31, 2024 aims to reduce variable costs by approximately 7.0 billion yen per year through variable cost reformation etc., and the result for the first fiscal year (ended March 31, 2022) was a decrease of 8.5 billion yen. We are moving forward with reviewing product specifications, exploring new suppliers and breaking away from self-sufficiency through collaborations with partner companies, and in this way, we will aim not only to produce variable cost reduction effects in the short term but also to continue to significantly reduce investments and complement human and technical resources by building strategic partnerships. <Vision for future sustainable growth> We are in a situation where it is increasingly difficult to make forecasts, but our future vision is that no matter what changes occur to the external environment, we will accelerate the establishment of organizational culture where all regional business sites and divisions autonomously pursue overall optimization for survival by sharing the perspective of corporate value maximization, in other words, the establishment of a global learning organization. For that purpose, each business site needs to enhance the autonomy of its daily management and administration work to promptly respond to changes in a situation surrounding the business site under close coordination within the entire NTN Group so that the business site can use its relationship with the head office as a stepping stone for making a leap forward. On the other hand, the head office will focus on formulating and promoting a global financial strategy, brand strategy, business portfolio strategy, production/technology strategy, etc. and enhance the cohesion of the entire NTN Group by stepping up functions of the head office as a global strategic headquarters. I myself will maintain a keen awareness of investment in personnel as a non- financial indicator and will have direct dialogs including global web meetings with leaders of all divisions within and outside Japan to explain and discuss strategies and directions to be adopted by us. yen of net sales and 42.0 billion yen of operating income) for the fiscal year ending March 31, 2024 can be attained by, as previously, restraining an increase in fixed costs across the NTN Group to 15% or less of an increase in net sales and reducing variable costs by 7.0 billion yen per year to cut the variable cost ratio by one point as planned.  First, if the exchange rates for the forecasts (720.0 billion yen of net sales and 23.0 billion yen of operating income) for the fiscal year ending March 31, 2023 are converted to the exchange rates as of formulating the Medium-term Management Plan for the fiscal year ending March 31, 2024, net sales and operating income are changed to 660.0 billion yen and 13.0 billion yen, respectively.  Note that the amount of costs passed on to sales prices and included in such net sales is 28.8 billion yen and if the exchange rates for the Medium-term Management Plan are applied to this amount, the amount is changed to 27.0 billion yen. Then, if the 27.0 billion yen is regarded as a temporary external factor and excluded from the net sales and the variable costs, the net sales and the operating income are changed to 633.0 billion yen and 13.0 billion yen, respectively. These amounts can be compared with the targets (700.0 billion yen of net sales and 42.0 billion yen of operating income) for the fiscal year ending March 31, 2024 based on the same exchange rates and the same conditions.  In this case, net sales will increase by 67.0 billion yen from 633.0 billion yen to 700.0 billion yen over a period from the fiscal year ending March 31, 2023 to the fiscal year ending March 31, 2024. Accordingly, fixed costs will increase by 10.0 billion yen, or 15% of 67.0 billion yen, resulting in an increase from 284.0 billion yen to 294.0 billion yen. Meanwhile, if the variable cost ratio is assumed to be further lowered by one point to 52% as planned, the targets of 700.0 billion yen in net sales and 42.0 billion yen in operating income will be achieved in the fiscal year ending March 31, 2024 as initially planned.  However, as the excluded 27.0 billion yen of costs are actually to be added, the net sales and the operating income will come to 727.0 billion yen and 42.0 billion yen, respectively. As such, the operating income ratio will be worse than the 6% target and the break-even point will rise. That being said, we recognize that it is absolutely necessary to take price pass-on measures in order to respond to the sharp rise in costs under the current circumstances, and even in the case of a further rise in prices of steel materials, etc., we will <Progress of transformation toward Revitalization of NTN> 1) Pricing Power (product/business portfolio reformation): Investment decision criteria (NPV, IRR) and business performance evaluation criteria (EVA, ROIC) that were set by globally introducing the concept of capital costs in the fiscal year ended March 31, 2020 have taken root, strengthening the investment selection and follow-up systems. Also, the systems for monitoring the status of creation of corporate value, clarifying issues and taking measures are being strengthened with regard to each group company in each region of each business. Regarding the OEM business for automobiles and industrial machinery in particular, while thoroughly verifying investment returns and taking into consideration NTN’s competitive advantages such as future product technologies and production technologies, we thoroughly implement a policy in which measures to expand investments simply for winning price competitions are eliminated and such available funds are used to invest in the aftermarket business. This will surely lead to improvement in the product portfolio of each OEM business and improvement of the business portfolio through expansion of the aftermarket business in the future. Especially in the automotive business, the trend toward decarbonization and EVs has created a business opportunity for NTN to utilize its technological advantage. 2) Cash Conversion Cycle (production/logistics reformation): We have been promoting production reformation since the fiscal year ending March 31, 2020 and many of our production sites in Japan succeeded in reducing work- in-process and shortening production lead times. We are working to apply such successful practices across more sites, but in the environment with significant changes in top-line revenue, our efforts to reduce inventory assets have currently not produced good results in the NTN Group as a whole and the number of our inventory turnover days is consistently approximately 40 days larger than that of competitors in Japan. We cover this weak point by implementing factoring and other measures and have produced positive results in terms of the Cash Conversion Cycle, as a whole. However, a large volume of inventory assets still remains a heavy drag on us in this competitive environment. Starting from the current fiscal year, we will link the production reformation that produced results in production sites in Japan to 2018/3 2019/3 2020/3 2021/3 2022/3 2023/3 2024/3 0 0.5 1.0 1.5 2.0 2.5 3.0 -5.0 0.0 5.0 (%) ROIC Crisis Response Period Medium-term Management Plan ROIC Net D/E Ratio Net D/E Ratio Achieve ROIC 5% or more, maintain ROE 8% or more, return 4% to shareholders, and allocate the remaining 4% to sustainable growth in the future. Fiscal year ended March 31, 2018 (Results) Net sales: 744.7 billion yen Operating income: 39.9 billion yen Fiscal year ending March 31, 2024 (Medium-term Management Plan) Net sales: 700.0 billion yen Operating income: 42.0 billion yen (6% or more) Fiscal year ended March 31, 2022 (Results) Net sales: 642.0 billion yen Operating income: 6.9 billion yen 1. Fundamental review of marketing and pricing strategy 2. Strengthen production control and inventory control 3. Break out of self-suf ciency “Structural Reform” *Dotted lines are estimation when formulating the scenario “Selection and Concentration” 1. Sales of assets 2. Business integration and closure (in billion yen) Operating income Exchange rate B Exchange rate B Exchange rate B Exchange rate B Exchange rate A Variable cost Fixed cost Break-even point 2023/3 Latest announcement 23.0 390.0 307.0 54.2% 2023/3 Latest announcement Net sales 660.0 13.0 363.0 284.0 55.0% 2023/3 Latest announcement excluding price pass-on measures Net sales 633.0 13.0 336.0 284.0 53.1% 2024/3 Medium-term Managament Plan Net sales 700.0 42.0 364.0 294.0 52.0% 2024/3 Medium-term Managament Plan including price pass-on measures Net sales 727.0 42.0 391.0 645.0 617.0 590.0 570.0 595.0 294.0 53.8% Net sales 720.0 Exchange rate A Latest announcement in May 2022 1US$ = ¥120 1EURO = ¥135 Exchange rate B Medium-term Managament Plan 1US$ = ¥103 1EURO = ¥125 NTN Revitalization Scenario that must be achieved and our future vision 4 Lower Break-even Point towards Revitalization Lower Break-even Point towards Revitalization NTN Revitalization Scenario - Toward Corporate Value Creation (ROIC 5% or More) 51 52 NTN Report NTN Report 2022 2022 Company Data/Investor Information Financial Report SASB Data Business Strategies Sustainability Management About Us Value Creation Story