Interview with the President
Q1. Please summarize Kurita’s consolidated business results for the six months ended September 30, 2018.
In the six months ended September 30, 2018, the Kurita Group achieved outstanding increases in orders and net sales in both the Water Treatment Chemicals and Water Treatment Facilities segments. Orders and net sales in the Water Treatment Chemicals business showed strong growth thanks to the addition of Hansu Co., Ltd., which became a consolidated subsidiary in the fourth quarter of the previous fiscal year, and strong business performance from our other overseas Group companies. In the Water Treatment Facilities business, orders rose as a result of strong capital investment by semiconductor manufacturers and electronic components manufacturers in the electronics industry in East Asia, including Japan, and net sales increased due to progress in construction work for outstanding orders. On the cost side, additional costs were incurred in the domestic facilities business, mainly in facilities for general industries due to a sudden increase in projects. However, production efficiency improvements were achieved in large facilities projects in the overseas facilities business, and the business results of Group companies improved. As a result of these developments, we secured a year-on-year increase in operating income.
Q2. What is the aim of the medium-term management plan, Maximize Value Proposition 2022 (MVP-22)?
In a nutshell, the aim of the MVP-22 five-year management plan, which started in April 2018, is to build a rock-solid earnings base. Although until now the Kurita Group has enjoyed the advantage of developing in the fields of water and the environment, our business approach has changed very little since the company was founded. Out of a sense of danger that it will be difficult for the Group to survive if it adheres to traditional approaches in an era of dramatic change in the business environment, during the two and a half years since I became president I have advocated business process and business model transformation. Under the MVP-22 plan, I want to further proceed with this transformation and link it to profitability improvement by creating social value, as well as the kind of value that customers are unaware of.
At the same time, in MVP-22 plan we have placed CSR at the core of our management strategy and aim to create shared value for the Kurita Group and society. In particular, we will promote “CSV businesses”* as growth opportunities that fall under four themes: solving water resource issues, realizing sustainable energy use, reducing waste, and advancing industrial production technologies.
- * CSV businesses: We use the term Creating Shared Value (CSV) to refer to the management concept of balancing social value and corporate value and helping to solve social problems through business activities. The Kurita Group defines product, service, and contract businesses that promote the creation of shared value for the Group and society as "CSV businesses."
Q3. What measures have been devised to build a rock-solid earnings base?
For profitability targets in MVP-22 plan, we aim to achieve an operating income margin of 15% and a return on equity (ROE) of 10% or more. Judging from the actual operating income margin of 9.5% in the previous fiscal year, the target of 15% is particularly ambitious. Nevertheless, we intend to achieve it during the coming five years through the following measures.
The first is an initiative to increase the percentage of highly profitable service contracts in the Water Treatment Chemicals business from the current level of 10% to 30%. In this regard, we have already developed several models and are beginning to see results: for instance, a service contract to reduce steam use in the drying process at paper and pulp mills and a proposal to improve operations management efficiency at petrochemical plants that combines water treatment facilities and water treatment chemicals. The second measure is to secure comprehensive contracts that combine maintenance with operations management at the time of delivery of large water treatment facilities to customers in the electronics industry in Japan and overseas and to expand this as a highly profitable business second only to the ultrapure water supply business. The third measure is to consider restructuring and downsizing of low-margin businesses and assets if there is no prospect of achieving results from profitability improvement measures. In the first half of the current fiscal year, we pursued asset efficiency improvement by deciding to divest an alumina compound business acquired in a business acquisition in Europe and by selling our shareholdings in other listed companies.
Q4. How do you plan to utilize funds during the period of the MVP-22 plan?
During the period of MVP-22 plan, we intend to actively invest funds entrusted to us by shareholders in growth opportunities. However, we will impose strict discipline when investing, such as setting hurdle rates based on the cost of capital.
We will continuously strive to increase dividends to the extent possible. Furthermore, if there is any concern of deterioration of capital efficiency due to capital accumulation, we will also consider repurchasing our own shares. I request the continued understanding and support of our shareholders in the coming years.