Interview with the President
Q. What operating climate did Kurita face in the year under review and how did the business perform?
President and Representative Director
In the fiscal year ended March 31, 2020, persistent trade friction between the U.S. and China and disruption surrounding the Brexit issue weighed on economic growth in China and Europe. Towards the end of the fiscal year, the slowdown was compounded by a rapid deterioration in economic growth caused by the widening outbreak of novel coronavirus disease (COVID-19). In Japan, production activity weakened in the second half of the fiscal year due to an increase in consumption tax and sluggish exports. In the electronics industry – the Kurita Group's main market – customers in Japan, China and South Korea delayed decisions on facility investment amid weak smartphone sales and a downturn in the semiconductor market.
Despite that challenging environment, the Kurita Group reported higher profits year on year. Orders were lifted by the consolidation of a number of businesses – U.S. Water Services, Inc., which was acquired and became a subsidiary in the previous fiscal year, and U.S.-based Avista Technologies, Inc. and Avista Technologies (UK) Ltd., which supply reverse osmosis (RO) membrane chemicals and services. However, total orders rose only slightly year on year due to a decline in major projects in the Water Treatment Facilities business.Net sales increased, driven by the new businesses that joined the Group, but excluding that factor, net sales fell year on year. Several factors weighed on net sales. Yen appreciation against overseas currencies pushed down sales at overseas subsidiaries in yen terms compared with the previous fiscal year, the Group streamlined low-margin product lines in the Water Treatment Chemicals business, and sales of water treatment facilities declined in Japan and overseas amid weak demand from the electronics industry.
Although orders and net sales missed our projections, the Group reported an increase in business profit* year on year thanks to an improvement in the cost of sales ratio. We took steps to improve the ratio by adjusting the product mix in the Water Treatment Chemicals business, cutting costs by overhauling global procurement activities, and reducing one-off additional costs in the Water Treatment Facilities business. Operating profit also increased, supported by those factors and a significant improvement in net other income and expenses.
* Business profit is an internal earnings indicator, which is calculated based on net sales after deducting cost of sales and selling, general and administrative expenses to give a more consistent picture of earnings. Business profit is not defined under International Financial Reporting Standards (IFRS), but the Company voluntarily discloses the indicator for reference purposes.
Q. What progress did Kurita make with MVP-22 initiatives in the plan's second year?
We are working to create shared value together with society under the Maximize Value Proposition 2022 (MVP-22) medium-term management plan, which puts CSR at the core of our business. Our aim is to help tackle and solve issues faced by society and provide new value to customers. We are doing that by dramatically increasing the quality and speed of our work, leveraging customer intimacy as the clear source of the Kurita Group’s competitiveness.
As key initiatives to provide new value to customers, we are developing "Creating Shared Value" (CSV) business and total solutions. The Kurita Group defines CSV business as products, technologies or business models that substantially reduce environmental impact while also contributing to an improvement in profitability. Under the MVP-22 plan, we are working to expand the Group's CSV business. In the fiscal year ended March 31, 2020, we finished putting in place systems covering all aspects of CSV business, from how CSV businesses, products and technologies are selected to performance monitoring. CSV business orders also exceeded our target for the fiscal year ending March 31, 2023.
We also made progress with developing total solutions. Working groups that combine marketing, sales, technologies and development functions were formed for each market and began work on devising solutions models. Our solutions models encompass contracts for products, technologies and services and are designed to be rolled out for a wide range of customers. In the fiscal year ended March 31, 2020, we completed six solutions models, including one model that improves water quality and productivity on paper processing lines by combining our expertise in water treatment chemicals, IT and sensing technologies. In addition, we put in place a framework to promote the Group's new total solutions. Specifically, we integrated domestic sales departments previously separated along product and business lines into a single sales division targeting specific markets and regions. Another step we took was to establish Kurita Kitakantou Co., Ltd. as a single sales entity to provide water treatment chemicals and maintenance services on a one-stop basis, replacing several standalone sales offices. These new business models and organizational changes show how the various initiatives to transform our business are now gaining momentum.
We have also been working to expand and improve the profitability of overseas businesses, which along with the development of new business models, is a key theme for the Group. To create a platform to provide total solutions in North America, we merged U.S. Water Services, Inc. with our existing subsidiaries in the U.S., Kurita America Inc. and Fremont Industries, LLC, to form a newly established integrated company, also called Kurita America Inc. The new company started operations in April 2020. In addition, with the acquisition of Avista Technologies, we have gained highly competitive technologies in the RO membrane chemicals market and a RO membrane management service business model.
In January 2020, we launched Project Acorn, a global initiative that draws on the Group’s business resources related to RO membrane chemicals, including products and technologies. Leveraging global synergies, we aim to increase RO membrane chemicals-related sales from ¥8 billion currently to ¥10 billion by the fiscal year ending March 31, 2023. Separately, in order to strengthen our competitive position in the electronics industry overseas, we acquired additional shares in U.S. company Pentagon Technologies Group, Inc., making it a consolidated subsidiary in April 2020. We expect the company's tool cleaning business to support the Group's profit growth going forward.
As part of efforts to reinforce the cost control structure, which is key to improving profitability, we continued to rebuild our water treatment facility manufacturing system. We have reduced errors in the design phase by introducing an automated design system. In procurement, our global supply team (GST) contributed to the Group’s profitability through activities to establish a global supply chain. We also created a personnel map of engineers in our production system to help us train and better utilize human resources involved in production activities.
To support Group business management, we took a number of steps to reinforce group governance. Specifically, we launched a Management Monitoring System for group companies in Japan and overseas, led by the Internal Auditing Department, which reports directly to the president. Using the system, we upgraded governance rules in line with the Kurita Group Business Policy and verified implementation status. Additionally, in order to strengthen governance at group companies in Japan by enhancing the effectiveness of boards of directors, we verified conditions within the board at each company and developed measures to tackle any issues related to effectiveness. The Company itself also took several steps to improve governance, including making improvements to the Successor Planning Committee's candidate selection process for president and directors and reducing holdings of shares in other listed companies.
Q. What kind of company is Kurita aiming to be in the post-COVID-19 world?
The COVID-19 pandemic forced the lockdown of entire cities and led to restrictions on movement worldwide, resulting in severe limitations on economic and corporate activity. In just a few months from the initial outbreak, the value systems of society and industry were completely upended. Business continuity plans (BCPs) have become a priority issue for companies and the pandemic appears to be accelerating the shift to digitization in society and industry, with activities increasingly shifting from physical to remote and from real to virtual interactions.
In last year’s interview, I also talked about how the digital transformation of society and industry represents a major opportunity. However, I warned that if the Kurita Group is too late to catch the wave of innovation, existing business models will become outdated and be left behind by the market. The COVID-19 outbreak has not changed those opportunities or risks, it has accelerated them. By driving digital transformation (DX) in all our business processes, we have the opportunity to create new value for society through our total solutions for water treatment. Conversely, if we are slow to respond, we face the risk of losing markets to competitors or even to new market entrants from other industries.
However, by supporting customer BCPs in the post-COVID-19 world, I see an opportunity for Kurita to show how it can play an important role as a corporate Group that creates shared value with society by responding to public needs. Kurita Group companies have continued to supply products and services worldwide despite the pandemic. By ensuring our own businesses continue to operate, we are keeping customer operations running smoothly and helping to maintain the functions of society and industry.
In terms of business processes, our existing lineup of physical services, such as taking water samples at customer sites and analyzing them offsite, are likely to see a decline in value as digitization spurs the creation of alternative services. In parallel, remote services, which use online design presentations, sensors and software, are likely to gain in value. Not all physical services will fall by the wayside. The value of services such as personnel training to improve emergency responses related to BCPs and to strengthen frontline business capabilities is likely to increase. By reassessing the value of services that are best provided physically and by combining them with remote services, Kurita has a major opportunity to dramatically transform its business processes and business models. Using the pandemic as a rare opportunity to dismantle preconceived ideas, I want the Kurita Group to become a vital partner for society and industry in the new post-COVID-19 world.
Q. What measures are planned for the third year of MVP-22?
In the fiscal year ending March 31, 2021, the plan's third year, our first aim is to promote CSV business and step up the deployment of total solutions. We will fine-tune our sensitivity to social issues and deepen our understanding of customers' businesses to help us create new business models and launch them in the market. Our goal is to increase profitability by building up earnings from highmargin solutions models.
Our second aim is to transform business processes. In April 2020, we integrated all the Group's IT-related departments into a new Digital Strategy Division, which is tasked with driving digital transformation. We plan to utilize big data resources gathered from our ultrapure water supply facilities and the AI technologies and expertise of U.S. subsidiary Fracta to create new value. In water treatment facility manufacturing, we will also enhance the value we provide customers by using more automation in design processes and introducing a digital twin simulator.
In the fiscal year ended March 31, 2020, we made the decision to relocate the Kurita Global Technology Center, our main domestic R&D site. The new center, scheduled to open in April 2022, will also transform the Group's development processes. Our strong commitment to scientific hypothesis and practical experiments will remain the same, but we plan to maximize time allocated for experiments and analysis by encouraging remote working to ensure the development center is primarily a place for conducting experiments. The new center will therefore be equipped with IT infrastructure and technology that facilitates remote monitoring of experiments, virtual presentations and other innovative approaches.
Our third aim is increase profitability in overseas operations. Leveraging the business platforms and technologies acquired through M&A, we plan to improve profitability from both a global and local perspective. In terms of global initiatives, we will reinforce our position in the RO membrane chemicals and services market, centered on Avista Technologies. Locally, we aim to rapidly generate synergies from the integration of our subsidiaries in the U.S. and develop new water treatment chemicals and technologies that reflect the needs of each region. We also plan to expand our recurring income business in East Asia, using EPC projects as an entry point to provide other services such as membrane cleaning and resin regeneration.
Q. What is your closing message for stakeholders?
The COVID-19 pandemic has led to many changes in society's values and priorities. However, the Kurita Group's vital role of contributing to society and industry by providing solutions that address issues related to water and the environment is fundamentally unchanged. We want to prioritize funds entrusted with us by shareholders and investors on growth businesses, such as new solutions models and the ultrapure water supply business, which is expected to be highly profitable.
Despite the increasingly uncertain economic outlook, we have no plans to change our current dividend policy of working to continue raising the dividend, because we are confident in the Group's cash flow-generating capabilities. We will also consider share buybacks while balancing the Group's cash on hand and funding requirements and taking into account share price trends.
I hope we can count on your continued support as we transform our business to create an unshakeable earnings base that is resilient to the toughest of operating environments.
President and Representative Director
This interview was quoted from Integrated Report 2020.