Interview with the President
Q. What is your take on Kurita's operating environment and results Q in the fiscal year ended March 31, 2021?
President and Representative Director
Our operating environment was obviously impacted by the COVID-19 pandemic, which led to lockdowns, restrictions on movement and other measures worldwide to prevent the spread of infection, dealing a major blow to economic activity everywhere. In Japan, production activity in the manufacturing sector declined and capital investment plans were postponed due to a slump in demand in both Japan and overseas. In China, economic activity started to normalize, but Europe, North America and the wider Asia region continued to face challenging economic conditions. Despite these conditions, the electronics sector - the Group's core market - saw continued growth in demand for semiconductors, electronic components and other products, driven by wider uptake of AI and 5G technologies, as well as the increase in working from home. These trends supported strong capital investment and high capacity utilization rates in the electronics sector in Japan and overseas.
The Group's orders and net sales increased only slightly due to the impact of the pandemic, but profits continued to rise year on year. Orders and net sales were lifted by the consolidation of U.S. tool cleaning business Pentagon Technologies Group, Inc., but our business was affected by weaker demand for water treatment chemicals due to lower capacity utilization rates at customer plants and by delays to maintenance and soil remediation plans at customers in general industrial sectors in Japan.
Business profit* increased 10.6% year on year, reflecting an improvement in the cost of sales ratio and a decline in selling, general and administrative expenses. Despite additional costs booked by some domestic businesses, we reduced the cost of sales ratio by making global procurement activities more efficient and by overhauling product and service lineups at overseas subsidiaries. Selling, general and administrative expenses declined due to efforts to reduce overheads, complemented by a drop in expenses related to restrictions on business travel and an increase in working from home. In addition, under other income, we booked a liquidation gain on contract termination settlements with a customer in the ultrapure water supply business and gains on the sale of idle assets. As a result, operating profit increased year on year and profit attributable to owners of parent reached a record high.
* 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 initiatives in the third year Q of the Maximize Value Proposition 2022 (MVP-22) plan?
We are working to create shared value with society under the MVP-22 medium-term management plan, which puts CSR at the core of our management. Our aim is to provide new value to customers while also achieving high levels of profitability by dramatically increasing the quality and speed of business processes. In the fiscal year ended March 31, 2021, the plan's third year, we faced the challenge of the global pandemic, but we continued to actively execute the plan's priority measures to drive a transformation in our business that dismantles preconceived ideas.
First, in order to provide total solutions, we continued to focus on creating solution models that incorporate products, technologies, services and contracts that can be deployed horizontally. We completed six new models, including a service that helps manufacturing plants reduce water usage by optimizing the operation of RO membrane treatment facilities. Including models already developed, we now have a lineup of 13 solution models. While the deployment of these models is slightly behind schedule due to restrictions on movement at customer sites and delays to verification testing amid the pandemic, we have established a solid platform to drive growth in the fourth year of the plan and beyond.
Second, we continued to put the highest priority on driving forward the Group's digital transformation (DX) in order to change business processes and transform business models. In April 2020 we established a new Digital Strategy Division to lead the Group's DX strategy. As part of that strategy, we launched a joint initiative called the Meta-Aqua Project with subsidiary Fracta, a U.S.-based AI startup, to promote DX in water treatment and create related AI and IoT products. The project has already led to the development of an AI-based solution that optimizes the operation of water treatment facilities, reducing electricity consumption and operation and management costs. We also continued to implement Groupwide procurement, production and logistics activities under our Global Supply Team project. The project, which brings together the top supply chain managers from each Group company, has three main aims: leverage the Group's networks to optimize procurement and production, share expertise to reduce costs, and reinforce the Group's business continuity systems in logistics and other areas. In the fiscal year ended March 31, 2021, these efforts led to a larger decrease in the cost of sales than in the previous fiscal year, raising prospects for a sustained improvement in profitability going forward.
Overseas, we worked to improve profitability from both a global and local perspective, backed by our operating framework in Japan, Asia, EMEA and the Americas, which has been built up through M&A activity in recent years. In terms of global initiatives, we are now into the second year of Project Acorn, which brings together all the Group's products, technologies and other business resources related to RO membrane chemicals. In addition to creating a common global lineup of products, the project is also steadily delivering results in other areas, such as an optimized Groupwide production system and a human resources training program that will give our people the skills to drive the next phase of business expansion.
In terms of local initiatives, we retargeted all our marketing resources in the ASEAN region on high-value-added products, technologies and services, and in Europe we overhauled our product lineup to put greater focus on high-margin products. These initiatives lifted profitability in both the ASEAN and Europe regions, contributing to the improvement in the Group's profit margin. In the U.S., post-merger integration (PMI) efforts at Kurita America, Inc., a new subsidiary created by combining several local subsidiaries, fell short of expectations due to a major hit from the COVID-19 pandemic. However, Pentagon Technologies Group, Inc. became a consolidated subsidiary, giving us more contact points with potential customers in the expanding electronics sector. In terms of non-financial performance, we began work on tackling climate change after setting new long-term targets for reducing CO2 emissions in line with the recommendations of the TCFD*1. In addition, we joined the Water Resilience Coalition as a co-founder. The coalition is an initiative established under the UN Global Compact (UNGC)*2 to address issues related to water resources. Through the coalition, we started work on developing an integrated platform for water resources and establishing medium- and long-term targets and activity benchmarks for securing water resources in the world's water-stressed areas. We also set up a dedicated organization to accelerate the Group's diversity & inclusion efforts and formulated a vision and related measures.
*1 Task Force on Climate-related Financial Disclosures: Established by the Financial Stability Board (FSB) to promote the disclosure of climate change-related information by companies and to explore ways for financial institutions to address climate change.
*2 A non-binding initiative to encourage companies and groups worldwide to act as good corporate citizens and help realize sustainable growth by exerting responsible, creative leadership.
Q. What measures are you planning for the fiscal year ending Q March 31, 2022, the fourth year of MVP-22?
The current fiscal year will be a critical period for the ultimate success of MVP-22. We are aiming for further improvements in profitability by creating shared value and by rapidly providing value to customers, supported by an accurate understanding of the issues faced by society today.
First, we will continue to implement DX to drive change in business processes and transform business models. Using digital tools, AI and IoT, we will accumulate information and data from diverse points of contact with sites and utilize this "water knowledge" across the entire value chain - such as development, sales, engineering, and facility operation and management - to establish and implement ways of creating value for customers. We will also work with partners across the Kurita Group to develop data-driven solutions that underpin new business models. We also plan to step up activities under our Meta-Aqua Project, launched in the previous fiscal year, which aims to optimize and improve the efficiency of water treatment facilities and introduce more automation into design processes.
Additionally, we will build a framework to deliver solutions that help increase corporate value for customers by balancing improvements in economic value with CSR implementation, such as reducing high-level environmental impact. Leveraging our deep understanding of customers' manufacturing processes, we aim to expand our range of highly effective total solutions and our CSV (Creating Shared Value) business. Also, to increase contact points with customers through new business model development, we will utilize web-based platforms to build a framework for providing diverse water treatment solutions.
In order to optimally utilize the Group's business resources, we absorbed wholly owned subsidiary Kurita Engineering Co., Ltd. through a merger in April 2021. Our goal is to increase profitability by integrating the company's engineering cleaning business with related operations in the Group to establish a framework for delivering total solutions covering water treatment facilities, water treatment chemicals and cleaning services, creating a core business in the public and industrial infrastructure market. In engineering processes, we aim to reinforce engineering chains and supply chains by using alliances with startup companies to free up our engineers for deployment in core businesses. Moreover, to foster a culture of innovation based on diverse perspectives and backgrounds, we will continue to upgrade programs and systems that support diversity in our workforce and different ways of working.
Reinforcing the Group's overseas business base will be a key challenge in the year ahead. In North America, we will push ahead with our Kurita America, Inc. PMI plan, which was delayed by the COVID-19 pandemic, to establish a more efficient production and sales structure. In April 2021 we acquired Keytech Water Management, a Canadian water treatment chemicals company, giving the Group a business base in Eastern Canada, where much of the country's industry is located. We aim to generate synergies with other North American subsidiaries by deploying solutions across the region in their shared general industrial market. Also in April 2021, we converted Kurita AquaChemie Ltd., a joint venture with AquaChemie DMCC, into a consolidated subsidiary in order to reinforce our business in the Middle East region. The subsidiary has local manufacturing sites, which will be key to business expansion. In Asia, we aim to further improve profitability in the ASEAN region by channeling business resources into new business models, such as remote facility monitoring and services that realize significant reductions in CO2 emissions. In Taiwan, where we have combined our water treatment chemicals and water treatment facilities subsidiaries, we aim to accelerate the deployment of total solutions that draw on their combined capabilities.
Q. What is your long-term vision for Kurita?
The COVID-19 pandemic provided us with an opportunity to reconfirm the key role the Kurita Group plays in ensuring business continuity at many customers that support society and industry. We need to consider two things: how can we contribute to the creation of a sustainable society, and what value can we provide to support the continuity of customers' businesses. To achieve that, the whole Group has to accelerate its transformation based on a redefined view of water treatment's value to society. In the three years since the start of the MVP-22 plan in April 2018, we have taken steps to change our business processes and transform our business models, putting greater emphasis on customer issues. In the next two years, we need to focus closely on customer value, and beyond that, social value. Every manager and employee in the Group will need to work even harder to dismantle preconceived ideas and maximize value across the Group's entire value chain, including customers and business partners, based on issues faced by society.
In 2020, the Board of Directors discussed the Group's value creation story - what Kurita needs to do to sustainably create value with society. The resulting value creation story sets out how the Group's core competences dovetail with the Group's purpose of “Winning the trust of customers and society and building a sustainable society." Kurita has points of contact with diverse customers in many industries. Our “water knowledge" derived from information and insights into various water-related issues faced by those customers, is Kurita's competence and will underpin the Group's long-term growth. By changing how we do business to focus more on social issues and by providing solutions that leverage our “water knowledge", we can provide new value to society. In this way, we can drive positive change in society and industry, which is the Group's ultimate purpose. We have only defined the broad outline of the value creation story at this stage, but we will develop it further into a more robust, structural reform process by establishing a comprehensive framework of individual strategies, KPIs and evaluation systems.
Q. What is your closing message for stakeholders?
To achieve the numerical targets in the MVP-22 plan - a business profit margin of 15% and ROE of 10% or more - we have implemented a range of priority measures in the face of the global pandemic. These measures are starting to bear fruit, supporting a steady improvement in the quality of earnings. In the plan's remaining two years, we will accelerate strategy execution in order to transform Kurita into a highly profitable, global corporate group that creates shared value with society. I hope we can count on your continued support as we continue to transform the Kurita Group to generate sustained growth.
President and Representative Director
This interview was quoted from Integrated Report 2021.