CEO Message: To Be an “Enterprise That Is Essential to Tomorrow's Society” Driven by the Creation of Value Through Ceaseless Evolution and Ambition

In February 2017, the Teijin Group announced a new medium-term management plan, titled “ALWAYS EVOLVING” Medium-Term Management Plan For 2017–2019. The plan clearly articulates our aspirations and the actions we must take to be an “Enterprise that is Essential to Tomorrow's Society,” as set forth in our long-term vision.

Our path to the future will involve many different changes, and will not merely be a continuation of current conditions. In order for Teijin to truly be an “Enterprise that is Essential to Tomorrow's Society,” it will be imperative for us to identify and anticipate those changes as we continuously transform our own businesses. Moreover, I would like us to create new value and contribute to the evolution of society. These aspirations are embodied in the plan's slogan, “ALWAYS EVOLVING (Ceaseless Evolution and Ambition).” The Teijin Group will mark its founding centennial in fiscal 2018. Over our past history of nearly a century, we have constantly embraced the spirit of ambition, and have pressed ahead with expanding business, entering new fields and advancing globalization. We remain committed to ceaselessly surveying the future and being a challenge seeker that initiates self-transformation. In the following pages, I would like to discuss the Teijin Group's evolution and ambition.

Fiscal 2016 Business Performance and the Status of Achievement Against the Previous Medium-Term Management Plan

The Teijin Group Has Almost Completed Laying a Foundation for Advancing to its Next Stage of Growth

In fiscal 2014, the Group announced the revised medium-term management plan for fiscal 2014–2016. Under this plan, we have been implementing initiatives based on two key priorities, specifically restructuring initiatives and transformation and growth strategies.

Progress on Restructuring Initiatives

Our first priority was to dramatically restructure unprofitable businesses. I believe that the Teijin Group has made progress on restructuring initiatives largely as planned and that it has developed the core earnings power needed to steadily generating operating income of over ¥50.0 billion.

Figure: Progress on Restructuring Initiatives

  • *
    ‌By transferring its entire equity interest in Braden Partners L.P. and Associated Healthcare Systems, Inc., both of which are consolidated subsidiaries, to an affiliate of Quadrant Management, Inc., which is an investment company in the U.S.

Progress on Transformation and Growth Strategies

Our second priority was transformation and growth strategies. The Teijin Group has strategically allocated resources to realize a solutions-oriented business by making investments of around ¥100.0 billion over the past three years, beginning with the acquisition of Continental Structural Plastics Holdings Corporation, Headquarters: Michigan, U.S.A.

Figure: Progress on Transformation and Growth Strategies

Moreover, for fiscal 2016, the final fiscal year of the revised medium-term management plan, we targeted operating income of ¥50 billion and ROE of at least 8%. Looking at our business results for fiscal 2016, we recorded operating income of ¥56.5 billion, surpassing our target. In addition, we posted record-high profit attributable to owners of parent of ¥50.1 billion, helped by the additional factor of deferred tax assets recorded in connection with the withdrawal from the U.S. home healthcare business. We also posted ROE of 15.7%. However, we see this performance as just a milestone. The Teijin Group is transforming into a business portfolio with new highly profitable businesses at the core. I believe we have largely finished laying a foundation and securing the core earnings power needed to achieve that transformation. Indeed, the Teijin Group is now standing on the threshold of a new beginning.

New Medium-Term Management Plan

Envisioning the Teijin Group Ten Years in the Future and Clarifying the Actions We Must Now Take

In February 2017, the Teijin Group announced a new medium-term management plan for 2017–2019. This plan was not developed by merely projecting current conditions into the future. Rather, it was drawn up by first envisioning the Teijin Group ten years in the future and then clarifying our action plans for the next three years to realize this vision.

Corporate Philosophy and Vision

We have long embraced the Teijin Group Corporate Philosophy, “Quality of Life,” and it has served as a crucial reference point for envisioning the Teijin Group ten years in the future. In order to continue to realize this Corporate Philosophy as society faces many issues and needs, we have reformulated our long-term vision as follows: “Teijin will become an enterprise that is essential to tomorrow's society by continuously creating value.” Put differently, being “an enterprise that is essential to tomorrow's society” means being a “QOL Innovator” that creates innovation to enhance people's quality of life through the delivery of solutions that accurately capture ever-changing social trends and consumer needs. The following three points clarify our vision for the type of enterprise we aspire to be:

  1. An enterprise that helps to solve social issues
  2. An enterprise that achieves continuous transformation by anticipating changes in the external environment
  3. An enterprise that continues to create new value at all times

Identifying our Core Priority Fields

How should we address the various demands of society, and how can we help to solve the issues it faces?

Taking a fresh look at the nature of our characteristics and strengths, we believe that the Teijin Group has built up a unique business platform spanning the three different fields of Materials, Healthcare and IT. We have identified environmental value; safety, security and disaster mitigation; and demographic changes and increased health consciousness as our three core priority fields where we will be able to leverage our strengths and capture business opportunities.

I'm confident that we will make an even greater contribution to solving social issues by delivering solutions in these core priority fields. While maximizing business opportunities, we will take the initiative to accomplish business portfolio transformation through ceaseless evolution and ambition. That will be one of our most important themes for achieving sustainable growth over the medium and long terms.

Figure: Identifying our Core Priority Fields

Transform Businesses and Open a New Chapter

Business Portfolio Transformation

In my vision for Teijin ten years in the future, the Materials and Healthcare business fields will be the company's two major pillars of operations, and these two businesses will be supported by an ICT platform. Besides driving the growth of existing businesses, we will realize this vision by developing new businesses that are not yet contributing to profits at present into new highly profitable businesses that will serve as the core of Teijin, thereby achieving business portfolio transformation.

Figure: Business Portfolio Transformation

Transformation and Growth Strategies

Our growth strategy encompasses activities to further strengthen the company's core earnings power by continuously enhancing the competitiveness of our existing businesses. Meanwhile, our transformation strategy encompasses activities to ambitiously enter different fields than our existing businesses and create new products and services through business model transformation. The profits generated by the growth strategy for existing businesses will fund the resources to be allocated to the transformation strategy. Based on these two strategies, we will strive to continuously create and develop businesses that lead to growth in profits.

As the main pillar of the transformation strategy, we will accelerate expansion of the automotive composites business in the Materials Business field. Teijin will transform its previous business model as a supplier of single types of materials into a supplier of automotive components. That in itself represents a major transformation in our business model. In the Healthcare Business field, we will expand our business to fields outside of public insurance, such as nursing care, disease prevention and pre-symptomatic care. The concrete vision for our transformation strategy is discussed in greater detail by Senior Executive Officers in charge of the Materials and Healthcare businesses later in this report.

Build a Solid Management System Platform and Accelerate Growth and Transformation Strategies

Strengthen the Management System Platform

On the organizational front, we restructured our organization into two broad business fields, specifically Materials and Healthcare, in order to accelerate our growth and transformation strategies. We will promote inter-business integration by incorporating materials-related businesses into the Materials Business field. In parallel, coordination will be deepened by splitting up New Business Development into units for materials and healthcare businesses. In the process, we will formulate specific strategies with a stronger awareness than before of how we allocate resources for the short term and medium to long term, and how we do so between existing and new businesses.

Restructuring of Organizational Structure (As of April, 2017)

Figure: Restructuring of Organizational Structure

Additionally, in the course of creating new businesses and changing business styles, we cannot overlook the role of IT, which has recently been evolving exponentially through artificial intelligence (AI) and the Internet of Things (IoT). That is why we have established the new post of Information & Innovation Strategy Officer to provide Group-wide control of various “Smart Projects" designed to proactively introduce and apply cutting-edge IT to our businesses. Going forward, we plan to allocate resources of around ¥10.0 billion primarily to information platform construction. Moreover, we have established the new post of Global Business Strategy Officer in order to control regional strategies across businesses on a global basis.

We aim to realize cost benefits of ¥11.0 billion compared with fiscal 2016 by strengthening product cost competitiveness through such means as productivity enhancements and boosting energy efficiency, in addition to completing restructuring initiatives laid out in the revised medium-term management plan, which was formulated in fiscal 2014. In addition, we aim to realize rationalization benefits of ¥9.0 billion by restructuring into a “Small Head Office” commensurate with business scale after the implementation of restructuring initiatives, along with enhancing productivity through such means as streamlining the organization, centralizing operations, and developing information infrastructure. Through all of these cost restructuring initiatives, we aim to reduce total costs by ¥20.0 billion in the three years from fiscal 2017 to 2019.

Investment Efficiency and Earnings Power as Top Priorities

Under the new medium-term management plan, we have established new key performance indicators with an emphasis on both investment efficiency and earnings power. As our most important indicators, we have set ROE as a profitability indicator and EBITDA as a growth indicator.

Management Targets

Figure: Management Targets

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    ROE = Net income divided by average shareholders' equity; Shareholders' equity = Total net assets at year-end less subscription rights to shares at year-end and non-controlling interests at year-end
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    Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) = Operating income plus depreciation and amortization
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    Return on Invested Capital (ROIC) = Operating income divided by invested capital; Invested capital = Net assets plus interest-bearing debt minus cash and deposits

Since the revised medium-term management plan was formulated in fiscal 2014, we have been emphasizing profitability, and we intend to retain this approach in the future. We have adopted ROE, which represents the investment returns on funds entrusted to the company by shareholders, as a profitability indicator to pursue investment efficiency. We are targeting an ROE of 10% or more. To ensure that we achieve this ROE target on a Group-wide basis, we will utilize ROIC based on operating income as an indicator of the efficiency of generating profits relative to invested resources. Specifically, through factor analysis of ROIC, we will translate this KPI into targets for the front lines of each business site. Doing so will enable us to make use of ROIC in activities such as investment decisions, inventory management, productivity enhancements, and cost reductions.

Meanwhile, as a means of ensuring growth while avoiding a contraction of business due to an over-emphasis on efficiency, we have set a target for EBITDA, which represents operating income before depreciation and amortization, as a growth indicator. With this target, we will seek to increase our ability to generate cash to fund growth investments and shareholder returns. We are targeting EBITDA of over ¥120 billion in three years. Considering that our transformation strategy will be making a full-scale contribution to earnings ten years in the future, we are targeting EBITDA of over ¥200 billion at that time, which would be more than double the current level.

EBITDA

Figure: EBITDA

Resource Allocation and Shareholder Returns

During the medium-term management plan from fiscal 2017 to 2019, we will invest resources of around ¥300 billion, combining capital expenditure and the M&A budget. For our growth strategy, we will allocate resources to increasing carbon fiber production capacity and investing in healthcare systems. For our transformation strategy, we will allocate resources to projects essential to business portfolio transformation, including proactively making use of external resources by M&As, in addition to capital expenditure for composites, LIB separators and membranes in the Materials field, and orthopedic implantable devices in the healthcare field. In addition, we will continuously allocate around 5% of net sales to research and development expenses in order to nurture future core businesses.

Figure: Resource Allocation and Shareholder Returns

While proactively advancing resource allocations, our basic policy on shareholder returns will be to provide a steady dividend in line with consolidated operating results. We will target a consolidated dividend payout ratio of 30% of net income for the medium term. We have built up steady core earnings power through the restructuring initiatives undertaken to date. As a result, we believe we will be able to maintain financial soundness even as we implement both such aforementioned resource allocations and shareholder returns.

To Sustainably Enhance Corporate Value

I have already explained how we will identify business opportunities while contributing to society. Meanwhile, I also believe that our activities to address various requirements from environmental, social, governance and other perspectives will have an equally significant bearing on our corporate value in future. The Teijin Group has identified its material CSR themes (materiality), and is working to address those themes in order to enhance its corporate value. These material CSR themes have been determined based on consideration of the priorities that the international community is making a concerted effort to address, such as the Sustainable Development Goals (SDGs) of the United Nations and the Paris Agreement within the United Nations Framework Convention on Climate Change. Notably, Teijin has identified reduction of environmental impacts, as well as corporate governance and diversity, as core priority fields in the medium-term management plan. Activities in each of these fields will be essential to further strengthening our management base.

With regard to reduction of environmental impacts, Teijin has long worked to address this issue as a chemicals manufacturer. Going forward, we will step up our efforts to reduce greenhouse gas emissions based on the Paris Agreement, and to practice sustainable water use and management, which is included in the SDGs.

Strengthening corporate governance is also essential to sound and sustainable growth. Thus far, we have worked to put in place a governance framework to ensure higher transparency and faster decision-making. Going forward, we will redouble our efforts to fulfill our accountability to shareholders and investors and gain their understanding through dialogue, thereby paving the way for future growth and development.

In addition, strengthening human resources and harnessing the strengths of diverse personnel are vital to our future. Under the medium-term management plan, diversity, including women's advancement, has been defined as a transformation theme. Accordingly, we intend to step up the promotion of diversity more than ever. The Teijin Group endorses and is a member of the United Nations Global Compact, which sets forth ten principles related to human rights, labor, the environment and anti-corruption. Moving ahead, we will keep mobilizing the Teijin Group's collective strengths as we aspire to be a prominent enterprise that is admired around the globe.

Count on the Teijin Group to Make Major Strides Toward its Next Centennial

Three years have passed since I was appointed as the CEO of the Teijin Group. We can view the past few years as a rebuilding period focused on reestablishing our profitability and laying the groundwork for new growth and transformation strategies. The next three years, which will span Teijin's founding centennial in 2018, will mark a new beginning for the Teijin Group—one that will see us make major strides towards the Teijin Group's next centennial. In the new medium-term management plan, we have clarified anew our vision for the Teijin Group. Accordingly, we are sincerely determined to make steadfast efforts to bring the Teijin Group closer to our vision.

We look forward to our stakeholders' ongoing support and understanding as we endeavor to drive ceaseless evolution and ambition.

Jun Suzuki, President and CEO
Jun Suzuki

Born in Tokyo in 1958. Joined Teijin Limited in 1983 and was engaged in pharmaceuticals development. Appointed Corporate Officer and Chief Marketing Officer in April 2012, after serving as President of Teijin Holdings Netherlands B.V. in 2011. Assumed the post of Executive Officer and General Manager, Advanced Fibers and Composites Business Group in April 2013 and Director, Executive Officer in June 2013. Appointed President and Chief Executive Officer (CEO) in April 2014.