Improving Enterprise Value

Message from our Director in Charge of Finance and ESG

Enhancing dialogue with capital markets and pursuing financial and non-financial management that leads to value creation.

Director and Senior Vice President, Hideaki Shindo

Enhance capital profitability by increasing the earnings of existing businesses and returning profits to shareholders. Ensure growth potential by actively investing in high value-added products and new products. Upgrade non-financial value by working to resolve ESG material issues. We will advance these three initiatives to improving our enterprise value.

FY2023 results and FY2024 outlook

FY2023 resulted in net sales of 578.9 billion yen. Boosted by significant yen depreciation, this represents a record high for net sales. However, while the Environment Business recorded favorable sales on the increase in vehicle sales, the Digital Society Business recorded decreased net sales and profit on the impact of a downturn in the semiconductor market. Operating income was 66.4 billion yen, and net income was 40.6 billion yen, resulting in a decrease in profits.

For FY2024, we are targeting increased both sales and income of 620 billion yen in net sales, 75.0 billion yen in operating income, and 53.0 billion yen in net income for the entire company. While market conditions for the Digital Society Business remain difficult, the semiconductor market is projected to recover from the second half of the fiscal year onward. Also, the Energy & Industry Business is projected to see an increase in shipments of NAS batteries for overseas projects. Overall, we project being able to grow both sales and profit.

Aiming to improve enterprise value

As of the end of FY2023, stock markets evaluated NGK as having a price-to-book ratio (PBR) of less than 1x but we are striving to make rapid improvement. NGK positions sustainable increases in enterprise value and profit returns to shareholders are core management issues, and we are promoting three initiatives to enhance capital profitability, ensure growth potential, and upgrade non-financial value.

Enhance capital profitability

For capital profitability, we assume capital costs of approximately 9% based on the capital asset pricing model (CAPM). We also set a target return on equity (ROE) of 10% or higher, which would exceed capital costs. To achieve these targets, we adopted an NGK-specific formula for return on invested capital (ROIC: operating income / business assets (accounts receivable + inventory assets + non-current assets)) as an internal management metric. Closely related to ROE, we use this metric to evaluate capital profitability for each business.

Looking at each segment, while the Environment Business, our core business, is projected to see a decline in growth potential due to developments related to the shift to vehicle electrification, we will aim to improve profitability by reducing costs and negotiating prices with customers. From FY2024, we transferred Industrial Processes from the Energy & Industry Business to the Environment Business. We will accelerate the development and validation testing for new products by combining the engineering functions of Industrial Processes with the manufacturing technology used to produce ceramic substrates for automotive catalytic converters and filters.

For the Digital Society Business, we will further expand industry share by developing new products and increasing the added value of existing products. This is a sector with extremely high growth potential, so we will input management resources, including aggressively engaging in development, capital investments and, when appropriate, M&A deals to increase profitability.

With the Energy & Industry Business, we have seen an improvement in profitability thanks to expanding growth potential through large-scale NAS battery projects while also continuing with ongoing initiatives of insulators. Moving forward, I hope to further accelerate these efforts.

Thanks to efforts in each business, we project the NGK ROIC to improve from 9.8% in FY2023 to 11.0% in FY2024. An awareness of the importance of the NGK ROIC has permeated the entire company and I feel that each business headquarters is constantly pursuing business management focused on asset performance.

Ensure growth potential

Ensuring growth potential is a core element of our management strategy. In addition to portfolio management to ensure the appropriate distribution of management resources, we are also strengthening R&D to promote sustainable growth. These initiatives are embodied by NV1000, our target of achieving at least 100 billion yen in net sales from new products by FY2030.

For existing businesses and newly commercialized products, we are pursuing business portfolio management based on two core themes: profitability and growth. We carefully examined our targets of achieving an NGK ROIC of 10% and a sales growth rate of 5%. We will prioritize investments in businesses projected to see growth and will evaluate the viability of businesses in low-growth and low-profit sectors. In FY2024, we are planning to make a total of 68 billion yen in capital investments, mainly to make upgrades in the Environment Business and increase production in the Digital Society Business, which is expected to see future growth.

In the area of new business expansion, we are making steady progress towards NV1000, and we are aiming for sales of roughly 20 billion yen in FY2030 for AMB and DCB substrates for power modules, products we have already commercialized. For products in the validation phase that are close to commercialization, we will aim for the rapid commercialization of direct air capture (DAC) ceramics and sub-nanoceramic membranes. In total, we will aim for sales of roughly 100 billion yen. We also have themes in the development phase projected to generate nearly 100 billion yen in total. As with the previous year, in FY2024 we plan to invest more than 30 billion yen in R&D, mainly in the carbon neutrality and digital society sectors.

Progress Relative to the NGK Group Vision (performance trends)

This chart depicts progress relative to the NGK Group Vision.

Business Portfolio Policy

This chart depicts business portfolio policy.

Upgrade non-financial value

Upgrading non-financial value, value that is not reflected in financial indicators, is also important to improving our enterprise value. The NGK Group positions Environment, Society, and Governance (ESG) as central to our management as we strive to achieve sustainable growth and transform our business structure to reflect the NGK Group Vision. I believe these activities are essential for long-term growth.

In April 2023, we identified nine materialities for the NGK Group. These materialities work to support our basic sustainability policy, and we recognize that resolving these issues will lead to growth as a Company. The ESG Management Committee deliberated on the KPI to serve as targets for each materiality, and the Board of Directors approved these. As such, we will steadily engage in management based on these materialities and KPI.

As part of ESG management, in addition to considering our social responsibility, we will also invest in human capital and intellectual capital, which we view as sources of future growth. As management metrics, we have adopted NGK Value-added. In addition to operating profit, NGK Value-added takes into account CO2 emission costs, labor costs, R&D costs, and our achievement rate for the ESG targets of each rating agency. These targets and metrics will help clarify relevant issues related to increasing sustainability and non-financial value. Improvements in these areas will lead to improved quality as a company. We believe it is important to grow profit by achieving a good balance between input towards increasing current profitability and input towards upgrading non-financial value that leads to future performance.

Maintaining a sound financial platform

As for our capital policy, we are focused on achieving both profitability that exceeds the cost of capital and financial soundness. We will work to maintain profit margins, capital turnover, and financial leverage at healthy levels that are consistent with our business strategy. In addition to reducing capital costs by actively returning profits to shareholders, including the use of interest-bearing debt and flexible share buybacks, we will aim to improve ROE and expand our equity spread by securing growth potential. With financing, our basic policy will be to use interest-bearing debt if we exceed free cash flow while ensuring financial soundness by aiming for a D/E ratio of 0.4. While maintaining our bond rating of A+, we will work to improve our rating by increasing our earning potential and cash flow.

Relations Between Enterprise Value and Management Indicators

This is a diagram illustrating the Relations Between Enterprise Value and Management Indicators. It outlines the management policy, key performance indicators (KPIs), and 2030 targets aimed at increasing our capital profitability, growth potential, and non-financial value to improve Enterprise Value. We are incorporating the NGK version of added value (NGK Value-added) into our management indicators, which factors in operating income, CO2 emission and labor costs, R&D expenses, and the ESG target achievement rate of each evaluation organization.

Valuing dialogue with investors and shareholders

The NGK Group places importance on the interests of our shareholders and positions the sustainable improvement to our enterprise value and profit returns as our most important management policies. We will maintain a good balance between securing appropriate investment capital for growth and returning profits with a focus on capital efficiency.

As a dividend policy, our medium to long-term goal is to maintain a dividend to net assets ratio of 3% and a consolidated dividend payout ratio of approximately 30%. At the same time, we will pursue net asset management that reflects changes in our business risks and the link to ROE over a period of approximately three years. We will also consider cash flow forecasts and other factors when making allocations. For FY2023, we are planning to issue shareholder dividends of 50 yen per share, and planning on 60 yen per share for FY2024.

We also are proceeding with share buybacks towards improving capital efficiency and enhancing shareholder returns. In FY2023, we acquired 8.5 million shares (14.9 billion yen). We will continue to flexibly implement investments while comprehensively considering factors such as growth investments, dividend levels, cash on hand and stock price levels.

We are also actively promoting dialogue with investors and shareholders. In addition to financial results briefings for investors (twice a year), we also held forums for overseas investors led by our lead securities firm, conducted overseas IR, and conducted IR activities for individual investors. Last fiscal year, we also held SR meetings for shareholders. During these activities, I could sense that investors had a strong interest in our business status, future growth, and human resources.

We will use the feedback obtained through such dialogue to improve the quality of our management. We will also strive to further enhance information disclosure towards promoting a better understanding of the NGK Group’s medium to long-term outlook and management style. We look forward to your continued support as we continue our efforts to further improve our enterprise value.

Note: This interview was conducted in May 2024.