• Japanese

ANNUAL REPORT 2015

  • Message from the President. Corporate Vision.
  • Special Feature
  • Dialogue 1
  • Dialogue 2
  • Dialogue 3
  • Dialogue 4
  • Dialogue 5

Dialogue 3 Discussion between an Analyst and the President

download PDF
Continuously Evolving, Mitsui Chemicals Maintains an Unwavering Commitment to Change. Takao Kanai, Managing Director, Head of Citi Research, Citigroup Global Markets Japan Inc. and Tsutomu Tannowa

Off to a good start in first year of 2014 Mid-Term Business Plan

Kanai:
The management policy of Creating New Customer Value through Innovation in the 2014 Mid-Term Business Plan seems to represent a major change in direction for the Mitsui Chemicals Group.
In the three targeted business domains, growth is on the horizon as sales expand, and results are beginning to emerge from the steady progress made on the restructuring plan announced in February 2014. I think that the first fiscal year is an important one, and that employees are well motivated.
Tannowa:
We got off to an excellent start in the first fiscal year of the 2014 Mid-Term Business Plan. We are on track to reaching our fiscal 2016 target for operating income of at least ¥60 billion. With clear objectives and results emerging already, I believe the atmosphere inside the Group has been quite vibrant.
Kanai:
Among the three targeted business domains, the Mobility domain in particular has several globally competitive businesses, such as PP compounds and functional compounds, that are riding a wave of strengthening demand. On the global market, I think that results have been steadily materializing everywhere you look. With its midterm targets already achieved, will the Mitsui Chemicals Group set even higher targets and continue to invest aggressively?
Tannowa:
Demand for our PP compounds has mainly been from Japanese automakers until now, but we are rapidly expanding our share with the Big Three automakers in the United States.
In North America and Mexico, we must reinforce our supply capacity at a pace faster than market growth, or we will lag behind. Our basic approach is to continue investing steadily while monitoring conditions in each region.
Kanai:
In the Healthcare domain, sales have increased strongly for ophthalmic lens materials and nonwoven fabrics.
Tannowa:
High refractive index lenses, one of our areas of expertise, is a domain where we have traditionally been strong. Rather than competing on the refractive index front, we have pivoted slightly toward increasing the range of applications and linking this to end-user demand. Our investments and acquisitions are also based on this direction.
Kanai:
Earnings have been somewhat slow to improve in the dental materials business of Heraeus Kulzer, an acquisition. Is this just a matter of time, with no need for concern?
Tannowa:
Indeed, we are slightly behind our initial projections for realizing benefits from rationalization, but the transfer of production facilities to Romania has proceeded as planned. I expect to see the results of this restructuring emerge from the second half of this year. However, we must address the issue of increasing earnings in the digital field.
Kanai:
In the Food & Packaging domain, I see that the agrochemical business is growing strongly overseas. Has there been feedback in this regard?
Tannowa:
Our efforts promoting business development overseas have shown results. We have a bright outlook for growth as well, with plans to bring to market five new active ingredients in our pipeline.

Full steam ahead with restructuring

Kanai:
I am under the impression that the corporate structure has been beefed up quite a bit and is now more resilient to changes in market conditions, as the earnings structure has changed as a result of expansion in the three business domains and restructuring in Basic Materials. What is your take on this?
Tannowa:
I think we have made excellent progress on this front.
Our restructuring has proceeded faster than planned back in February 2014. However, every story comes to an end, and there are always risks. I believe it is important to continue pushing forward with restructuring while looking for more areas to improve.
Kanai:
The scope of the restructuring program is quite extensive, in my opinion. I understand that management made the decision to embark on bold restructuring with a sense of urgency. With so many suppliers and companies with user relationships, I assume there were a number of obstacles to restructuring, not in small part because the Mitsui Chemicals Group has been doing business for such a long time.
Tannowa:
Our decision to close the Kashima Works was particularly difficult. It took many visits and a lot of discussion, but the employees working there have come to accept the loss of their workplace. We took great care to explain the necessity of taking this measure as a company, as it is equivalent to terminating operations at other plants.
Kanai:
Basic Materials is still an important business. However, the Group’s current growth investments are focused on the three targeted business domains. I imagine that emotions are mixed among the people working in traditional businesses and vary widely from those of workers at businesses that are being strengthened. Has top management’s effort to lay out a clear direction given the Group a common path to follow?
Tannowa:
I think everyone has a firm understanding of why we have had to undertake such far-reaching restructuring. We may invest in unique materials and products that we think we should focus on with the expectation of earning a profit.
Kanai:
In Basic Materials, there are businesses that can grow and be technologically differentiated.
Tannowa:
That’s right.
Kanai:
The current business environment has functioned as a tailwind for naphtha-based petrochemicals businesses in Asia, amid a weak yen and low crude oil prices. Would it be correct to say that the Mitsui Chemicals Group does not intend to change its basic approach to restructuring?
Tannowa:
Current conditions have turned in our favor, but shale gas will continue to pose a threat, and we must also consider the risks posed by China’s coal chemical industry. I believe we need to steadfastly stay on course.
Regarding the issue with naphtha crackers, we must decide to what degree it is necessary to restrict cracker capacity as an upstream business and find the product composition that preserves the value added of derivatives, rather than argue about cracker scale only. The value added of derivatives changes with market conditions, so an approach with diverse perspectives is necessary, in my opinion.
Kanai:
From the standpoint of competitive conditions for petrochemicals, I have been asked by overseas investors if Japanese petrochemical makers will change or delay policies that have already been put in place. My reply remains an emphatic “No.”
I believe the Mitsui Chemicals Group and other petrochemical makers will continue to advance without hitting a wall or changing direction.

Promoting internal change by shifting to market-oriented priorities

Kanai:
Under the 2014 Mid-Term Business Plan, a major transformation is underway in line with the shift in focus from “product-oriented” to “market-oriented.” Can you give a specific example of how the Group has changed internally, from the perspective of this shift in focus?
Tannowa:
A symbol of this shift in the Mobility business is our acquisition of the mold maker Kyowa Industrial Co., Ltd. Until recently, I had no idea what this business entailed. By the very nature of their business, mold makers come to understand the issues automakers face. This is the reason, I believe, that Kyowa Industrial’s information-gathering and solutions-proposal capabilities are so well developed. By combining this expertise with our materials and technologies, we aim to enhance our ability to propose solutions. The impact of the acquisition has spread throughout our organization, leading to outcomes that we did not originally anticipate, such as synergies in the PP compounds field in the United States.
Also, our Healthcare business has had a strong “market-oriented” approach to products from the beginning, and we have taken steps such as M&A to fortify the business. By increasing our range of products and solutions, we have been able to offer our products and to pursue improved usability for each customer.
Kanai:
I think that Whole You™ is a symbolic example of the Mitsui Chemicals Group’s aim to pivot toward BtoC, including as an information-gathering function.
Tannowa:
Throughout the organization, we discussed how quickly we could achieve profit targets and at what development cost. Despite the various challenges before us, we made the decision to proceed because we thought there was genuine value in at least giving it a try. We can see considerable advantages and benefits in dentures in particular, and think this business has potential. Our perceptions have evolved out of necessity because, for us, this way of doing business is completely new.
Kanai:
In the Mobility business, for example, ideas about specific market strategies have changed; has this accelerated associations across different segments?
Tannowa:
I would say it has. Across the board, we have seen that organic associations are formed due to the setting up of one unified strategy. I think that the benefits of this are evident in our new materials for automobiles and other developments.
Kanai:
How about the Food & Packaging domain?
Tannowa:
We aim to maximize profits through separate strategies for foods and packaging. The Mitsui Chemicals Group is stepping up marketing in the packaging business for other products, centered on EVOLUE™.

Coming up with interesting projects

Kanai:
The Mitsui Chemicals Group has prioritized the improvement of its financial structure and scrutinized investment projects more closely. Plans currently call for increasing investments by ¥15 billion. What kind of investments do you have in mind?
Tannowa:
We have not yet decided on specific investment projects due to the large number of candidate projects.
Basically, our intention is to invest in growth areas where we can create value added. We want this to be the unavoidable outcome when entering new businesses. Even in Basic Materials, we must continue to invest in unique products and technologies.
Kanai:
Does it seem like there are an increasing number of investment candidates that look compelling to top management?
Tannowa:
Everyone seems to be coming up with projects that look interesting, even though they may not all be major projects. We aim to screen and invest in projects while holding them in high regard.

Accelerating the pace of human resource development to be a truly global company

Kanai:
While business has expanded overseas in the past, the Mitsui Chemicals Group now looks ready to make an all-out push to expand worldwide. In terms of human resources, decisions will have to be made about deploying Japanese employees around the world or hiring locals, as well as about shaping the human resources system for global business. I think that the Mitsui Chemicals Group is on the brink of becoming a truly global company.
Tannowa:
There are not very many people who can conduct business globally, and such talent cannot be trained in a short period of time. We have to accelerate the pace of human resource development to keep pace with business expansion.
The other day, I visited one of our subsidiaries in the United States, and the Japanese employees there seemed to be quite inspired by working overseas and were determined to improve their skill levels. These employees are gaining a management perspective on marketing, investment and finance. Although it is a demanding experience, their pace of growth has been quite rapid. At the same time, we need to nurture local employees.
Kanai:
I understand that the Mitsui Chemicals Group has a training program. Does the Group have a global human resource system and job performance evaluation system?
Tannowa:
We have a variety of training programs, including the overseas dispatch training program for young employees to gain experience. I think how we will implement these systems is as important an issue as ensuring the quality and volume of the human resources we need. In this regard, I believe the addition of Heraeus Kulzer to the group represents a big opportunity to advance our management of human resources on a global basis.

Improving ROE now more important than ever

Kanai:
The Mitsui Chemicals Group has disclosed a target of 8% for ROE. Can you give some background to this target? Also, what measures are being taken to achieve this target?
Tannowa:
The Mitsui Chemicals Group had long been using ROA as a management benchmark, and began using ROE at the request of investors.
However, I believe the main story of action is to increase profits, rather than artificially manipulating equity.
Kanai:
I think that most companies use a combination of performance indicators, such as ROA and ROIC. When looked at from the inside, I believe it is easy to see how much of a return has been made on invested capital. However, these days investors are more focused on ROE as a clear, easy to understand indicator that can be applied to all companies.
Compared with chemical companies overseas, Japanese chemicals makers record somewhat lower ROE. I attribute this to the smaller profits recorded by Japanese companies, rather than differences in their capital makeup. As you said, I think increasing profits would be the best course of action for improving ROE.
Tannowa:
In terms of being evaluated by global equity markets, I agree that ROE is an important benchmark.
Kanai:
ROE is indeed a key indicator. Absolute profit levels are also important, but even more important, in my opinion, is improving ROE. I think that attention will focus on improvement in ROE, as it progresses from its current 4.5% to 6% or 8%, if such a path seems likely.

What can we expect of the Mitsui Chemicals Group?

Kanai:
Even among Japanese companies, the Mitsui Chemicals Group has best-in-class technologies in polymers, catalysts, precision synthesis and downstream fields. I view the Mitsui Chemicals Group as one of the few leading chemicals makers in the world. Unfortunately, on a historical basis, the Group’s technologies and advantages have not always translated into strong earnings.
Nevertheless, over the past 18 months, more specifically since February 2014, I think that the entire Mitsui Chemicals Group has really come together as one to advance restructuring and move forward under the 2014 Mid-Term Business Plan. Restructuring benefits and top-line growth in the targeted business domains have led to improvement in earnings. From the perspective of a global investor, the Mitsui Chemicals Group’s story for stable earnings and ¥100 billion in operating income looks like a viable one.
While it is a fact that there are still issues that need to be addressed, I look forward to seeing the Mitsui Chemicals Group increase profits and quickly raise ROE to the level demanded by equity markets. I believe this is a distinct possibility given the human resources available to the Mitsui Chemicals Group.
I wish the best for the Mitsui Chemicals Group as it unswervingly pursues these objectives under the leadership of top management.