Further improving corporate value through active investment and dialogue
Executive Offcer in Charge of Finance, CFO
A year of selection and focus in response to changes
From a financial perspective, various factors changed significantly in FY2022, including increasing material costs, geopolitical risks, rapid economic recovery after the COVID-19 pandemic, progressive inflation, and rising interest rates. Not only for the Fuji Seal Group, but also for many companies around the world, FY2022 was probably the most difficult year to steer a business. However, in a situation where we had to take action in many ways, it was also a year in which FSG as a whole was able to take new unprecedented actions. One example is the expansion of our relationships with our business partners. By creating new relationships, we were able to ensure a secure supply. I believe that this will lead to more effective purchasing activities in the future.
Our products are resistant to economic slowdown due to their steady demand, but in FY2022, progressive inflation caused changes in customer demand, including a shift to private brands, which affected our profitability. However, we were able to respond to these changes and proceed with selection and focus, which should lead to growth from FY2023 onward. At one point, President Okazaki and other members of the management team and I jokingly remarked that "too much change makes us insensitive to change." This is actually a very important perspective. I believe that it is essential to remain sensitive to changes and issues in order to survive in this era.
Performance of each business with different results
The spouted pouch business performed extremely well. Although previously the main demand was for refill pouches, there was increasing demand for pouches that can be used as containers. One of the reasons is that these pouches use less plastic than conventional containers and can contribute to the realization of a circular society. In addition, the fact that they became available in various sizes from small to large helped expand their range of applications, which led to increased sales. In the future, we would like to solve the profitability issues by building a business model that helps customers invest in filling machines.
On the other hand, the shrink sleeve label business and the pressure sensitive label business, which are our primary businesses, continued to struggle. Their profitability declined due to soaring material costs and other factors. Although we made great internal efforts and with their understanding passed on costs to customers, it is undeniable that our response time was slow compared to our foreign-affiliated competitors. However, considering that we are currently at a low point, we are positive about the future. Environmental solutions are in great demand. Our RecShrinkTM labels, developed in the U.S., which can be recycled together with PET bottles into PET bottles, have been well received by many customers and have been increasingly adopted. These efforts of ours have led to high evaluation from external organizations such as EcoVadis and the CDP, and we have received comments from customers saying that they appreciate our efforts because it makes it easier for them to choose us as their suppliers.
In the machinery business, although orders were strong, sales were almost flat. The reasons for this were that the lead time for materials and other items was extended under the difficult environment, and that the introduction of machines was postponed due to changes in the timing of customers'investments. We believe that we will be able to continue sales at favorable levels once the situation returns to normal. We are currently working on discovering new projects while taking advantage of our strength of "system sales," in which labels and machines are sold together.
Taking the next steps in Europe and the ASEAN regions
In terms of performance in each region, Europe and ASEAN showed challenging results. First, as countermeasures for Europe, we implemented structural reforms aimed at recovering profitability, and reviewed our fixed costs. Furthermore, we must focus on delivering solutions that match the market needs to achieve growth and succeed over the competition. The U.S. is a large lot market with 330 million people and one language. Europe, on the other hand, has more than 400 million people and is larger in scale, but there are 13 major countries alone, with a wide variety of languages and consumer tastes, resulting in smaller lot sizes. How can we increase profitability in such a difficult market? We are working on promoting discussions and initiatives from various angles, including machinery and equipment.
As for the ASEAN region, I think we are still at the stage of steadily increasing sales. However, compared to other regions, its population and GDP are consistently increasing, and there is no doubt that its growth potential is high. In the future, we would like to aim for movement that can secure profitability as well as sales.
A solid financial base – the challenge is strengthening earning power
As stated in the "Basic Capital Policy" FSG aims to improve its corporate value by making strategic investment for sustainable growth, increasing capital efficiency, and striving to further enhance shareholder returns. To this end, we are investing aggressively in technological development (investment in intellectual property), human resource development (investment in human capital), capital expenditure, M&A, and other activities. Moreover, in order to build a stable financial base, we aim to bring our ROE (return on equity) closer to our target of 10%. In terms of shareholder returns, we would like to improve the total return on stocks through higher stock prices as well as direct profit returns.
As for financial conditions, sales are mostly on track and growing steadily as indicated in the Medium-Term Management Plan, however, earnings have declined slightly since peaking in FY2018. On the other hand, it can be said that our financial base is solid because we always secure funds that exceed our borrowings. The shareholders' equity to total assets has been moderately increasing, from 63% in FY2018 to 67% in FY2021, and I do not think this trend will change for the time being. Although shareholders' equity per share was approximately 1,680 yen in FY2018, they are now approximately 2,200 yen, showing an upward trend. The issue is, after all, profitability or earning power. How do we find a profitable market? Or to what extent can we select and concentrate on existing products? We must work hard on these things, although it is not an easy task given the relationships that we have built so far and the thoughts of each person. In addition, it is important to further enhance the cash conversion cycle (CCC). The finance and sales departments must work together to promote steady day-to-day activities like the collection of overdue receivables will also lead to "earning power."
Aggressive investment in equipment and human resources
In my view, the role of finance is to make preparations for active investment. In order to fulfill this mission, it is necessary to carefully assess whether it is worth the money.
For instance, since demand for spouted pouches is expected to continue to increase in the future, we have purchased land in Yamagata Prefecture to build a new factory in order to improve our production capacity. We also promote investment in the pharmaceutical business, which has high growth potential and is important to society. We also manufacture medical equipment in Italy. Since its demand has been growing in recent years, we have purchased land adjacent to our current factory. We are currently considering what kind of factory to build there and how much production capacity to install, with the aim of starting construction in 2023. In Europe, for which we have completed structural reforms, I think FY2023 will be a year in which we will make further investment for growth in line with new markets.
We are also actively investing in human capital to achieve sustainable growth, and one of the ways we are doing this is through a partnership with a business school in Belgium. Our goal is to develop high-potentials to have management skills. We would like to create a follow-up system so that each participant can apply what they have learned in the field and further improve themselves, rather than just making a one-time investment.
Emphasis on dialogue with stakeholders
Unfortunately, we are not satisfied with the stock price trend in FY2022. When viewed on a yearly basis, the stock price dropped from around 1,700 yen to around 1,500 yen. We have to make a solid investment for growth to make our company attractive, and I believe we can do so. Please look forward to our growth in the future.
As a new initiative, we are focusing on two-way communication with investors. We explain our growth strategy to investors, while the investors can ask questions and give us their encouragement. We are also involved in various activities targeting a wider range of stakeholders. Last year, on the occasion of our 125th anniversary, we started a visiting class program in areas where our group bases are located. In this program, employees go to schools as lecturers and offer classes to explain to children the role of packaging, and that packages, if processed properly, can be used as resources. The program provides a good opportunity to share the importance of recycling and deepen understanding of FSG's initiatives. Moreover, eco-bags, made from label waste generated in the manufacturing process and labels collected from the market, were presented to the children to help them experience resource recycling. This initiative was born from an employee's idea, and was implemented not only in Japan but also in the U.S., the Netherlands, Thailand, and other countries. Since it has been very well received, we plan to continue it in the future.
Active dissemination of information for gaining understanding
regard, we have met expectations. To reiterate, we will continue to aim for a total return by promoting growth through active investment, and raising the stock price to pay steady dividends.
We believe it is very important to have our stakeholders understand not only our dividend distribution but also our business and strategies. We firmly believe that this is a market that will continue to expand and that we are developing technologies that will enable this growth, and we hope that you will continue to watch over us through close communication.