Message from the Chief Financial Officer

April 24, 2023

Using cash generated from portfolio and balance sheet management
to create new value and accelerate our growth

Shinjiro Akieda
Senior Executive Officer
Kirin Holdings Company, Limited

2022-2024 Medium-Term Business Plan (2022-2024 MTBP)
Steady progression toward achieving our goals for the final year of the business plan

──Please briefly explain the 2022-2024 Medium-Term Business Plan.

The 2022-2024 MTBP is the second management plan aimed at achieving the Kirin Group Vision 2027 (KV2027) long-term management plan. Our goal is to expand corporate value by scaling up the Health Science business, developing its revenue base, and utilizing a business portfolio that encompasses the three domains of Food & Beverages, Pharmaceuticals, and Health Science.

──What are the financial and non-financial Key Performance Indicators (KPI) for the 2022-2024 MTBP?

Our financial KPIs are a ROIC of 10% or more and normalized EPS CAGR of 11% or more (compared to FY2021). Our guidance targets a normalized operating profit CAGR of at least 13% (compared to FY2021).

For non-financial KPIs, we have established eight indicators that are directly related to economic value in the three categories of “Environment,” “Health,” and “Employees.”

  • Figure: the financial and non-financial Key Performance Indicators (KPI) for the 2022-2024 MTBP

  • Figure: the financial and non-financial Key Performance Indicators (KPI) for the 2022-2024 MTBP

──Looking back at FY2022, please tell us about the progress of the 2022-2024 MTBP.

Our ROIC improved by 0.9% to 8.5% from the previous year's 7.6%, mainly attributed to an increase in consolidated normalized operating profit. Normalized EPS increased by 15 yen from the previous year to a record high of 171 yen, driven by the increase in consolidated normalized operating profit and the effects of share buyback, among others. Despite operating in a challenging business environment, we are proud to have delivered solid results.

We are generally making steady progress toward our goals for the end of 2024, the final year of the MTBP, including the guidance item of normalized operating profit CAGR and non-financial targets. We will continue striving to improve corporate value and achieve both financial and non-financial targets as a group.

Business Portfolio
Responding to changes in the business environment while continuing to generate cash and investing in growth

──What is your philosophy with regard to the medium- to long-term business portfolio?

We are always striving to achieve the optimal business portfolio to achieve KV2027. Our policy is to utilize the stable cash flow from our existing Food & Beverages domain to fund growth investments in the Health Science and overseas craft beer businesses. In the Pharmaceuticals domain, we will continue to invest in growth opportunities within the scope of our free cash flow.

The Board of Directors convenes at least twice a year to discuss our business portfolio and cash allocations. Our investments in the overseas craft beer business and the sale of China Resources Kirin Beverages, which was an equity method affiliate, were among the outcomes of these discussions. Our current business portfolio is largely centered around our core businesses, so for the time being, we will prioritize increasing our cash generation by improving the efficiency and growth potential of each business.

At the same time, the Board will continue to discuss growth investment in the Health Science domain and the overseas craft beer business.

──What are current challenges in each business domain?

Food & Beverages domain
Many of our businesses in the Food & Beverages domain operate primarily in mature markets, which are anticipated to contract in the future. To address this, we must prioritize premiumizing our products and improving operational efficiency. Our focus will be on expanding our most profitable products and services while simultaneously optimizing our sales organization and reducing costs through SCM (Supply Chain Management) reforms that utilize ICT (information and communication technology) and other methods to ensure we meet our normalized operating profit targets.

Pharmaceuticals domain
Our challenges are to improve production and sales infrastructure for our global strategic products and to expand our next-generation pipeline. While we will continue to steadily expand our global strategic product offerings, including establishing an independent sales system in North America, we will also prioritize the development and strategic investments in enhancing our next-generation strategic products, which will be the key driver of future growth.

Health Science domain
Our challenges are to expand the scale of our business and improve profitability. To achieve this, we will focus on sales growth of Lactococcus lactis strain Plasma (LC-Plasma) and organic growth of Kyowa Hakko Bio’s specialty ingredients, such as Citicoline*1 and human milk oligosaccharides (HMOs*2), which are expected to secure high profitability. Additionally, we will collaborate with FANCL Corporation and pursue M&A opportunities to convert all businesses in the Health Science domain into highly profitable ventures.

  1. An ingredient found in the body that maintains the cell membranes of the brain and nerve cells, and has been used for many years around the world in medicines for brain diseases and health foods that support the improvement of cognitive functions. In Japan, it is currently classified as a pharmaceutical product.
  2. A generic term for oligosaccharides contained in breast milk. More than 200 kinds are contained in breast milk, and the results of research contributing to immunity and brain function, among others, have been reported.

Balance Sheet Management
Using GCMS to improve increase capital management efficiency while streamlining inventory

──Please tell us about initiatives to improve the balance sheet.

To achieve a ROIC of 10%, we plan to conduct asset reduction of more than 100 billion yen during the 2022-2024 MTBP. In 2022, we expanded our Global Cash Management System (GCMS) to more Group companies. This system has enabled us to consolidate and transfer funds to and from overseas subsidiaries in a timely manner, resulting in a reduction of cash balances by approximately 40 billion yen.

With regard to the Cash Conversion Cycle (CCC), we were able to achieve working capital improvements of 10 billion yen by introducing SAP and improving our processes. Moving forward, we plan to continue reducing CCC by promoting further process improvement through SAP and DX (digital transformation), improving demand forecasting accuracy, and reducing inventory volume. Furthermore, we reduced cross-shareholdings to 4.5% of total capital in 2022, which attains the 2022-2024 MTBP target of less than 5%. In addition to growing our businesses, we will continue actively working to improve our balance sheet.

──How is cash allocation coming along for the 2022-2024 MTBP?

Despite the slightly weakened operating cash flow caused by the prolonged spread of COVID-19 and rising global costs, our overall cash allocation policy remains unchanged as we strive to generate a figure as close to 700 billion yen*3 as possible.

We are proceeding smoothly with cash generation of 100 billion yen through asset reduction, and in 2022, we used the proceeds from selling China Resources Kirin Beverages to buy back 50 billion yen of our own shares and to invest in our overseas craft beer business through M&A. Our goal is to achieve an ROIC of 10% or more and a normalized EPS CAGR of 11% or more by 2024, as outlined in the 2022-2024 MTBP, by continuing disciplined capital investment while returning profits to shareholders through stable dividends.

  1. We expect cash flows from operating activities of approximately ¥700.0 billion in total during the three-year period of the 2022–2024 MTBP.

──What is the status of investments in intangible assets?

To create corporate value, it is also essential to invest in intangible assets that will serve as the foundation for innovation. The Kirin Group focuses on (1) Brand development in the Food & Beverages domain, (2) R&D in the Pharmaceuticals domain, (3) ICT investments for utilization of digital technologies, and (4) Human capital investment.

In response to the COVID-19 pandemic and soaring raw material and fuel costs, we reduced brand investments, focused on advertising expenses, in 2022. For 2023, we are implementing price revisions and cost reductions in all our businesses to secure our earnings base, and we will step up investments to nurture our brands over the medium to long term.

In R&D, we will invest in expanding our future pipeline in the Pharmaceuticals domain while increasing efforts to create and expand highly profitable specialty ingredients in the Health Science field.

In terms of investments in ICT, in addition to our efforts to streamline business processes, we will intensify our efforts to create value through the use of digital ICT for the future.

For human capital, we will achieve sustainable growth and value improvement through the development of specialized and diverse human resources, as well as enhancing our organizational capabilities. To accomplish this, we will expand our DX training programs and introduce human capital management for each function.

──Would you tell us your shareholder returns policy and thoughts on the current share price level?

The Kirin Group has always prioritized shareholder return. In 2022, based on our basic policy, we were able to maintain a dividend payment ratio of normalized EPS at 40% or more and increase the dividend by 4 yen to 69 yen. Going forward, our goal is to distribute our proceeds to shareholders stably and consistently. However, to ensure stable dividends in the long run, we believe that investing in growth is important. Therefore, we will flexibly review share buybacks, while considering the balance between generated cash and growth investment.

We recognize that the current share price level doesn’t meet our investors’ expectations. Therefore, we will focus on achieving growth and improving profitability in each business area while reviewing our business portfolio to achieve KV2027. In particular, we aim to attain a share price level based on an appropriate valuation by ensuring that stakeholders understand the Kirin Group’s future potential through the early expansion and profitability of our Health Science domain.

Conclusion
Accelerating our growth toward KV2027

──Finally, please give us a message for our stakeholders.

To achieve sustainable growth for the Kirin Group, each operating company must independently enhance its organizational capabilities and implement the PDCA cycle to achieve short-term goals, while executing initiatives to create value for the future. We aim to work closely with our operating companies to identify any issues and implement specific solutions by engaging in dialogue from the unique perspective of a holding company. Additionally, we will contribute to maximizing corporate value by integrating management and financial strategies, continually reviewing future cash flows for each business, and optimizing the entire Group’s business portfolio through ongoing management considerations.