Message from the Chief Financial Officer
We will work to enhance corporate value by implementing major reforms to our profitability structure while minimizing the impact of the COVID-19 pandemic.
Noriya Yokota
Director of the Board,
Senior Executive Officer & CFO
Progress under the medium-term business plan:
Sustained efforts on strategic priorities
toward the realization of KV2027
Q1. How would you sum up progress in fiscal 2020 and fiscal 2021, which is the final year of the 2019 medium-term business plan?
As stated in the financial forecasts released in February 2021, we expect the COVID-19 pandemic to have a significant negative impact on our financial KPIs for fiscal 2021. While the effects of COVID-19 are likely to be smaller than in fiscal 2020, the pandemic will continue to have an impact, especially in Japan, and we cannot afford to be complacent.
At the same time, the COVID-19 crisis is hastening the environmental changes anticipated in our long-term management vision, KV2027. Kirin Group is focusing on the realignment of the beer and spirit business toward the off-premise channel, while maximizing the value of global strategic products in the pharmaceutical business. Another priority is the start-up and development of the Health Science business in response to unmet health needs. We have pursued all of these strategies in anticipation of medium- to long-term changes in the external environment. There has been no change in the level of the consolidated normalized operating profit target in KV2027.
However, we recognize that we will need to adjust the trajectory of our growth curve in the period to fiscal 2027. To achieve that, we aim to strengthen our brands in the Food & Beverage domain, develop new businesses that reflect market changes, and step up investment initiatives designed to strengthen organizational capabilities for innovation, including R&D and information technology. Assuming that the COVID-19 pandemic can be brought under control, we expect our profit to recover to the fiscal 2019 level in fiscal 2022. We will accelerate our strategies toward the realization of KV2027, while also implementing comprehensive cost structure reforms.
Q2. As CFO, what is your view of the impact of the COVID-19 crisis on the consolidated financial results for fiscal 2020, and how have you responded to this unprecedented situation?
Both sales and profit declined year on year in fiscal 2020, with revenue reaching 1,849.5 billion yen and normalized operating profit 162.1 billion yen. The impact of the COVID-19 pandemic was relatively small in the Pharmaceuticals domain, but we estimate that COVID-19 reduced normalized operating profit, especially from our domestic and overseas Food & Beverage domain, by around 66.0 billion yen.
As the COVID-19 crisis began to have a significant impact in March 2020, Kirin Group made course adjustments, including the reassessment of our investment capacity, further tightening of the focus of our investment priorities, and the reduction of non-urgent investment. Our business companies implemented urgent cost control measures that yielded savings of around 30.0 billion yen. These efforts focused primarily on our Food & Beverage operations in Japan and overseas, which were severely impacted by COVID-19.
COVID-19 countermeasures in fiscal 2020
Business portfolio:
Completion of restructuring of low-profit businesses
Business portfolio optimization an ongoing priority
Q3. What are your thoughts on Kirin’s business portfolio?
Some shareholders and investors expressed doubts about the strategy set down in KV2027 concerning our unique business portfolio, which consists of Food & Beverages, Pharmaceuticals, and Health Science. However, we can now see that the environmental changes anticipated in KV2027 are occurring earlier due to the COVID-19 pandemic, and we are very confident that our strategy was appropriate.
Our results for fiscal 2020 show that while the Food & Beverages domain was significantly impacted by COVID-19, we achieved sustained growth in the Pharmaceuticals domain. There were also clear signs of business opportunities in the Health Science domain with the emergence of unmet needs in key health-related areas. We can respond to those needs using the fermentation and biotechnology knowledge that we have built in our existing business areas. I will continue to make business portfolio reform my most important priority as CFO.
Q4. Capital market insiders have expressed concern about a conglomerate discount. What is your view as CFO?
During the COVID-19 crisis, there has been increasing interest in our non-beer business areas, and I believe that capital markets now have a better understanding of our strategies. However, the markets are still not convinced of the achievability of our strategies, and we recognize the need to respond to these concerns by creating synergies and building a track record of growth in the Pharmaceuticals and Health Science domains. Furthermore, because we only hold 53.8% of shares in Kyowa Kirin, which is active in the Pharmaceuticals domain, not all of that company’s growth will be captured within Kirin Group. We are also aware of the issues concerning parent-child listings. We will consider our future direction while working to maximize the growth of the pharmaceutical business and group-level synergies.
In fiscal 2019 we acquired a 33% stake in FANCL Corporation, which is part of the Health Science domain. In fiscal 2020 we implemented channel-related initiatives, including the sale of Kirin Group products on the FANCL website. We will continue to focus on synergy creation through product development and the improvement of functional efficiency.
Q5. What progress have you made toward the restructuring of low-profit businesses?
In January 2021, we completed the sale of our entire shareholding in Lion Dairy & Drinks, which was one of the businesses classified as low-profit under the previous medium-term business plan. Going forward, we aim to achieve growth by concentrating Lion’s resources toward alcoholic beverages and high-added value beverages. We believe that this sale represents significant progress toward the goal of restructuring and revitalizing low-profit businesses. We will continue to monitor the profitability and efficiency of our businesses, and to consider and implement the measures needed to achieve this.
Cash allocation:
Emerging impact of COVID-19
Emphasis on a balance between growth and financial soundness
Q6. What is your approach to cash allocations?
The cash inflows projected during the three-year period of the 2019 medium-term business plan included cash flows of 700.0 billion yen from operating activities. We expect that the impact of COVID-19 will cause the actual figure to fall short of that amount by around 170.0-180.0 billion yen. Progress on asset sales exceeded our goals, including the achievement of the target for the reduction of cross shareholdings in the second year of the plan, despite the fact that the sale of Lion Dairy & Drinks, which we planned to complete in fiscal 2019, was delayed until fiscal 2021.
On the cash outflow side, we have tightened our selection criteria for capital expenditure and taken a disciplined approach with the aim of maintaining and improving capital efficiency across the entire group. We will give priority to dividends in accordance with the policy defined in the medium-term business plan, but we will basically postpone large-scale M&A and other types of growth investment because of the anticipated impact of the COVID-19 pandemic.
Our goal for financial discipline is to achieve a positive free cash flow after dividends in fiscal 2021, including the cash inflow from the sale of Lion Dairy & Drinks. We will continue to maintain a balance between growth and financial soundness by effectively controlling cash outflows according to cash inflows.
Cash inflows and outflows (Billions of yen)
Q7. What is your thinking on investment targeted toward the strengthening of organizational capabilities for innovation in such areas as branding, R&D, digitalization, HR, and organization?
We see the enhancement of our organizational capabilities for innovation through investment in intangible assets as an essential requirement for the realization of KV2027.
We are already seeing the benefits of continual investment in the areas of marketing and R&D. However, I believe that we need to accelerate our investment in digitalization, HR, and organizational capabilities. We are making progress on initiatives in the area of digitalization, including the introduction of an enterprise system that will form our infrastructure for the achievement of digital transformation (DX). Information technology infrastructure will also play a role in efforts relating to HR and organizational capabilities, including the KIRIN Work Style 3.0 “Job Satisfaction” reform that we launched in fiscal 2020 to boost employee motivation. In addition, we will continue to recruit the human resources needed to accelerate our initiatives, especially in the Health Science domain and the digitalization area, and to build an organization capable of realizing the potential of diversity.
Q8. How would you assess the state of the balance sheet?
In fiscal 2020, we responded to an increasingly uncertain outlook by prioritizing measures to secure cash on hand, and the resulting increase in interest-bearing debt caused the gross debt-to-equity ratio to rise to 0.77 times. At the same time, we had significant success in our efforts to secure profits through initiatives that included the sale of cross-shareholdings and Lion Dairy & Drinks, as well as comprehensive cost control measures. As a result, we have been able to fund volatile assets, including growth investment, within the scope of capital, and to maintain those assets at a healthy level from a balance sheet perspective. There will be a continuing need for investment to support medium- to long-term growth. We will continue to maintain investment discipline while ensuring that balance sheet soundness is reflected in our decision-making.
Q9. What is your thinking on shareholder returns?
Our cash flow plan has been significantly impacted by the COVID-19 pandemic. However, we will continue to maintain stable dividends in line with our existing policy. Under the 2019 medium-term business plan, we have raised our consolidated dividend payout ratio to “40% of normalized EPS or higher,” and in fiscal 2020 we increased the dividend by one yen over the previous year’s level to 65 yen, as stated in our initial plan.
Kirin has never reduced its dividend since it was listed on the stock exchange, and in fiscal 2021 we again plan to pay a dividend of 65 yen, despite the lingering effects of the COVID-19 pandemic, especially in the Food & Beverage domain. I believe that by consistently paying stable dividends we are responding to the wishes of our shareholders, and we will continue to provide appropriate returns.
In addition, we bought back shares worth 100.0 billion yen between fiscal 2019 and fiscal 2020. We will make decisions on future buy-back programs while monitoring the recovery of operating cash flows.
A message to stakeholders:
Our priority in fiscal 2020 was crisis response.
We see fiscal 2021 as year in which we will return to a growth track.
Q10. Finally, what message would you like to share?
In fiscal 2020, we focused on responding to the crisis triggered by the spread of the COVID-19 pandemic. In fiscal 2021 we will take our first steps toward emergence from a crisis management situation, and the achievement of a recovery to our pre-COVID profit level. It will be a pivotal year for our efforts to return to a growth path and achieve the KV2027 goals. As CFO, I will work to ensure that resources are allocated in ways that lead to sustainable growth, while taking both short-term and medium- to long-term perspectives into consideration.