Feature I: New Medium-term Management Plan

• Thorough Enhancement of Our Earning Power
• Management Base That Supports Earning Power

Thorough Enhancement of Our Earning Power

Under BBBO2014 we will take steps to realize the thorough enhancement of our earning power, which was an issue under ƒ(x), our previous medium-term management plan. Our strategies for achieving this are “Pursue and combine our strengths and capabilities” and “Stimulate the metabolism of our business portfolio from a medium-to-long-term perspective.”

(1) Pursue and combine our strengths and capabilities

Society’s needs are diversifying and becoming more complex, and industrial and regional boundaries are becoming easier to cross. To enhance our earning power in this environment, we must mobilize various types of know-how and capabilities across the boundaries of business units and regional organizations to create new value and meet society’s needs.

BBBO2014 will leverage the full power of our integrated corporate strength by having each business unit and regional organization thoroughly analyze and pursue its strengths and capabilities, combine them across organizational boundaries, and share strategies and business models. But bringing out our integrated corporate strength internally is not enough. Collaborating with external partners is also critical to strengthening our business. We will strive to bolster strategic partnerships by expanding the scope and facets of our ties with existing partners, as well as cultivating new partners with whom we can share a common philosophy and strategies. In this way, we will also leverage our integrated corporate strength externally with strategic partners.

(2) Stimulate the metabolism of our business portfolio from a medium-to-long-term perspective

To take profit growth to the next level, we must raise the organization’s overall profitability while identifying the role of each of our various businesses. Our key focus here is how to effectively use limited corporate resources—personnel and funds.

BBBO2014 aims to thoroughly enhance our earning power by stepping up the metabolism of our business portfolio on the four fronts described below, which are critical to corporate growth.

• First, we have designated businesses that are currently our earnings pillars, and where we have strengths and know-how, as “primary fields.” We will prioritize allocation of corporate resources to these areas so that they remain earnings pillars in the future.
• Also, we have identified business fields and regions where we can leverage our strengths and capabilities, and where there is great medium-to-long-term growth potential, designating them as areas for “strategic industrial focus” and “strategic regional focus” and strategically allocating corporate resources to them. We will also promote development from a medium-to-long-term perspective at the ­company-wide level, such as by forming ­company-wide, cross-organizational project teams.
• In addition, we will concentrate personnel and know-how in major projects, including upstream resource businesses in which we have recently invested. Here we will focus on value enhancement and steady completion of projects.
• Meanwhile, we will continue to reduce and divest assets while controlling our balance sheet by downsizing or withdrawing from businesses with poor earnings and growth potential and by pursuing strategic tie-ups with strong partners. With this, we will redirect financial and human resources to bolstering and developing operations in primary fields, strategic industrial and regional focus areas, and existing major projects.

Plan for New Investment and Loans

During the two years of BBBO2014, we plan to make new investment and loans totaling ¥750 billion—a record high.
We have earmarked ¥650 billion of this investment plan for the primary fields noted above and ¥100 billion for the areas of strategic industrial focus and strategic regional focus.
Under BBBO2014, we will set clear priorities for use of this budget in line with the primary fields in each business unit, making investments to build up our portfolio of prime projects.
At the same time, we will be flexible in implementation. We will continuously monitor each business unit’s progress and if there are business units making slow headway, we will take measures like reallocating funds to other business units that are progressing more rapidly.

Primary Fields

• In the Mineral Resources, Energy, Chemical & Electronics Business Unit, we will invest in tight oil development in North America, the Sierra Gorda copper mine in Chile, and other projects under development, as well as expansion of established projects.
• In non-resource fields, we will focus investment on the Metal Products Business Unit’s North American tubular products business, expansion of the Transportation & Construction Systems Business Unit’s automotive value chain; the Environment & Infrastructure Business Unit’s overseas independent power producer (IPP) business; and the Media, Network, Lifestyle Related Goods & Services Business Unit’s real estate operations and overseas media business development. In this way we will maintain the balanced portfolio for which we are known.

Strategic Industrial Focus

• Unconventional energy-related businesses

  We aim to develop LNG exports and create value chains involving petrochemical products building on our shale gas and tight oil development business in North America.
  Besides this, we will put our integrated corporate strengths into play to pursue the abundant business opportunities in fields related to the unconventional energy business, including tubular products and infrastructure.

• Retail business in Asia

  We will work to grow our retail business earnings base by tapping into the robust consumption demand in other Asian nations, drawing on the strengths and functions that we have amassed through our Japan-centered retail operations, along with the experience, know-how, and personal networks that we have built up in Asia, and deploying successful business models from Japan to gain a foothold for development of our Asian business.

• Food business

  In the context of medium-to-long-term growth in the global population and in demand for food, we will identify global supply and demand imbalances, and focus mainly on advancing food operations overseas.

For information on unconventional energy-related businesses and food operations, please refer to Feature II.

Strategic Regional Focus

• India, Brazil, Myanmar, Turkey, Sub-Saharan Africa (six countries)

  In India and Brazil, we will take our operations to the next level by focusing initiatives on areas where we can exert our strengths. In Myanmar, Turkey, and six sub-Saharan African countries (South Africa, Nigeria, Angola, Tanzania, ­Mozambique, and Ghana), we will first work to ascertain where business opportunities lie and where to focus business development.

Asset Divestiture & Reduction Plan

BBBO2014 targets asset divestitures and reductions amounting to ¥770 billion, on par with new investment and loans totaling ¥750 billion. In addition to shrinking or exiting from businesses with poor earnings and growth potential, we will reduce assets while controlling the balance sheet through strategic alliances with strong partners inviting them to take shares in our existing businesses.

Management Base That Supports Earning Power

To thoroughly enhance our earning power, new investment and loans and business divestitures are not enough; we must also strengthen the management base that supports our earning power. Under BBBO2014, we will further reinforce the management base supporting front-line operations. These initiatives will be taken on four key fronts: (1) strengthen management abilities on business investment; (2) strengthen foundations of overseas regional organizations; (3) maintain financial soundness; and (4) develop and deploy the human resources required to achieve our vision.

Maintaining Financial Soundness

From the perspective of stable management, our basic management policy is to keep risk-adjusted assets, which are our maximum possible losses, within our core risk buffer^*1, which is ­shareholders’ equity.

Click here to see “Risk-adjusted Return Management”

In addition, we manage our balance sheet from the perspectives of ensuring liquidity, maintaining an appropriate debt-equity ratio (DER), and controlling the scale of total assets, while giving consideration to current financial market conditions. In this way, we have conducted operations without excessive dependence on interest-bearing liabilities.

As of the end of fiscal 2012 (March 31, 2013), we had retained high liquidity, with cash and deposits of ¥931.1 billion against total assets of ¥7,832.8 billion. Shareholders’ equity had increased to ¥2,052.8 billion, so that the shareholders’ equity ratio was 26.2%, and the net DER improved to 1.4.

^*1 Core Risk Buffer = Common stock + Retained earnings + Foreign currency translation adjustments - Treasury stock, at cost

 

Enhancing Basic Profit Cash Flow^*2 Monitoring and Boosting the Core Risk Buffer

Under BBBO2014, we intend to aggressively invest in augmenting our earning power while remaining
financially sound.

To make new investment and loans while managing total assets at an appropriate level and steering clear of overexposure to interest-bearing liabilities, as we have done so far, we will need to maintain the financial capacity for investment. With basic profit cash flow as a new benchmark under BBBO2014, we will secure this financial capacity by recouping cash via dividends from associated companies, as well as working to recover cash by replacing assets and generating value from existing projects.

Also, while upholding our basic policy of keeping risk-adjusted assets within the core risk buffer, we will secure financial capacity for investment by augmenting our core risk buffer and building a more solid financial base; for this purpose we will see to it that our business investments produce profits matching their business plans.