For us, a Great Company is one that can both pursue profit and contribute to social development. Although this by itself is something that any company can deliver, we have spelled out a vision unique to Kansai Paint with the inclusion of two additional aspects: (1) We are paint professionals and (2) our global presence. Operating in the wide-ranging industry of paint and coatings, we can utilize our paint technologies to contribute to every imaginable opportunity. We can both pursue profit and contribute to social development by highlighting the regions and businesses that will enable us to maximize individual results. Inthe past, we did not have a deep understanding of our strengths, which lead to difficulttimes where just expanding became our goal. To overcome this difficulty, we held discussions internally and with various stakeholders such as shareholders and the Board of Directors, to clearly define who we are and what we want to achieve. At the same time, by solving numerous issues such as reviewing the company’s assets and strengthening overseas governance, we were able to make a strong start to the 17th Medium-term Management Plan (“17th MTP”), enabling us to focus on becoming a GreatCompany. The 17th MTP is positioned as the starting point for the company to create a cycle of sustainable growth. Due to the management cycle from the 16th Medium-term Management Plan (“16th MTP”) we have reached the stage where we have increased profitability and generate strong cash flow, which allows us to reinvest in promising segments and create a path towards further growth. Profit and fairness are at the core of these activities, and I believe that the right path to becoming a Great Company is to transform ourselves by taking bold steps to confront the challenges ahead.
Changes in the External Environment
The COVID-19 pandemic, shortage of semiconductors, soaring raw material costs, supplychain disruptions, extreme weather, as well as various incidents and accidents, mean we are experiencing unprecedented challenges. In addition, with the Ukraine Russia crisis andthe energy supply issue, we are having to deal with a very harsh business environment. the survival of a company depends on how it deals with these changes in the external environment. For Kansai Paint, strategies have been formulated and are being implemented on the basis that such changes will continue to happen. No one knows what hanges will occur in the external environment at any given time. By becoming a company that can face and adapt to the changes, we can look on those changes as opportunities for growth. On the other hand, for companies that cannot adjust to these changes, business will be difficult.
With the progress of globalization and increase in world population leading to climate change and rising geopolitical risks, we believe that it is our mission to pursue and contribute to the generation of sustainable society. Companies are responsible for achieving this important mission and have the opportunity to make contributions in scope that are beyond the reach of individuals.
The Value of Paint and Understanding the Issues
coatings industry naturally contributes to sustainability by achieving low emissions of CO2 during the manufacturing process, in addition to extending the durability of objects and surfaces. Even before sustainability management became an issue, we were developing coatings that emit less CO2 when applied and promoting environmentally friendly coatings such as waterborne coatings and powder coatings in collaboration with customers. However, humankind is now facing environmental difficulties that we had never thought of and this has prompted us to review the nature of social development. The chemical industry, which is derived from mineral resources such as petroleum, requires discontinuouschange in various fields such as product design, procurement, manufacturing, distribution,and sales.
We believe that it is both a challenge and an opportunity to review and adjust our value chain to social demands and create new value.
Kansai Paint has updated its Materiality to address these issues. We will review and organize the value creation process to connect our business practices to our long-term goals.
The Significance of the 17th Medium-term Management Plan
The 17th MTP, which began in April 2022, has been positioned as the first three-year period for us to tackle our material issues. These three years will be extremely important for us, as they mark the start of a transformation that will strengthen the areas where we can contribute to society and maximize profits. Thanks to the 16th MTP, we made significant progress in reviewing our unprofitable assets, establishing a foundation for targeting our strengths in business-to-business (BtoB) operations, as well as in the regions of Europe and India. By divesting our African business (announced on June 1, 2022) to the company that we consider to be the best owner, AkzoNobel N.V., we have taken a major step forward in proactively changing our portfolio. In addition to continuing to strengthen the earning power that we established over the past three years, we will further advance structural reforms to boost profitability. At the same time, we will make maximum use of funds raised through the sale of real estate, cutting back cross-shareholdings and reducing assets, to actively investin promising growth areas. This investment, in addition to M&A and other business investment, will be used to strengthen our foundation. In this way, from a global perspective, we can become a leading company and revamp our supply chains to make them more sustainable.
The 17th MTP clearly conceptualizes the ideal state of Kansai Paint and promotes initiatives to realize this vision, something that is very different from previous medium-term management plans,which focused solely on operational aspects.
Growth Strategy and Business Portfolio
Business growth is the source of all our activities. With the aim of reaching record highs in all metrics, targets have been set for the final year of the 17th MTP to include net sales of 500 billion yen, an earnings before interest, taxes, depreciation, and amortization (EBITDA) margin of 17%, and an adjusted return on equity (ROE) of 13%. We will further refine our strengths in automotive coatings, which is the backbone of the Group, while developing the automotive parts and electric vehicle-related markets where there is scope for expansion. In our fastgrowing International Business Unit, we will focus on the industrial segment as well as European and Indian operations to capitalize on strong market growth. In our Japan Business Unit, we will push through with structural reforms to make the business unit a source of growth investment. In both business units we will strengthen our portfolio by proceeding with business divesture and making acquisitions based on a foundation of growth through our own efforts.
Human Resources Strategy
All strategies, and all of our many different activities, are driven by our people. The most important thing for us is a long-term strategy and plan to continuously develop our human resources and the organization. The Group has more than 15,000 talented people around the world, people who work hard each and every day. We will clarify the type of human resources that the company desires, selecting and appointing employees regardless of age, gender, nationality, or other such traits, to positions that are vital to the growth of the company. We will create numerous opportunities for talent with true drive to take on challenges and, by overcoming numerous difficulties through the pressures of their work, we will develop people who are determined to support and lead the company. To enable these talents to play an active role, in the 17th MTP we have set out career plans for individuals and succession plans for the organization. And as another aspect of our human resources strategy, we have focused in recent years on bringing together a broad range of personnel from outside the company who are essential for responding to the changes that are taking place. We have already seen significant results, so we will continue to push ahead with this approach.
In the 2010s, we acquired a number of overseas companies and rapidly expanded our sales. It was a challenging experience at the time, because we could not maintain efforts to strengthen our management foundation and governance, and this resulted in a decline in profitability. We were able to break this vicious cycle in the 16th MTP by incorporating knowledge from external experts. But this proves the need to return to the basics of profit and fairness, and to rigorously adhere to the principle that “what is right is right, and what must not be done must not be done.”
These words encapsulate the essence of what is called governance. To properly reflect on the past and turn this into a major success, we will prioritize the strengthening of our management foundation and governance, maintaining a state of control that enables us to once again steer the Group toward expansion. On top of this, we will bolster the comprehensive strengths of the Group by enhancing our competitiveness and focusing on regions and businesses where we can demonstrate our cohesive capabilities.Digitalization is also crucial to strengthening the management foundation, especially governance. There are many reasons why we should push ahead with digital transformation, but the most important is that the power of digital technology is essential when specifically promoting each aspect of environmental, social, and corporate governance (ESG). So that we can properly share information within the Group to ensure that correct management decisions are made, we are proceeding with a number of projects to promote digitalization, including the construction of a Group-wide platform for finance, human resources, and ESG-related information. Governance is an extremely important part of all our corporate activities and sustainability management, so we will continue to strengthen it, sparing no effort, manpower, or expense.
Toward a Great Kansai Paint
I feel that the essence of change is to keep what we have promised through dialogue with our stakeholders, while continuing to evolve as a company. So once again I thank all of our stakeholders for their continued support. Going forward, we will continue to meet the expectations of our stakeholders by carrying out our business responsibly as professionals with the same objectives as all of our stakeholders. I believe that by promoting management through dialogue with everyone, we can become a Great Company that continues to grow sustainably. Please expect great things from Kansai Paint in the years to come.
Message from Vice President
About My Own Roles after Joining the Company as Managing Executive Officer in 2020 and Being Appointed as Vice President from FY2022
My current role can be summed up as “Kansai Paint’s administrator.” In general, administrators are often known to play defensive roles, but I believe that aggressive roles are becoming more ingrained to maximize corporate value while supporting the president and other management members as a business partner and working together with them.
In the two years since joining the company, I have made full use of the management knowledge and business management experience cultivated during my time at a global company in Japan and the United States, and strived to transform the company into one with a “strong business structure,” mainly by reforming the financial structure and creating a corporate structure through my position as CFO. Moving forward, I will work together with all employees tostrongly promote our medium- to long-term Growth Strategy. I am convinced that we can create something great by successfully combining the “wisdom we have gained in the past” with “the best parts of our company.”
And the cornerstone of all this is our human resources. Our Group has many employees who are motivated and have outstanding capabilities, so one of our major roles is to give these people opportunities and develop them as best as we can.
Recognizing the Environment Facing the Company and the Business Overview
The paint and coatings business in which the Group operates is supported by a broad range of demand from different industries, including the automotive, industrial, and architectural industries. The coatings industry is basically a growth industry that has achieved tremendous growth along with the evolution of paint technologies. Looking around the world, although the need for paint and coatings varies by region and country owing to differences in economic growth, overall demand continues to increase steadily coupled with the expansion of applications.
However, at present we are facing an extremely severe external environment, with problems such as the COVID-19 pandemic, shortages and soaring price of raw materials including semiconductors, and supply chain disruptions. As a result, although demand for coatings themselves has been firm, we are temporarily facing a difficult situation in terms of profits due to the significant impact of soaring raw material costs, despite repeated management efforts such as price increases and cost reductions. However, I believe that the current headwind is an “opportunity” as demand continues to grow. We will take this opportunity to conduct a comprehensive review of our portfolio and reallocate valuable resources to our BtoB business or to business areas where we excel, such as Europe and India, in order to achieve profitable growth. By doing so, we can expect to reap huge benefits when the business environment bounces back.
Announcement of Support for TCFD in 2021 Countermeasures against Climate Change
The Sustainability Promotion Committee at Kansai Paint plays a central role in evaluating and building systems in line with the TCFD recommendations and examines key factors while gaining knowledge from external experts. Some of the details f these examinations that have been resolved by the Board of irectors are included in this integrated report(page 57). In he future, we plan to make additional disclosures at our strategy briefings and on the company’s website, and we will continue to update and improve the content of our disclosures.
Specifically, with regard to current examinations on governance, the Board of Directors will strengthen the monitoring system, discuss and resolve important matters such as an overall environmental basic policy that includes tackling climate change issues, and resolve related matters when formulating the three-year medium-term management plans. The Board of Directors also receives quarterly progress reports from the Sustainability Promotion Committee, enabling us to provide, where appropriate, any necessary supervision and advice. Meanwhile, executive officers discuss and resolve measures at the Exco Meeting and ensure that thesemeasures are put into practice.
Kansai Paint’s strategy is to clarify short-, medium-, and long-term climate-related risks and opportunities based on the 1.5°C and 4°C scenarios, reviewing the scenario analysis as appropriate. We will also establish a system that can always factor in any impact on our business, business plans, and finances.
Financial Policies and Strategies
While we are required to disclose in an easy-to-understand manner what kind of financial impact climate-related risks and opportunities can have on the company and how they are reflected in our strategies, the way we respond to these risks and opportunities remains fundamentally the same. In other words, to minimize the risks we need to ensure that we do not carry too much on our own and we must keep things to the bare minimum. And to maximize opportunities, we need to have as many options open to us as possible. These strategies are the basis of our financial discipline.
The Japanese word mottainai (“too good to waste”) is attracting attention from around the world, along with interest in the Sustainable Development Goals (SDGs). This word is in line with the company’s financial policy, and with this thinking I believe we can eliminate “waste and irregularity” by focusing investment in the right places as and when necessary.
If we recover funds that lie dormant as company-owned real estate and cross-shareholdings within the Group, as well as surplus funds from subsidiaries, and effectively allocate them to our business as growth investments, we can expect to see high yields (consolidated ROIC for FY2021 was 6%).
Taking the transfer of our Africa business as an example,we judged that it was mottainai to spend the funds and human resources on business centered on architectural coatings in Africa, a region where we are not particularly strong. We therefore decided that we should maximize the efficiency of the entire Group by allocating these resources to our strongest portfolio. I believe that portfolio management is one of the most important roles of our management at the corporate level. From the perspective of capital productivity, I believe that it would be mottainai not to utilize our solid financial position. Considering our currently high capital adequacy ratio, we can still leverage borrowed capital (debt) to raise large-scale growth investment funds for the Group. In addition, when raising funds, we are taking advantage of the historically low interest rates in the current Japanese financial markets to utilize commercial paper and short-term bank loans in order to diversify our fundraising options and give ourselves a variety of options when the time comes. With the funds raised in this way, we will invest actively in business growth and post an appropriate shareholder return. Our basic approach to shareholder return is, in addition to improving corporate value through business growth, to give a direct return to our shareholders in the form of share buybacks and dividends in a balanced manner. Regarding dividends, for the time being we would like to set a dividend payout ratio of 30% and a minimum annual dividend of 30 yen per share. We will also carry out share buybacks flexibly in response to changes in the business environment.
Progress on Each Measure
In response to the current decline in the business environment, we are focusing on two measures to quickly restore our profitability. The first measure is to pass on increased costs by raising selling prices. Unfortunately, we have no choice but to move to increase price while we seek to gain understanding from our customers in all business fields around the world. By leveraging Kansai Paint’s strengths in its advanced technological capabilities, customer support, and stable supply capacity, we hope to provide high added value.
The other measure is cost reduction. Looking at our cost structure, raw material costs account for about 80% of the cost of sales. As an emergency response to the surge in purchase prices, the R&D function is leading the way and making every effort to cut costs from the design stage with all related business units.
are taking place around the world. Examples include a renewal of domestic supply chains and reorganization of production sites, active investment in digital transformation, and continuous innovation initiatives that have led to the establishment and rollout of a new company dedicated to E-commerce. I am happy to note that all these initiatives are proceeding as planned. The entire Group is making concerted efforts to implement reforms as we benefit appropriately from the advice and knowledge of external experts. At the same time, we continue to promote financial structural reforms. As mentioned above, our cutback of less efficient assets such as real estate and cross-shareholdings has been progressing steadily, but the remaining issue for us is to improve efficiency of current assets and the cash conversion cycle. Although there are differences in collection and payment terms as well as with production lead times owing to the differences in business practices in each country, there are two main issues facing the company: the long collection period for account receivables in Japan and the inefficient inventory turnover rate at overseas subsidiaries. For inventories, they can be improved through management efforts, so we will once again make every endeavor to improve them. However, for our accounts receivables in Japan, since there are limits to how much can be negotiated with our business partners, we will also seek to use financial arrangements such as factoring, where appropriate. While, through these activities we will actively invest in our growth by raising funds in-house and through leveraged funding, the 17th Medium-term Management Plan calls for a combination of organic (self-growth) and inorganic growth (through M&A). With regard to M&A in particular, we are continuing to look at and carry out bolt-on acquisitions of small and medium-sized companies, as well as large-scale M&A at the corporate level. We intend to use the different means of funding appropriate to these two types of M&A as and when necessary.
Support for Business Units
As in my remarks above, I have discussed our financial strategy mainly at the corporate level, but since the bulk of our business is conducted through our business units, as well as on the ground in our Corporate Research and Development and our Corporate Production, Supply Chain Management, and Procurement, it is vital for us to have a system of collaboration and cooperation in place with all these units and functions. Since our organization was reorganized into 6 units and functions on April 2021, the Corporate Finance Division has adopted a so-called “business partner system” in which dedicated finance personnel located close by support the heads of each business unit and staff. Although this approach is still in its infancy, we will be able to drive our business forward together mainly from a financial viewpoint, based on a thorough understanding of the business model.
Approach to Human Capital
I mentioned at the beginning that the Group has excellent human resources, and I am constantly reminded of this fact. However, there are some who may have a somewhat unconcerned attitude that comes from working under a typical Japanese company structure, such as a system of seniority based on lifetime employment. For us to transform into a true global company, we believe it is essential to develop internal human resources who have energy, enthusiasm, and ability, and at the same time, to fill any necessary positions with excellent external human resources as appropriate and give them the opportunity to play active roles.
We have developed a number of HR-related improvement measures, such as the introduction of an engagement survey two years ago, the introduction of a job-type employment system for managers from April 2022, and the shift to a performance-linked remuneration system, but I think there is still much room for improvement. It is vital that we actively choose and appoint young employees to important positions both in Japan and overseas, and for future executives it is essential to acquire the foresight, leadership, and attitude of innovation that can respond to changes in the business environment for the sustainable growth of the company. We also face challenges in terms of diversity and inclusion. At the management level, we have two foreign nationals and one female with the company as outside director/Audit & Supervisory Board members, but the ratio of women in managerial positions is particularly low, so we hope to achieve our firm target of 15% or more by 2030.
A Message to Shareholders and Investors
In terms of communication and providing information to everyone, we believe that many may not yet fully understand our fundamental strengths. To efficiently provide timely and useful information along with bolstering two-way communication, this year we have strengthened our investor relations and public relations systems and hired or reallocated human resources.
I believe that the most important thing for us is to meet the expectations of all stakeholders, providing an appropriate shareholder return while continuously improving corporate value. All management and employees will work together to transform ourselves so that we can reach new heights as a true global company, namely, going from Good to Great. I hope that we can count on your continued support.