Message from our CFO

We are aiming for stable growth that exceeds the capital cost required by the stock market, with a stable double-digit ROE as a quantitative target of our Midterm Corporate Strategy 2024. To achieve this, we are prioritizing four key points, (1) promoting replacement and yield improvement of existing businesses, (2) leveraging a disciplined approach to growth investment and risk management, (3) making market-conscious shareholder returns, and (4) maintaining financial soundness. With regards to existing businesses and new growth investments in particular, a structure is in place so that each business segment can be independently aware of its capital efficiency, through a Business Management System introduced during Midterm Corporate Strategy 2024. As a result, we have been able to steadily maintain a double-digit ROE, and aim to improve that even further in the future.

In order to improve our corporate value, we have accelerated initiatives under the Value-Added Cyclical Growth Model.① Even for profitable businesses, we are proactively and strategically replacing our portfolio, in addition to promoting reinvestment of managerial resources and working to create new businesses for further growth. As part of this model, we are listing candidates for replacement based on ROIC and growth potential, allocating targets to each business segment, and encouraging independent asset replacement and yield improvement. We are attempting to enhance capital efficiency by securing capital gains and replacing low-yield businesses. For the businesses that are on the list, a dedicated team checks their progress every month, while monitoring projects through Value-Added Cyclical Growth Model reviews (discussions with management), ensuring the reliable execution of these initiatives.

For example, at one of our holdings which was put on the list for the Value-Added Cyclical Growth Model because of low performance, we strengthened the management foundation by seconding MC personnel to the company, and leveraging our knowledge of strategic planning of overseas production sites, and exploring tie-ups in regions and fields where we have strengths to enhance product sales, all working together to maximize corporate value. As a result, the consolidated operating income target originally expected to be achieved in FY2025 was actually achieved in FY2023. This is just one case, but by concentrating such efforts toward yield improvement and replacing our assets, the earnings improvement of these businesses in FY2023 was ¥60 billion compared to FY2021, and is expected to reach ¥100 billion in FY2024. Also, overall Company ROE, introduced as a monitoring tool to increase awareness of capital efficiency in each business segment, has made steady inroads, leading to independent initiatives by the business segments.

For new investments, we have established quantitative standards based on factors such as industry and country for each individual project, and strictly choose projects upon comprehensive evaluation of their quantitative and qualitative characteristics. Also, from the perspective of business portfolios as a whole, we have put in place a framework to regularly monitor the general situation from such angles as headquarters, industry, country, and currency, allowing for companywide management to regularly review for concentrated risks and downward performance resilience.

In addition to strengthening our business portfolio through this kind of risk management, we are also working to suppress capital costs by continuously strengthening corporate governance for sustainable value creation, as well as strengthening stakeholder engagement, by addressing environmental and societal risks and enhancing information disclosures.

With regards to shareholder returns, we are basing our approach on a progressive dividend policy, aiming for a total payout ratio of 40% or more, and our policy is to flexibly execute additional returns while keeping a close eye on cash flow trends. When exploring yearly dividend increases and share buybacks, we are conscious of responding to market expectations while fully coordinating with the CSEO organization, which is in direct contact with the stock market. In FY2023, in addition to a dividend of ¥70 per share (totaling ¥290 billion), we executed share buybacks totaling ¥600 billion, including ¥500 billion of flexible additional returns announced in February 2024. In FY2024, in response to the growth in our earning power and the increased predictability of cash flows, and following a review of the balance between dividends and share buybacks, we announced a dividend increase to ¥100 per share, based on the assumption of the continuation of our progressive dividend policy. The total dividend amount of approximately ¥400 billion is sufficient to cover the entire 40% total payout ratio for the full-year forecast, and we recognize that this is a reasonably high dividend level considering that the current business stage is a period of “Reinforce,” “Enhance,” and “Accelerate.”② However, we have decided on this with the belief that even if this level of dividend is maintained in the future, it will allow us to both promote growth investment and maintain financial soundness.

The final year of Midterm Corporate Strategy 2024 is FY2024, and while we will continue to be disciplined and aggressive in pursuing growth investment opportunities, we will also consider flexible additional returns based on the level of cash inflows and the status of our investment pipeline.

We have long set a goal of achieving a single A credit rating, and as of June 2024, MC has been rated highly by S&P: A (stable), Moody's: A2 (stable), and R&I: AA (stable). In Midterm Corporate Strategy 2024, in order to maintain and improve our financial soundness, we have adopted a policy of maintaining positive post-returns free cash flow over a three-year period. Since then, due to strong performance and further progress in the Value-Added Cyclical Growth Model, the three-year cumulative cash inflow, which is the source of capital allocation, has increased from the ¥4.5 trillion forecasted at the time of the release of Midterm Corporate Strategy 2024 to ¥5.5 trillion, and the financial soundness of the Company has remained at a level above expectations. As a result, we recognize that in the future there is increasing room to utilize financial leverage as needed while maintaining our current credit rating, and we intend to continue to balance the expansion of growth investments with the enhancement of shareholder returns by taking advantage of our high cash generation capability, which is one of our strengths.