Management Analysis Of Financial Position, Operating Results, And Cash Flows
(1)Operating Results
①Overall business conditions
In 2023, COVID-19 was moved to Category 5 under the Infectious Diseases Control Law in Japan, and social and working life has changed once again. People’s mobility has become more active, and cities are becoming more lively. Meanwhile, geopolitical risks have increased in various regions of the world, and global inflation and exchange rate fluctuations have continued. In addition, the risk of new infectious diseases is increasing due to global warming, and IT technologies, including generative AI, are rapidly evolving.
Since its founding, the Kirin Group has consistently focused on fermentation and biotechnology as its core technologies, and continues to evolve into a corporate group that is unique, with strengths not only in alcoholic beverages and non-alcoholic beverages businesses, but also in pharmaceuticals businesses.
Backed by these core technologies, we have been working since 2019 on the health science business utilizing distinctive materials such as Lactococcus lactis strain Plasma (LC-Plasma).
We will use the strengths of the Kirin Group to solve not only health and well-being issues, but also other issues facing society, while at the same time creating economic value as a company and maximizing corporate value.
In 2023, the Kirin Group steadily produced results even in an environment of increasing uncertainty. Under the Long-Term Management Vision Kirin Group Vision 2027 (KV2027), the Kirin Group promoted the increase of profits in the Food & Beverages domain, the strengthening of the global foundation in the Pharmaceuticals domain, and the expansion of the Health Science domain in order to achieve the goals of the Kirin Group 2022-2024 Medium-Term Business Plan (2022 MTBP).
Food & Beverages domain
In the Alcoholic beverages and Non-alcoholic beverages business, Kirin Holdings worked to strengthen its mainstay brands in Japan and overseas and expand high-value-added products to nurture new growth engines. In addition, we responded to the severe environment, including soaring raw material prices, by cutting costs and revising prices, and worked to improve profitability.
Each company's policies and achievements
Pharmaceuticals domain
Kyowa Kirin Co., Ltd. focused on maximizing the value of global strategic products. In addition, we worked to strengthen our foundation for sustainable growth as a Japan-based global specialty pharmaceutical company, including signing an agreement to acquire shares of Orchard Therapeutics plc (Orchard Therapeutics), a UK-based biopharmaceutical company, in order to expand our next-generation pipeline and meet future medical needs.
Each company's policies and achievements
Health Science domain
Centered on the LC-Plasma-related business, we expanded the scale of our business through aggressive development of our own group products such as non-alcoholic beverages and supplements, as well as through product development by external partner companies. In addition, we acquired shares in Blackmores Limited (Blackmores), an Australian company that develops health food (natural health) businesses, including supplements in the Asia-Pacific region, thereby strengthening our structure to accelerate the growth of our Health Science domain.
Each company's policies and achievements
We have achieved many results in terms of ESG and won high acclaim both domestically and internationally.
The Environmental Report 2023, published in July 2023 was recognized as a pioneering effort by investors and other stakeholders around the world for its example of integrated disclosure of environmental management information on the TCFD and TNFD.
Kirin Brewery Company, Limited achieved 100% renewable energy for purchased electricity at all of its breweries and sales offices in Japan.
At Mercian Corporation, the Chateau Mercian Mariko Vineyard was officially recognized by the Ministry of the Environment as a socio-ecological production landscapes and seascapes site (SEPLS) that contributes to the 30 by 30 Alliance for Biodiversity (30by30) global goal of halting and restoring biodiversity loss.
In the Health Science domain, Kirin Holdings was highly acclaimed for its contribution to society through the discovery and commercialization of LC-Plasma, and the company received the Imperial Invention Award at the 2023 National Commendation for Invention, the first time in 59 years for a food company and the first for a health and well-being ingredient.
In addition, the Company received the highest ranking in the 7th Nikkei Smart Work Management Survey for the seventh consecutive year. This was in recognition of the diverse and flexible work styles and employee engagement areas. In the 5th Nikkei SDGs Management Survey, we also received the highest ranking for the fifth consecutive year. This award was given in recognition of the results of our efforts to create economic value through our business, sustainable resource utilization, and biodiversity initiatives conservation through our business activities.
(¥ billions, unless otherwise stated)
| FY2023 | FY2022 | Change | ||
|---|---|---|---|---|
| Consolidated revenue | 2,134.4 | 1,989.5 | 144.9 | 7.3% |
| Consolidated normalized operating profit | 201.5 | 191.2 | 10.3 | 5.4% |
| Consolidated operating profit | 150.3 | 116.0 | 34.3 | 29.5% |
| Consolidated profit before tax | 197.0 | 191.4 | 5.7 | 3.0% |
| Profit attributable to owners of the Company | 112.7 | 111.0 | 1.7 | 1.5% |
| (Key performance indicators) | ||||
| ROIC | 8.0% | 8.5% | – | – |
| Normalized EPS (yen) | 177 | 171 | 6 | 3.5% |
Consolidated revenue for 2023 increased due to increases in sales of the Japan Beer and Spirits Businesses, the Japan Non-alcoholic Beverages Business, the Oceania Adult Beverages Business, Pharmaceuticals Business, and Coca-Cola Beverages Northeast. The Japan Non-alcoholic Beverages Business and Kyowa Hakko Bio Co., Ltd. posted a decrease in profits, but the Japan Beer and Spirits Businesses, the Oceania Adult Beverages Business, Pharmaceuticals Business, and Coca-Cola Beverages Northeast saw an increase in profits, resulting in an overall increase in consolidated normalized operating profit. Profit attributable to owners of the Company increased mainly due to the divestment of European businesses of Kyowa Kirin Co., Ltd. and an increase in equity in earnings of associates, despite the recording of a realized loss on foreign currency translation adjustments due to the withdrawal from the business in Myanmar and impairment losses related to Kyowa Hakko Bio Co., Ltd. and Kyowa Kirin Co., Ltd.
Among the key performance indicators, ROIC improved from the previous year to 8.0% mainly due to the acquisition of Blackmores Limited. Normalized EPS increased by 6 yen from the previous year to a record high of 177 yen, mainly due to an increase in consolidated normalized operating profit.
②Performance by reportable segment
Results by segment are as follows.
(¥ billions, unless otherwise stated)
| FY2023 | FY2022 | Change | ||
|---|---|---|---|---|
| Consolidated revenue | 2,134.4 | 1,989.5 | 144.9 | 7.3% |
| Japan Beer and Spirits | 684.9 | 663.5 | 21.3 | 3.2% |
| Japan Non-alcoholic Beverages | 255.0 | 243.3 | 11.8 | 4.8% |
| Oceania Adult Beverages | 281.0 | 255.9 | 25.1 | 9.8% |
| Pharmaceuticals | 441.9 | 397.9 | 44.0 | 11.1% |
| Others | 471.6 | 428.9 | 42.7 | 10.0% |
| Consolidated normalized operating profit | 201.5 | 191.2 | 10.3 | 5.4% |
| Japan Beer and Spirits | 77.7 | 74.7 | 3.1 | 4.1% |
| Japan Non-alcoholic Beverages | 16.9 | 18.8 | (1.9) | (10.1%) |
| Oceania Adult Beverages | 32.4 | 31.5 | 0.9 | 2.7% |
| Pharmaceuticals | 96.0 | 82.5 | 13.5 | 16.4% |
| Others | (21.5) | (16.3) | (5.2) | – |
- Corporate expenses and inter-segment eliminations are included in Others.
③Changes in Disclosure Segment
We will provide a more straightforward segment disclosure in line with the business strategy and engage in deeper stakeholder dialogue.
(2)FINANCIAL POSITION
①General overview
Total assets at the end of 2023 were ¥2,869.6 billion, an increase of ¥327.3 billion from the end of the previous fiscal year. Property, plant and equipment, goodwill, and intangible assets increased by ¥236.0 billion in total from the end of the previous year. This was primarily as a result of the acquisition of Blackmores Limited and the effect of foreign exchange rate fluctuations. Cash and cash equivalents increased by ¥43.3 billion. In contrast, assets held for sale decreased by ¥46.1 billion mainly due to sale of Myanmar Brewery Limited.
Equity increased by ¥172.6 billion from the end of the previous fiscal year to ¥1,425.8 billion due to an increase in retained earnings of ¥64.7 billion and an increase in reserves of ¥92.1 billion. The increase in reserves was mainly attributable to an increase in foreign currency translation differences on foreign operations of ¥90.1 billion due to a weak yen.
Liabilities increased by ¥154.7 billion from the end of the previous fiscal year to ¥1,443.7 billion. Bonds and borrowings increased by ¥133.3 billion mainly due to the issuance of bonds worth ¥93.0 billion including the issuance of social bonds worth ¥60.0 billion in connection with the acquisition of Blackmores Limited in October 2023 and new borrowings.
As a result, the equity ratio attributable to owners of the Company and the gross debt equity ratio stood at 39.5% and 0.58 times, respectively.
②Financial status of reportable segments
Japan Beer and Spirits
Segment assets of the Japan Beer and Spirits Businesses at the end of 2023 increased by ¥11.0 billion to ¥443.1 billion from the end of the previous fiscal year mainly due to an increase in other non-current assets.
Japan Non-alcoholic Beverages
Segment assets of the Japan Non-alcoholic Beverages Business at the end of 2023 increased by ¥14.5 billion to ¥147.7 billion from the end of the previous fiscal year mainly due to an increase in property, plant and equipment as a result of capital expenditures and an increase in other non-current assets.
Oceania Adult Beverages
Segment assets of the Oceania Adult Beverages Business at the end of 2023 increased by ¥60.5 billion to ¥607.2 billion from the end of the previous fiscal year. This was mainly because goodwill and property, plant and equipment increased primarily as a result of exchange rate fluctuations.
Pharmaceuticals
Segment assets of the Pharmaceuticals Business at the end of 2023 increased by ¥91.1 billion to ¥971.4 billion from the end of the previous fiscal year mainly due to an increase in equity-accounted investees in association with joint ventures of established medicine businesses in Europe, increases in property, plant and equipment and goodwill mainly due to exchange rate fluctuations, and an increase in cash and cash equivalents.
(3)Cash Flows
①Cash flows and liquidity status
The balance of cash and cash equivalents (hereinafter, “net cash”) at the end of 2023 was ¥131.4 billion, an increase of ¥43.3 billion from the end of the previous fiscal year. Cash flows for each activity were as follows:
Cash flows from operating activities
Net cash provided by operating activities increased by ¥67.6 billion year on year to ¥203.2 billion. Although impairment loss, which is a non-cash item, decreased by ¥36.2 billion, a ¥32.6 billion decrease in gain on sale of equity-accounted investees, a ¥19.1 billion increase in loss on sale of shares of subsidiaries, and a ¥14.9 billion decrease in outflow of working capital resulted in an increase of ¥33.4 billion in the sub-total. Below the sub-total line, cash flows from operating activities increased year on year due to a ¥32.2 billion decrease in income taxes paid.
Cash flows from investing activities
Net cash used in investing activities increased by ¥215.7 billion year on year to ¥226.1 billion. Net cash provided by investing activities for 2023 included proceeds from sale of shares of subsidiaries, net of cash disposed of, and proceeds from sale of investments through our continuous efforts to reduce cross-shareholdings, which were both ¥8.0 billion. The increase in net cash used in investing activities year on year was mainly due to an increase in acquisition of shares of subsidiaries, net of cash acquired by ¥115.9 billion year on year as a result of obtaining control of Blackmores Limited through a subsidiary in Australia in 2023, and a decrease in proceeds from sale of equity-accounted investments by ¥98.2 billion year on year, in association with the sale of China Resources Kirin Beverages (Greater China) Company, Limited in the previous fiscal year. Outflow for acquisition of property, plant and equipment and intangible assets increased by ¥15.3 billion year on year to ¥113.8 billion.
Cash flows from financing activities
Net cash from financing activities was an inflow of ¥35.9 billion compared to an outflow of ¥167.8 billion in the previous fiscal year. This was mainly due to an increase in interest-bearing liabilities by ¥163.0 billion as a result of the acquisition of Blackmore Limited and a decrease in payment for acquisition of treasury shares by ¥50.0 billion as a result of acquiring treasury shares to expand shareholder returns in the previous fiscal year. The Company pays dividends with a consolidated dividend payout ratio on normalized EPS of at least 40% based on the policy of implementing a stable and continuous shareholder returns. As a result, dividends paid, including to non-controlling interests, amounted to ¥71.2 billion.
The Group continues to allocate cash generated from “cash generation through BS (balance sheet) / PF (portfolio) management” to “measures for flexible shareholder returns” and “disciplined investment to acquire growth drivers” so that it can implement the appropriate distribution of profits and improve corporate value.
②Basic capital policy
Based on the capital policy formulated in the 2022–2024 MTBP, the Company will allocate resources to its businesses and distribute profits to its shareholders as set out below.
Regarding resource allocation to businesses, giving top priority to growth investment with a focus on the Health Science domain, the Company will make investments that contribute to enhancement of existing businesses and profitability improvement. The Company will also implement a stable and continuous allocation of resources to intangible value (such as brands, research and development, information and communication technology (ICT), and human resources) as well as new business creation that sustain the growth of future cash flows. The Company will take a disciplined approach to investments in terms of maintaining and improving the Kirin Group’s capital efficiency.
We view the distribution of profits to shareholders as a key management matter. Since its foundation in 1907, the Company has continued to pay dividends to shareholders every financial year without fail. The Company has stably and continuously provided dividends based on a consolidated dividend payout ratio on normalized EPS of at least 40%. In addition, we will consider opportunities to acquire treasury shares as additional shareholder returns, comprehensively taking into account various factors including optimum capital structure, market conditions and reserve funds after investments.
With regard to financing, priority is given to debt financing, while maintaining a high credit rating that is not affected by financial conditions, in preparation for rapid changes in the economic environment and other factors. The Company fulfills its accountability to its shareholders by carefully considering the impact on stakeholders and other factors when raising funds for investments required to achieve medium- to long-term goals, which may result in a change in control or a large-scale dilution, after verification and review by the Board.