Message from Director of the Board, Senior Executive Officer of Financial Strategy

May 31, 2024

Continue to Review the Business Portfolio to Achieve Kirin Group Vision 2027 While Striving to Grow and Improve Profitability of Each Business Domain

Shinjiro Akieda
Director of the Board,
Senior Executive Officer, CFO
Kirin Holdings Company, Limited

Implement management with an eye on the short-, medium-,
and long-term in the 2022 Medium-term Business Plan (2022 MTBP)

──Please share with us what the Group accomplished in FY2023.

In FY2023, our sales revenue exceeded two trillion yen, the highest normalized operating profit in Kirin Holdings’ history. There are challenges, of course, but I have the feeling that all operating companies are firmly implementing cost reductions and price revisions amid continuing inflation and soaring costs, and that their ability to control earnings in the short term is increasing.

After gaining experience in the planning departments of many Group companies, I was blessed with an opportunity to work in the planning department at Kirin Holdings. Even as CFO, I have been aware of my role as a link between business and finance, rather than simply a coordinator of the accounting department. I am also reforming our organizational culture so that the entire Kirin Group's finance department is aware of this and is committed to increasing corporate value, but we still have room to grow. By further enhancing the organizational capabilities of the finance division, we intend to drive the improvement of the earning power of each business.

── What is the current status and issues of the 2022 MTBP?

Kirin Holdings uses return on invested capital (ROIC) from the perspective of capital efficiency and normalized earnings per share (EPS) from the perspective of shareholder value as financial KPIs in order to increase corporate value.

Financial KPI performance for FY2023 was as follows: an ROIC of 8.0% (weighted average cost of capital (WACC) was 6.0%) and a normalized EPS of 177 yen.

ROIC is always targeted at 10% or more to achieve a return above WACC. However, a temporary decline is unavoidable at times when we execute inorganic investments for growth; in 2023, the acquisition of Blackmores, the future core of our Health Sciences business, was executed with an increase in interest-bearing debt, resulting in a temporary decline to 8.0% from 8.5% in the previous year. However, the company's debt-to-equity ratio (D/E ratio) remained healthy at 0.58 even after the increase in borrowing, thus maintaining financial discipline.

The normalized EPS grew by 6 yen year-over-year, to 177 yen, our highest ever, due to an increased investment income from consolidating normalized operating profit and equity in earnings of affiliates, showing a steady increase in our earning power. As a result, the annual dividend, which is our highest priority in shareholder returns, grew by 2 yen, to 71 yen.

2024 is the final fiscal year of the 2022 MTBP. We have determined that this is the year we should prioritize growth investments, such as acquiring a new pipeline in the Pharmaceuticals business and implementing M&As in the Health Science business, so we predict that the ROIC will not grow to reach our 10% goal. That said, we will use the returns gained from investments to reduce our debt and more quickly restore our ROIC to 10%. We also plan to keep normalized EPS at the same level as the previous year, as we are increasing R&D and marketing expenses to prepare for future growth. We hope you will understand that we are managing our business with both the short- and medium- to long-term in mind.

In light of the uncertainty about the future of the alcoholic beverages and beverage business, the Kirin Group took advantage of its fermentation and biotechnology to launch its own Pharmaceuticals business 40 years ago, which has now grown to become one of its core businesses. We are now following this by taking on the challenge of developing the Health Science business into our next pillar. While maintaining financial discipline, we are pursuing an ambidextrous management approach that will allow us to steadily grow our existing businesses and nurture our future core businesses.

Medium- to long-term business portfolio
Achieve both short-term profit generation and medium- to long-term growth through stage-appropriate investments in each domain

──As CFO, what are your thoughts on the medium- to long-term business portfolio?

──For each business domain, what are you doing to improve ROIC at each operating company and at the Group headquarters?

The Kirin Group as a whole always aims to achieve 10% above WACC, and for new M&A investments, one of the criteria for investment decisions is whether 10% can be achieved in five years. On the other hand, the industry’s standard ROIC depends on the industry’s characteristics and lifecycle. Therefore, in regard to existing businesses, we do not seek a uniform ROIC of 10% across all businesses, but rather set annual goals for how much their ROIC will improve.

Improvement of ROIC is basically done on the business front, and the operating companies take the initiative. The role of Group headquarters is to work with each operating company to identify issues and to support them in implementing specific solutions.

In order to improve ROIC, operating companies create an ROIC tree that factorizes its components and builds up specific improvement measures to address them.

More specifically, in order to reduce the denominator (invested capital), the companies can reduce working capital (inventory reduction, shortening terms of payment, etc.), reduce cross-shareholdings, etc. On the numerator (profit) side, there is a variety of concrete plans, such as improving marketing ROI, reducing logistics costs, and increasing unit sales prices. Each of these is a small initiative, but their accumulation is a shortcut to ROIC improvement.

About balance sheet revision
Reducing our cash balance and ensuring effective use of funds

──Could you please talk about your initiatives in balance sheet revision?

We are aiming to improve ROIC by reducing our assets by more than 100 billion yen during the period of the 2022 MTBP. Since 2022, we have expanded the number of companies implementing the global cash management system (GCMS) and succeeded in reducing each company’s surplus funds (funds set aside for risks). Through the Group headquarters’ lump control of cash (borrowing of surplus funds and lending of deficient funds), they have already successfully reduced our cash balance by approximately 60 billion yen in two years from 2022 through 2023. We have already introduced the GCMS at Blackmores, acquired last year, quickly resulting in an effective use of funds.

In regard to CCC (Cash Conversion Cycle), we improved working capital by a total of 20 billion yen during the period of the 2022 MTBP by introducing SAP to improve processes. In the future, we aim to further reduce CCC by promoting further process improvement through using SAP and promoting DX, improving supply and demand accuracy, and reducing inventory.

We are also continuously striving to reduce cross-shareholdings. In the two years leading up to last, we had already reduced them by 15 billion yen, bringing their share of total capital to about 4%, well below the level required by voting companies. Every year, the Board of Directors reevaluates whether to keep the cross-shareholdings, and, if there are any that it would not be reasonable to hold on to, we proceed with selling them in a timely and appropriate manner through future dialogue with our business partners.

In the aim of improving ROIC, in addition to growing each business’ profitability, we are actively improving balance sheets.

──Tell us about the progress of cash allocation in the 2022 MTBP.

Due to unexpected external factors, such as the prolonged COVID-19 pandemic and the skyrocketing global costs that are arising from geopolitical risks, the total amount of operating cash flow during the medium-term plan period is not expected to reach the 700 billion yen initially planned. Despite this, replacements in our business portfolio and balance-sheet management have steadily generated enough cash to cover the deviation of operating cash flow from the original plan.

Fundamentally, we return profits to shareholders through stable dividends, but in times when there are no appropriate investment projects suited for growth, we also participate in share buybacks (most recently 50 billion yen in 2022). While maintaining financial discipline, we are making well-balanced cash allocations, investing sufficient funds to enhance the competitiveness of existing businesses and allocating cash to investments that will lead to future growth.

Growth investments and shareholder returns
Optimizing the balance of dividend growth and investments in earning capacity

──As part of your investment in growth, what is the status of your investment in intangible assets (brand, R&D, ICT, human capital, etc.)?

As the foundation that will grow each business, we are actively investing in human capital and digital ICT, making marketing investments for brand development, and investing in R&D to expand the pharmaceuticals pipeline and more.

We are maintaining minimum marketing investments to keep us competitive, while continuing initiatives to heighten consumer understanding and improve the quality of our marketing measures.

R&D investments, in addition to extending our Pharmaceuticals business pipeline, are enhancing the R&D that is directly linked to our businesses, such as product development that utilizes technology created from the research centers of each operating company and business unit. We are especially focused on investments in the Health Science domain, which supports next-generation growth.

Investments in human capital are one of the most important investments for a company, and we will be aggressively expanding them. We will begin to implement function-oriented human capital management from 2025 to develop expert human resources with expertise that are globally competitive. Additionally, we will aim to equip each and every one of them with diverse ways of thinking by utilizing our unique business portfolio that stretches across Food & Beverages, Health Science, and Pharmaceuticals businesses to help them systematically gain experience in multiple businesses within the Group. We will enhance the human resource capabilities of the entire company through the growth of each individual by improving their professional skills and diversity in decision-making.

As for the digital ICT field, digitalization is progressing in various areas and the latest AI technology is being incorporated. By proactively verifying feasibility in each business entity, we will continue to boldly take on the challenge of both improving productivity through business process reforms and creating new businesses through the use of data.

──What are your thoughts on shareholder returns and the current share prices as CFO?

The Kirin Group considers the appropriate return of profits to shareholders through dividends to be one of its highest management priorities, and in 2023 we maintained a dividend payout ratio of at least 40% of normalized EPS in accordance with our basic policy, paying a dividend of 71 yen, up 2 yen from the previous year. Going forward, our policy will continue to be to grow dividends in a steady and continuous manner. On the other hand, we also consider it important to invest in long-term growth of earning power, which is the source of dividends, and will constantly optimize the balance between the two.

Regarding the current share prices, the management team and I are aware that they are not sufficient enough to fully satisfy our shareholders and investors. We will continue to review our business portfolio, improve the earning capabilities of and grow each business, and work to raise shareholder value toward achieving KV2027. In particular, we believe that the most important thing at present is to gain an understanding of the potential for growth and earnings expansion in the Health Sciences domain, which is our future, and to show results as soon as possible.