Aiming to Establish a Stronger Financial Base by Ensuring that Structural Reforms Are Firmly in Place by 2025
Naoki Okawa
Director and Senior Executive Officer
External Environment and Structural Reforms Combined to Achieve Favorable Results in Fiscal 2023
Our management approach in fiscal 2023 was based on reflecting on lessons learned regarding the unmet targets of the previous mid-term plan. By pursuing highly efficient management with an emphasis on profitability, we were able to increase business profit from ¥35.0 billion, the figure announced at the beginning of the term, to the final figure of ¥77.7 billion.
This success stemmed not only from external factors such as prices for maritime freight shipping returning to pre-COVID-19 pandemic levels and the stabilization of the supply chain in China and other countries, which led to the reduction of raw materials prices, but also from the Company policy of emphasizing profitability. Under this policy, we discontinued unprofitable products regardless of sales volume and accelerated sales activities focusing on highly profitable products. The combination of the external environment and structural reforms has led to favorable results.
Our tire pricing policy has also contributed to our success. For original
equipment tires for automobile manufacturers, we managed the risk of fluctuating raw materials prices by having dynamic pricing system-based contracts. Meanwhile, for replacement tires for auto-repair shops and car accessory stores, especially in the U.S. market, we were able to demonstrate the strong brand value and high quality of the FALKEN brand “WILDPEAK A/T3W” for SUVs and develop our business with a high level of customer trust without getting caught up in the price competition, which also contributed to improved profits.
We have also noticed that each employee within the Company looks distinctly more confident. This is proof of the organization’s strength that cannot be reflected in financial figures. While there is no doubt that returning profits to our shareholders is important, we are committed to appropriately distributing the results of our employees’ daily efforts, which is why we have decided to raise the base salary in the spring of 2024 by ¥12,000, or ¥2,000 more than what the union had requested.
Sports Business Achieved a Record High Business Profit of ¥12.5 Billion
Profitability is also improving in areas other than the Tire Business. In the Sports Business, sales of the golf business grew steadily in
North America and South Korea, partly due to the success of sponsored professional golfers, and the new golf club product “XXIO13” that launched in December 2023 got off to a good start. In addition, profitability also improved in the tennis business, resulting in a record high ¥12.5 billion in business profit for the Sports Business. It is also important to note that the Company achieved a high business profit to sales
revenue ratio of approximately 10%.
Furthermore, our Industrial Products Business has also made progress
in structural reforms and is now beginning to see a path to improved profitability in the future. Our main products, vibration control dampers, were reported to have made a significant contribution to preventing the collapse of houses in the 2024 Noto Peninsula Earthquake. We believe that this product will become widespread in preparation for possible earthquakes in the future.
Generated Over ¥40.0 Billion in Cash in Four Years through Structural Reforms
Since 2020, the Company has been promoting “Be the Change (BTC),” a project that aims to reinforce the foundations of our business by enhancing our organizational framework and reinforcing our foundation for profitability. As a result, we generated ¥10.0 billion in cash each year, exceeding ¥40.0 billion in four years. Accordingly, business profit for fiscal 2023 was ¥77.7 billion, and free cash flows (FCF) reached a record high of over ¥100.0 billion. Considering that fiscal 2022 had negative FCF, fiscal 2023 was also a year that gave us confidence in our ability to rise again as “Sumitomo Rubber Industries, a company known for profitability.”
Of course, with FCF reaching a record high, there is no doubt that momentum is building for a shift in management from quantity to quality, but we are still halfway through our structural reforms and we are determined to confront challenges head-on, especially in the top-priority tire business in North America. We will continue our structural reforms until their completion in 2025.
In the process, it is possible that a situation may arise that calls for significant cash outlays. We will first prioritize structural reforms to secure a solid profit base, and after implementing our growth strategies, we will return profits to shareholders and investors.
Regarding future capital expenditures, the allocation of investments may change depending on what choices we make as we work to complete our structural reforms and growth strategies. Top management
will discuss this thoroughly and come to a conclusion, as this could affect the future of the Company for the next five to 10 years.
CAPEX and Depreciation
Cash Flows
Accomplishing Structural Reforms by 2025
With structural reforms for 2025 reaching a critical point, we are currently monitoring ROIC and other factors, having established KPIs for each business, including those for the issues faced by our USA factory. Although still undetermined at the time of issuing this Integrated Report, we will inform our stakeholders without delay should the situation change.
To avoid any misunderstanding, we would like to clarify that although our USA factory is facing structural challenges, our North American tire business as a whole is performing well. By resolving this issue, we believe that we can significantly improve our profitability. One of our concerns about the North American market going forward is the U.S. presidential election to be held in the fall of 2024. In this regard, we are carefully assessing the risks and discussing the measures to take for each scenario.
In addition, there is no guarantee that prices for maritime freight shipping will not surge in the future, as was the case during the COVID-19 pandemic. In order to avoid risks in the mid to long term, it is necessary to establish production bases close to our sales areas from the perspective of local production for local consumption. These mid-term issues are also under consideration.
Introducing ERP to Shorten Supply Chains
As it was mentioned that cash is increasing as a result of the BTC Project, one measure that will further boost this momentum is to leverage DX to shorten the global supply chain. Previously, it took approximately one month for production orders from the U.S. to reach the factories in Southeast Asia. By improving our work flow, this lead time has been reduced to about one week. However, we plan to introduce a new Enterprise Resources Planning (ERP) system to further shorten the time to as close to real time as possible. This reduces excess distributor inventory and also allows us to adjust our factory operations flexibly in response to changing market conditions and decrease inventories of materials and other items.
Our cash conversion cycle was the longest in the domestic tire industry in 2019, but became the shortest in 2022. We remained at the top in 2023, maintaining an additional gap of 10 days or more in the cash conversion cycle compared to the company with the second shortest cycle, which has demonstrated our improved equity turnover and more stable cash flows.
Looking Beyond Structural Reforms to Formulate the Next Growth Strategy
The future path of the mid-term plan can only be explained in uncertain terms that short-term performance could fluctuate depending on the options available for structural reforms. However, we are determined to achieve the 2027 target figures that we promised and have been looking beyond structural reforms toward implementing the next growth strategy within the Company.
To this end, we will invest in the launch of competitive new products and services such as ACTIVE TREAD and SENSING CORE to transform our structure and generate even more cash flows from operating activities. Upon achieving this, we hope to focus on shareholder returns, including the repurchase of treasury stock.
For our dividend payout ratio, we are aiming to maintain a level of 40% or more. Dividends will not be determined solely by the amount of profit for a single fiscal year, but will be based on multi-year free cash flow trends, and we will strive to pay stable dividends as much as possible.
