“People are a finite asset; companies are perpetual entities.” Based on the philosophy we have upheld since our earliest days that there is no end goal to corporate activities, I have continued to take on a variety of challenges. Fortunately, we have received great support from customers and other concerned parties, and thanks to this, we successfully reached the milestone of 50 years in business in 2018. I would like to extend my warmest appreciation to our stakeholders for your unending cooperation. With these feelings of gratitude foremost in mind, I have newly resolved to boldly tackle further challenges aimed at the next 50 years of growth. In 2017, we established an internal fund of ¥5 billion for investment in a venture company, reaffrming our DNA as an organization that perceives changes in the times as opportunities for growth.
Turning the changing times into growth opportunities Our business environment indeed signals a turning point, a shift in the era that offers a chance for growth. Advances in the Internet of Things (IoT) and artificial intelligence (AI) have accelerated a digital transformation in which every industry utilizes electronics-related products and services. In addition, against the backdrop of trade friction between the United States and China and other such factors, we are heading toward a new stage of globalization in the supply chain of manufacturers both in Japan and abroad. On the other hand, competition with global corporate groups boasting sales of ¥2–3 trillion is inevitable in the future world market. To outstrip our rivals over the next 50 years and lead the Group along a new path to growth, it is imperative that we have a vision and strategy that is global in nature.
Become a ¥1 trillion company with a strong presence in the global market Based on an awareness of this environment, the Kaga Electronics Group formulated its Medium- to Long-Term Vision covering the next 50 years of becoming a corporate group capable of generating ¥1 trillion in sales, the scale required to compete and rank with rivals overseas at the several trillion yen level in the intensely competitive global market. We have also formulated a new Medium-Term Management Plan with the aim of becoming Japan’s No. 1 company in the industry with sales of ¥500 billion in the next three years. The plan sets out three key challenges: Enhancement of the revenue base, stabilization of the management base and creation of new business. The addition of Fujitsu Electronics to the Group in January 2019 forms part of this growth strategy. Going forward, we will strive to quantitatively expand our revenue base through mergers and acquisitions in the trading company business domain, develop our customer base for EMS business and utilize our global production base to significantly enhance Group management.
Create universal value as a company that benefits society In addition to this growth strategy, over the long term we will seek to develop new products and services that contribute to the resolution of social issues in the realms of safety and security and environmental preservation on top of meeting customer needs. While I do not expect to see results from this endeavor overnight, I am sure that our efforts will start to bear fruit if we just persevere in a way that typifies who we are. I would like Kaga Electronics to be a leader in how to effectively raise universal corporate value by showing that the key to sustainable growth is being a company that benefits society. I humbly ask all of our stakeholders for your continued support of the Kaga Electronics Group and our initiatives.
Review of the fiscal year ended March 31, 2019
Creating foundations for the next stage of growth The ﬁscal year ended March 31, 2019 was the ﬁnal year of our previous Medium-Term Management Plan. Overall, the three years of the plan were very productive as we were able to build foundations for a new stage of growth, which included creating infrastructure to drive growth in EMS business and securing a new trading company business network and resources through M&A. In terms of quantitative results, we achieved our targets for net sales and return on equity (ROE). This was mainly because net sales beneﬁted from the consolidation of Fujitsu Electronics in the fourth quarter of the ﬁnal year of the plan, 2019, while in ROE we enhanced our ﬁnancial leverage by borrowing acquisition funds. Conversely, ordinary income stood at ¥7,859 million, which was unfortunately below our medium-term target. Primarily this result reﬂected delays in the contribution to earnings from a new factory overseas and a limited contribution to income from the acquired company. As a key initiative in the ﬁscal year ended March 31, 2019, we enhanced our production system overseas in response to requests from customers. In addition, we focused on expanding EMS business by means such as relocating sites and strengthening functions in Japan. In January 2019, we solidiﬁed our foothold to drive further growth by making Fujitsu Electronics a Group company. As a result of these activities, net sales for the ﬁscal year ended March 31, 2019 totaled ¥292,779 million, up 24.1% from the previous ﬁscal year. This was primarily the result of a solid showing overall in EMS business and the consolidation of Fujitsu Electronics in the fourth quarter. In terms of proﬁt, operating income was ¥7,570 million, down 6.8% year on year, due to large upfront expenses for the startup period of new factories in Vietnam, Mexico and Turkey. Nonetheless, proﬁt attributable to owners of the parent grew 23.5% year on year to ¥8,014 million, owing mainly to the recording of a gain on negative goodwill as extraordinary income in line with the consolidation. In light of these results, we paid an extraordinary dividend to our shareholders.
Forecast for the ﬁscal year ending March 31, 2020 A cautious outlook given the uncertain business environment Net sales are forecast to increase by a signiﬁcant 46.9% year on year to ¥430 billion in the ﬁscal year ending March 31, 2020, since Fujitsu Electronics will contribute to consolidated results for the entire year. On the other hand, operating income is projected to decrease by 7.5% to ¥7.0 billion, due to such factors as an increase in expenses associated with the startup of new EMS factories in Japan and overseas, namely Fukushima and India, and investment in IT in line with the addition to the Group of Fujitsu Electronics. Proﬁt attributable to owners of the parent is forecast to be ¥5.0 billion, down 37.6%, due to the absence of a gain on negative goodwill as was recorded in the previous ﬁscal year. The Group overall is conservative in its projections due to uncertain domestic and overseas conditions and the risk of cancellation of large-lot commercial rights held by Fujitsu Electronics. Accordingly, we have set targets that we believe we can achieve without any shortfall in the ﬁrst ﬁscal year of our new Medium-Term Management Plan. Going forward, we will seek to improve performance gradually each year and realize the management targets stated under the plan.
Impact of making Fujitsu Electronics a Group company Looking at a breakdown of the net sales forecast for the ﬁscal year ending March 31, 2020, Kaga Electronics on a parent alone basis is projected to post ¥235.0 billion, which is roughly unchanged from the previous ﬁscal year, and Fujitsu Electronics is projected to post ¥195.0 billion, marking a year-on-year decline of ¥38.3 billion. This decline includes approximately ¥20.0 billion related to the risk of cancellation of large-lot commercial rights, which will be reﬂected in the second half of the ﬁscal year ending March 31, 2020 (sales will continue in the ﬁrst half). Discussions are still ongoing and details cannot be disclosed yet, but we will report on this policy as soon as it has been decided. With regard to gross proﬁt, Kaga Electronics is projected to secure a gross proﬁt margin and proﬁt on par with the previous ﬁscal year, while Fujitsu Electronics is projected to register an increase of about one percentage point in the gross proﬁt margin compared to a year ago. We plan to minimize any decline in gross proﬁt due to a loss of sales. Although proﬁtability (in terms of the gross proﬁt margin) differs widely at both companies, we will work to make steady improvements each year to contribute to the proﬁt growth of the Kaga Electronics Group on the whole. A one percentage point improvement in the gross proﬁt margin would result in an increase in proﬁt of ¥2.0 billion, and a two percentage point increase would result in a twofold rise in proﬁt, to ¥4.0 billion.
Industry positioning Reorganization aimed at becoming an industry leader in Japan The addition of Fujitsu Electronics to the Kaga Electronics Group provides an instant boost to sales, placing us third in the industry for electronics trading companies based on results for the ﬁscal year ended March 31, 2019. We expect to jump to second in the industry according to our projections for the ﬁscal year ending March 31, 2020, getting us within range of challenging for the No. 1 spot. Now that we have a strong foothold, we will strive to realize our goal of becoming an industry leader in Japan. There are currently more than 30 electronics trading companies listed on stock exchanges in Japan, with net sales ranging from ¥6.0 billion to ¥500.0 billion. If non-listed companies are included, this ﬁgure jumps to more than 300, and it is said that the number of industry players exceeds the scale of the market. Global reorganization is taking place in nearly every industry and business category, and electronics trading companies will not be able to avoid it. Against this backdrop, Kaga Electronics aims to be the corporate group to spearhead reorganization in the industry. The acquisition of Fujitsu Electronics is one of the moves characterizing our approach.
Medium-Term Management Plan 2021 and growth strategy Aiming to become an industry leader in Japan and outstrip the global competition In November 2018, Kaga Electronics formulated its three-year Medium-Term Management Plan 2021. The plan includes ambitious targets of 71% growth for both net sales and operating income after three years in the ﬁscal year ending March 31, 2022, compared with the ﬁscal year ended March 2019. The three basic policies of the new Medium-Term Management Plan are to enhance the revenue base, stabilize the management base and create new business. Through these policies, the Kaga Electronics Group will strive as one to become an industry leader in Japan and outstrip the global competition, which is our Medium- to Long-Term Vision. In terms of concrete initiatives, we will pursue growth in both trading company business for electronic components, which we have expanded by bringing Fujitsu Electronics into the fold, and EMS business, where we will focus on such growing ﬁelds as automotive and communications. Through these efforts, we aim to boost the level of business within the Kaga Electronics Group. In EMS business, we have vigorously looked to expand production system overseas in response to increasing customer requirements in recent years. We added production bases in Mexico and Vietnam in 2017 and in Turkey and India in 2018 to our production network, which was previously concentrated in China and the ASEAN region. We now have EMS production factories in 16 locations through 10 countries, including Japan. In addition, Towada Pioneer Corporation will be added to the Group in October 2019. Since it is a manufacturing subsidiary of Pioneer Corporation, a dedicated electronics maker, we will be able to incorporate the production know-how it has amassed over many years, outstanding production site human resources and production equipment into the Group with the aim of strengthening our growing automotive business. Another goal is to bolster capacity to meet rising production demand in Japan. We are also constructing a new factory planned for operation in autumn 2019 in Fukushima Prefecture to cater to this growing demand. Overseas, there is a remarkable trend among customers to shift production of products earmarked for the United States out of China and elsewhere to avoid the impact of trade issues between the two countries. In line with this, we have started building a second factory in Thailand and we aim to start operations there before the end of 2019. We plan to actively take advantage of the demand brought about by this trend at each of our factories in Vietnam, Malaysia and Mexico. In seeking to grow EMS business, we are executing a variety of such initiatives concurrently.
Shareholder return Maintain a payout ratio between 25% and 35% Kaga Electronics has positioned the return of proﬁts to shareholders as one of its most important management policies. We would like to reciprocate our shareholders’ support by providing dividends from our surplus so that they feel they can continue to support us by retaining the Company’s shares over the long term. Based on the belief of our founder that we have held since our earliest days—that proﬁt generated by everyone’s hard work will be shared with everyone—we make it a principle to conduct transparent management in which we return proﬁts to shareholders through extraordinary dividends when we expect to generate a level of proﬁt that exceeds our initial target. In quantitative terms, our basic policy is to provide stable payment of dividends while maintaining a consolidated payout ratio of 25% to 35%. In the ﬁscal year ended March 31, 2019, the payout ratio was 27.4% based on a dividend of ¥80 per share as a result of twice revising the dividend forecast upward during the period. In the ﬁscal year ending March 31, 2020, we are forecasting a year-on-year decline in proﬁt and therefore the dividend will drop to ¥60 per share and the payout ratio will be 32.9%. Although we succeeded in increasing dividends for six consecutive years from the ﬁscal year ended March 31, 2014, unfortunately we expect a break in this pattern. Going forward, with regard to the distribution of proﬁt, we aim to maintain a stable and continuous payment of dividends to shareholders while investing to drive further growth toward the next leap ahead, as well as ensuring a sound ﬁnancial position from a long-term perspective.