Aiming for Balance between Growth and Decarbonization
Management Policy: Reexamining our corporate philosophy and implementing it as a group
A year and a half has passed since I took the reins as president of Tosoh Corporation in March 2022. In fiscal 2022, Tosoh achieved new records in both net sales and profits, and successfully succeeded in meeting all numerical targets in our Medium-Term Business Plan. With constant hard work and dedication, the company was very fortunate to be able to execute a transition in leadership within our organization seamlessly, which enabled us to maintain our strong performance in both our financial base and the earnings structure in each of the areas of our business, which I am delighted to say remain strong.
Since I took over as president, however, the business environment has certainly had to weather one significant change after another. Concerns included soaring raw material and fuel prices triggered by Russia's invasion of Ukraine, China's zero-COVID policy put the brakes on economic growth, and the United States and Europe experienced economic recession due to austerity measures. In addition to dealing with such drastic changes in the business environment, there is also the challenge of becoming carbon neutral—obviously a major theme for our company—announced in January 2022.
We established our corporate philosophy in 1986: “We at Tosoh constantly strive to contribute to society through the chemistry of innovation.” Now, looking back over records from that time, we found that the president of the company—which was then known as Toyo Soda Manufacturing—expressed his desire to change the company significantly and create a global corporation.
Meanwhile, society is constantly changing, and we are always being presented with new hurdles to negotiate. If we are unsuccessful in dealing with these issues, there is no way for the Group to survive—we must therefore work together to tackle and overcome all obstacles and move on to finding solutions to the next issue we are presented with. We believe that now is the time to review the aspirations incorporated in our corporate philosophy and aim to become a company that can improve the quality of life for people worldwide through innovation in chemistry.
Medium- and Long-Term Growth Strategy
Aggressively investing capital in each product to boost the Specialty business bottom line
Our Group follows a dual management approach, which is based on the principle of securing basic cash flow and profits from our Commodity business—where demand is stable—while continuously investing in the development of the high-growth Specialty business to create new avenues for growth. To further strengthen our earnings foundation, we aim to formulate a profit base more than ¥100 billion in the Specialty business. Meanwhile, we plan to focus on the decarbonization of essential products which are indispensable in the sustainable development of society, such as caustic soda and PVC resin—provided by our Commodity business—as producing them requires large volumes of energy. We are convinced that the pivotal issue in the Group's overall growth strategy is striking a good balance between growth and decarbonization.
Based on this philosophy, the basic policy formulated in our Medium-Term Business Plan (FY2023–FY2025) announced in August 2022 outlines an unprecedented focus on raising the bottom line of the Specialty business, centered on functional products, while continuing and deepening our conventional dual management approach. Tosoh plans ¥200 billion in growth investment—a 25% increase over the previous medium-term business plan—of which ¥80 billion will be allocated to Specialty business products. We have completed the strengthening of our financial foundation and have the means to implement investments—which we intend to use effectively—toward achieving our medium- and long-term goals.
Our Specialty business currently has a number of products that are expected to serve as growth drivers. Examples include Toyopearl, a separation and purification reagent used to purify biopharmaceutical raw materials; zirconia, which is in increasing demand for decorative and grinding applications as well as dental materials; and silica glass, for which growth in demand is foreseen in semiconductor manufacturing equipment applications. Demand is also strong for bromine, used in plastic flame retardants, and chloroprene rubber, which is finding expanding applications across a host of industrial products, as well as being used in the production of medical gloves. Meanwhile, the shift to produce more electric vehicles (EVs) has suppressed the demand for high-silica zeolite used in the manufacture of exhaust gas purification catalysts. We still expect the launching of new products such as high heat-resistant grades, suitable for heavy trucks, but which are difficult to convert to EVs, therefore, we believe this will serve to drive growth. We are also looking forward to the future deployment of the Gallium Nitride (GaN) sputtering targets used in power semiconductor manufacture, scheduled to be launched this year, as response from the market has been extremely positive.
Through such proactive growth investment, we hope to achieve net sales of ¥1.160 trillion, an operating income of ¥150 billion, an operating income ratio of 10% or higher, and ROE of 10% or higher by the final year of the current medium-term business plan (FY2025), with more than 50% (at least ¥75 billion) of the ¥150 billion in operating income being generated by Specialty products. Furthermore, as the company moves forward, our goal is to raise this to over ¥100 billion by 2030.
Review of FY2023 and Outlook for FY2024
Our ability to secure steady profit amidst drastic changes in the business environment
As mentioned at the beginning of this message, FY2023 (April 1, 2022–March 31, 2023), the first year of our Medium-Term Business Plan, was, simply stated, a year of dramatic change. The petrochemical industry faced headwinds such as rising raw fuel prices and declining demand owing to the global economic slowdown. The skyrocketing price of coal has had a significant impact on the business environment surrounding the Tosoh Group. Coal is the main source of fuel used for our in-house power generation, and in FY2023, the price more than doubled from the previous year and quadrupled from the two preceding years, which consequently negatively affected our business operations. The impact on the Chlor-alkali Group, which uses a considerable amount of energy in their manufacturing process, was particularly noteworthy. In addition to a sharp rise in the cost of raw materials and fuel, the Asian commodity product market was severely affected by the market price decline amidst China's continued zero-COVID policy, resulting in the Chlor-alkali Group recording an operating loss in FY2023. Meanwhile, sales of all high value-added functional products mentioned earlier grew steadily, and overall earnings were generally in line with the company’s forecasts.
As a result, consolidated net sales for FY2023 increased 15.9% from the previous fiscal year to ¥1.064 trillion, as we succeeded in passing some of the cost increases onto customer prices. Operating income, however, plummeted 48.2% to ¥74.6 billion from the record high of ¥144.0 billion in the previous fiscal year. Net income attributable to the owners of the parent company also fell sharply, down 53.4%, to ¥50.3 billion. After obtaining and analyzing the relevant figures, we could understand that this decline resulted from the deterioration of earnings in the Commodity business, including the Chlor-alkali Group, and even with the growth of products in the Specialty business this was not sufficient to support the reduction in income. Given the business environment during the period under review, however, we see this as a situation where, in the past, it would not have been surprising if overall company earnings had fallen into the red. The fact that we were able to secure profit to a degree amidst challenging circumstances, due to the increased profitability of functional and other Specialty products, is proof that we have developed solid earning power as a company, and in that sense, we are very pleased with our unwavering efforts.
The outlook for FY2024 (fiscal year ending March 31, 2024), the second year of our Medium-Term Business Plan, however, remains uncertain. We expect that, if raw materials and fuel prices stabilize at anticipated levels, the Chlor-alkali Group will return to profitability. However, we will not let our guard down, and will continue to boost profitability through measures such as acquiring and adopting lower-grade, less expensive coal, for the production of some of our products.
As far as product demand is concerned, neither the Commodity nor the Specialty business has been significantly impacted in a negative way, and we intend to carry out production as we scheduled for- and invest capital—primarily in the Specialty business—as planned. In FY2024, we project consolidated net sales of ¥1.08 trillion, with an operating income of ¥95 billion.
Path to Decarbonization
Promoting investment in GHG emission reduction toward achieving carbon neutrality
The most challenging medium- to long-term management issue is to achieve both growth and decarbonization. The company previously announced its commitment to reducing the Group's GHG emissions by 30% from FY2019 levels by FY2031, then move toward achieving carbon neutrality by 2050. To achieve this goal, as an organization we have decided to invest ¥120 billion by FY2031, independent of investments in the growth of each of our business platforms and in R&D.
During the three years of our current Medium-Term Business Plan, we intend to invest half of this amount, or ¥60 billion, into the reduction of GHG emissions. We are now faced with the urgent issue of greening up our in-house power generation facilities, which currently emit rather large volumes of undesirable CO2, due to coal combustion. Our top priority in this regard is to implement fuel conversion at the Nanyo Complex coal-fired power plant, which has one of the largest outputs of any single company or complex in Japan.
As a first step toward this goal, the company has decided to replace the oldest of the six boilers in the Nanyo Complex in-house power generation facility with a new biomass co-firing power generation facility in FY2024, and I am happy to say that construction is already underway. This new facility will account for about two-thirds—or ¥40 billion—of the approximately ¥60 billion investment in our three-year medium-term business plan and represents the single most significant CO2 reduction effect we have planned. The new facility is scheduled to be completed in April 2026, and the emission reduction benefits are expected to be seen from the beginning of FY2027.
We also intend, in due course, to convert the remaining five coal boilers at the Nanyo Complex to handle biomass fuel and have already initiated the co-firing of biomass. Currently, the percentage of biomass co-fired remains in single digits, but we are developing new technologies including pre-carbonization of biomass to boost the co-firing ratio to nearly 30 percent. At the same time, we are acting to secure biomass fuel procurement routes, as supply is expected to be somewhat limited going forward. But it should be known that there are options other than biomass which we can consider for fuel conversion for on-site power generation. In addition, in 2022, the Basic Study on the Establishment of Ammonia Supply Center at the Shunan Industrial Complex was adopted as a project to be subsidized by Japan’s Agency for Natural Resources and Energy, and through this project we will attempt to establish Japan’s first ammonia supply chain.
Moreover, the Yokkaichi Complex, the main base for Tosoh’s Petrochemical Group, is currently considering expanding its gas turbine power generation facility where off-gas byproducts from the naphtha cracking furnace are used effectively as an alternative fuel. We intend to evolve the Yokkaichi Complex into a chemical and material recycling center, aiming to convert waste plastic into alternative resources.
We have also been conducting R&D on CO2 separation, recovery, and effective utilization in parallel with CO2 emission reduction. Endeavors include a new proprietary technology that employs an amine solution that extracts CO2 and utilizes it as a raw material for the production of isocyanate. Following verification at a demonstration test facility, we established a CO2 recovery process based on our own design and are currently building a CO2 recovery and feedstock conversion facility within an existing isocyanate feedstock manufacturing plant. We believe that we can contribute to society by providing our established CO2 recovery technology to a wide range of industries—including industry competitors—rather than restricting the possibility of CO2 recovery and the use of certain raw materials internally. If the recovered CO2 could be utilized as a raw material for chemical products, we believe this would represent a significant contribution to the improvement of the global environment.
Strengthening R&D
Conduct aggressive “seeding” while accelerating the cultivation process
One of our most important management themes is to strengthen our R&D capabilities. Among manufacturing industries, chemical product development requires a considerable amount of time to complete successfully. The functional products that have become highly profitable businesses today—including zirconia, separation and purification reagents, silica glass, and high-silica zeolite—all resulted from two to three decades of research initiated in the mid-1980s as part of a business diversification strategy. However, while the company did previously temporarily reduce R&D expenditures, due to deteriorating business performance, we began to plant seeds again around 2010 and have been investing management resources in R&D to create new businesses in support of future development and opportunities. In recent years, some of these seeds have successfully borne fruit and are gradually beginning to be harvested. One such example is our Gallium Nitride (GaN) sputtering targets.
As an organization, we believe that the key to the Tosoh Group's sustainable growth will be the consistency with which our R&D division can drive the creation of new products and businesses. We are constantly conducting research on about thirty different themes annually at all of our R&D centers, replacing the research contents, when deemed necessary, given the prevailing market environment and research progress. Our desire is to transition about ten of these annual themes into the commercialization phase, leading to at least one new product that will expand our product range.
To reinforce our structure for new business creation, we have been expanding our R&D bases nationwide over the past few years. As changes within the business environment are expected to occur increasingly rapidly, it is important to initiate as many seeds as possible while accelerating the cultivation process. The aim is to shorten the time to commercialization to the most extent possible. With this in mind, in April 2023 we opened the MI Center, which consolidates material informatics functions and human resources at the Tokyo Research Center in Kanagawa Prefecture. Moreover, we have introduced cutting-edge equipment to automate actual data collection, synthesis, and evaluation of physical properties required for MI, which will dramatically improve efficiency, thereby speeding up the development process.
ESG Initiatives
Ensure compliance—the basis for everything we do—and promote human rights initiatives
Tosoh recognizes that nonfinancial capital initiatives are also vital in sustainably enhancing corporate value. As I have been saying since I became president, I believe that earning the trust of all of our stakeholders is a fundamental condition for a company to achieve sustainability. We are also convinced that we can gain the trust of our customers, business partners, and government agencies by not only providing products that are safely produced and steadily supplied, but also by ensuring even more comprehensive compliance.
It is generally known that demand has recently grown for a global response to issues related to human rights. In response, the Tosoh Group has formulated a human rights policy to demonstrate its active approach to human rights across the value chain.
Safety Initiatives
Focusing on ensuring safe, stable operations as a chemical manufacturer’s responsibility to society
As the leader of a chemical manufacturer, I place particular emphasis on safe and stable operations. After the explosion and fire that was experienced at the Nanyo Complex in 2011, I served as the secretariat of a safety reform committee that was formed following the accident, and personally visited various plants to communicate directly with operators and facility managers to emphasize the importance of following and maintaining safety regulations at each site. My personal background is in manufacturing, so while listening to the issues faced by those at the work site, as well as the frank opinions concerning individual work styles, I have also been promoting sound facility operations, and reviewing personnel allocation and work details based on the underlying premise that safety takes precedence over everything else at the workplace.
Recently, we have been promoting the application of digital technology and digital transformation (DX) to safety. In manufacturing, for instance, we have introduced Internet of Things (IoT) technology as a safety measure against equipment failure and life expectancy prediction and renewed the distributed control system (DCS). Action has been taken and large screens have been installed in instrument rooms at all plants, enabling the oversight of important activities and data collection. This has created an environment that facilitates the making of decisions and issuing of instructions on the part of team leaders.
As a result of these ongoing investments into the workplace to restore soundness, which contributes to preventive maintenance, process-induced abnormal phenomena and accidents have declined steadily over the past several years. However, with this improvement, it is unacceptable to start taking things for granted and adopting half-hearted measures when it comes to safety activities, so we intend to continue working steadily to ensure an enhanced level of safety and stable operations are followed at all sites.
Cultivation of Human Resources
Creating a rewarding workplace that facilitates growth centered around self-reliant human resources
It goes without saying that personnel are the greatest management resource supporting the foundation of any company. I mentioned our corporate philosophy earlier, and the innovation in chemistry stated in that philosophy, will be respected and carried out by our employees. The word “innovation” does not only refer to R&D. In manufacturing, for instance, innovation represents the accumulation of improvements that are made every day to continue safe, consistent product manufacturing. When it comes to sales, listening to customers’ needs and using trial and error to deliver to customers the exact products they desire, as well as when they need them, is also considered innovation. Therefore, we always make it a point to share these ideas with our employees and remind them that they are all innovation leaders.
The basic policy for human resource development, which we established two years ago, stipulates that we seek to nurture self-reliant human resources who can create their own tasks and roles in any environment and work with others to achieve the best results possible. This constitutes a clear statement of intent on our corporate culture, which has been cultivated over many years.
The Tosoh Spirit, established at the same time as the corporate philosophy in 1986, comprises five basic beliefs: ‘eager acceptance of challenges,’ ‘calm assessment of situations,’ ‘passionate response,’ ‘firm resolve,’ and ‘cooperation and gratitude,’ which I believe are also rooted in a corporate culture that champions independence and initiative. In this diverse, complex, and ever-changing world, we are constantly reminded that we must cherish the guiding principles represented by the values expressed in the Tosoh Spirit.
We also believe that improving and maintaining employee motivation is extremely important. As part of our efforts, we cultivate a rewarding work environment while also promoting employee-centered career development. One such example would be the development of human resources with specialist skills capable of working overseas. Over 50% of our net sales is generated by our overseas operations, which makes us an attractive company that operates globally. As such, we have begun to formulate a system that offers our employees the opportunity to receive the appropriate education and preparation to be relocated and active abroad. Moreover, we would like to increase opportunities for administrative roles, as well as technical employees, to go overseas to gain many different types of experiences. At present, some technical employees may find themselves assigned to a single department for a long time, and although this is difficult to change, we intend to make our best effort to provide those employees with interesting alternative options.
Governance
Results of Discussion and Dialogue
While the top priority of any company is to achieve successful business results and earn good levels of profit, management must also take into account shareholders and investors’ interests, including dividends and stock prices. For this reason, the company regularly hold discussions and engage in dialogue with our management. We like to share appropriate information with our external directors prior to Board meetings to help deepen discussions and give every opportunity for all participants to share their views on any issues. Moreover, we provide opportunities for open discussion several times each year with members of the Board of Directors, independent of Board meetings, to discuss Tosoh as a whole and in what direction the portfolio should move in. Opinions voiced in such discussions are then often reflected in our future initiatives.
Message to Stakeholders
Welcoming further challenges with the Tosoh Spirit in mind
Looking back on FY2023, results revealed a turbulent year, something which I believe has applied to our stakeholders as well. But on a good note, our suppliers succeeded in providing us with raw materials amidst difficult conditions, and our customers were able to purchase our products even after consenting to price adjustments. Meanwhile, our employees also maintained the structure—from manufacturing to sales—and engaged in business even in the face of the COVID-19 pandemic. On reflection, I believe that FY2023 was a year highlighted by the support we obtained from all stakeholders.
In general, the Tosoh Group faces a major obstacle; namely, the need to balance growth and decarbonization amidst a continued outlook of uncertainty for the business environment. I believe that we can, however, find a positive, bright side to every situation, in addition to facing the inevitable negative aspects. We openly encourage our employees to make pessimistic assumptions and prepare accordingly, but always take an optimistic approach. The goal of decarbonization, for instance, will spark the development of a host of new technologies. This should provide the Group with a considerable competitive edge once implemented.
At Tosoh, we will always keep the spirit of cooperation and gratitude in mind, view situations dispassionately and at the same time with passion, while accepting the challenge of tackling difficult situations in a unified manner. We also aim to be a company that continues to earn the trust of all its stakeholders—including customers, business partners, shareholders, investors, and residents of local communities.
We humbly ask for your continued understanding and support of the Tosoh Group as we move forward together.
Mamoru Kuwada
Representative Director and President