Our goal is to remain an essential company that society cannot do without.

 

Kyoei Iron, the predecessor to Kyoei Steel, began business as an ironworks producing wire rods in 1947. This start can be traced back to the strong desire of Koichi Takashima, the de facto founder of the Company, to spur recovery in a Japan that had been devastated by war. As business got on track, in the 1960s the Company (now renamed Kyoei Steel) rapidly expanded overseas to Europe, the rest of Asia, the Americas, and elsewhere. The background to this expansion was the fervent wish of Koichi to show the world the true character of the sincere and industrious Japanese people, who were still thought of as war criminals by some.
In the 1970s, Japan achieved rapid growth, yet this success also brought problems. Pollution had become a pressing social issue, in forms such as Minamata disease (mercury poisoning) and Yokkaichi asthmas (pollution-induced breathing and pulmonary issues). Koichi Takashima reflected on whether humanity had become too complacent about the Earthfs abundant capacity to accommodate it, going on to declare his wish for harmony between corporate growth and the natural environment. This goal prompted the switching to fully closed systems at the Companyfs ironworks, and the start of its MESSCUD (medical waste disposal) business in 1988.
In this way, Koichi paid close attention to that history of Japanfs recovery and growth as he forged pioneering management policies. He would often ask employees to consider the point of the Company and what it aspired to, while promoting business under our management principle Spirit of Challenge. This would be the driving force behind the Companyfs growth. Much as the renowned economist Katsuhito Iwai asked who companies were for, Koichi dwelt on what he could do not for his own benefit, but for the Benefit of the people of Japan and the rest of the world. Based on that management philosophy of contributing to society through steelmaking, we have always aimed to be a company that can give back not only to shareholders, but to our local communities and all other stakeholders.
Now, in the 21st century, values associated with management are shifting, with the appearance of concepts such as the SDGs, ESG topics, resource circulation, and diversity and inclusion. Naturally, the ultimate management goal of any company is still to maximize profits, but as an inheritor of Koichi Takashimafs philosophy, I believe that in response to these changes in value systems that have come with our modern age, Kyoei Steel has an important role to play in society. To do so, ever since we formulated the previous medium-term business plan, NeXuS 2023, I have been expressing my wish for us to help bring about a resource-circulating society and to remain a truly essential company.

Japan has finally tipped over from anaging society to a shrinking one

 

With Russia’s war on Ukraine and, since the end of last year, conflict in the Middle East, alongside fears about the future of Taiwan, the world faces ever-higher geopolitical risks. On the other hand, moves toward digital transformations (DX) are starting to have a major impact on globalization and the way we all work. Even now, cutting-edge technologies like ChatGPT are appearing, and this trend is likely to continue accelerating. Other concerns abound: inflation continues around the globe, the gap between rich and poor is growing, and the forces of law and order are struggling. Moreover, there is the matter of large-scale natural disasters, which are becoming more frequent in recent years. These are fueling a sense of crisis about global warming, and there is growing interest in companies’ efforts to fulfill their social responsibilities to work toward a carbon-free society, a shift to renewable energy, and a more sustainable society.
Furthermore, Japanese society has at last reached, and gone past, the tipping point from a society that was merely aging, to one that is shrinking. The age has arrived where the country’s declining working populations is starting to result in labor shortages and a slump in consumer demand. However, if we can achieve a virtuous cycle between pay and prices, we can return to positive interest rates. For those of us who have long known a world with no, or negative, interest rates, we will need to remind ourselves that, once again, holding onto items comes with a cost.

The three years were a success in terms of profit targets, but there is plenty to reflect on

 

In FY2024, sales dropped compared to the previous fiscal year, but profits rose. It was the final year of NeXuS 2023, the medium-term business plan that we formulated in FY2022, and overall we largely achieved our net sales and other numerical targets. In terms of profits in particular, we exceeded our 18-billion-yen target for operating income by recording 21 billion yen. In this regard, we managed some respectable results. However, we fell short on our goal of creating a Group-wide production system capable of shipping 4 million tonnes of products a year. It was also a three-year period in which there is much we can learn from qualitative results such as in our efforts to strengthen quality. If I were to give the period a score out of 100, I think it would warrant a 70 overall.
In particular, our primary focus has been on strengthening our overseas steel business but while we achieved almost 5 billion yen in profit in the first year of the plan, by the final year we were unable to avoid recording a significant loss, with our Vietnam business playing a central role in that. While many of the difficulties in Vietnam were due to external factors such as political changes or changes by the Vietnamese government to financial or real estate measures, if we had been able to more flexibly gather information and respond to these changes, I think we would have been able to minimize the damage.
Also, as a manufacturer the most important point is to ensure safe, stable operations. Leaks of molten Steel causing fires here in Japan and elsewhere, and other events have occurred that have firmly impressed upon us the importance of issues such as maintenance systems in manufacturing departments, passing down workplace expertise to younger workers, and our education and training framework. While entirely eradicating accidents is difficult, we should still always aim for zero accidents. As part of that, we want to make sure that the expertise and knowledge our people have is passed down?not lost?so we need to do something to fill in all the gaps. To do so, as an analog method, we have to respect one another as one team, and create mechanisms so that we can warn each other in areas where we are lacking. On the other hand, we also need initiatives to create Smart factories, such as by introducing robots, AI, sensors, and other ways of bringing about automation and energy efficiency. We need measures for both.

Identifying aspects of NeXuS 2023 that were not thoroughly implemented, to strengthen reimplementation efforts

 

NeXuS II 2026, the new medium-term business plan started in FY2025, picks up where NeXuS 2023 left off and acts as a signpost how we will respond to changes to socioeconomic circumstances and to calls from society that our corporate management must address going forward. The crux of the new plan is to carry on with the basic policies of NeXuS 2023, while also laying out anew our fundamental approach to the strategies and direction we should take amid dramatic changes to the global economy and the structure of society. We have reacquainted ourselves with our strengths and weaknesses, and looked into what form our businesses should take to respond to market changes and a new age. To retain our strengths as a top manufacturer of construction steel, we Will focus on implementing decentralized, site-led management for different regions; optimum strategies that aim for optimal solutions rather than perfection; and our Globalization of Local Economies and Niche Industries Strategy. For our material recycling business, another strength, we have determined that we need to develop the business with a focus not on volumes, but on quality and reliability. That said, we will also humbly reflect on our unfinished efforts?such as those to boost cooperation within the Group, update our facilities, and train personnel?and enact measures to turn our weaknesses into strengths.
As such, in the new medium-term business plan, we have identified those areas we did not fully implement, and work to strengthen our efforts, and add measures that hone our strengths while mitigating our weaknesses. Taking the above into consideration, through NeXuS II 2026, we will pursue management focused on six key
points (see below).
A key point on the business front is our shift in our overseas steel business to place less weight on our Vietnamese business and more on our North American business. As I mentioned earlier, the slowdown in our business in Vietnam during the previous plan was a major factor in the drop in profitability for the overseas steel business overall. We have two underlying problems with our business there: the difficulty in overcoming cost differences between us and mini blast furnace manufacturers who use different production methods, and our inability to flexibly respond to changes in measures by the Vietnamese government since it started moving from a more open type of economic management to one with a greater emphasis on regulation. In terms of competition and overcoming cost differences, the large-scale investments we are making at our bases in the north of the country will significantly improve our cost competitiveness. At our southern bases, meanwhile, in addition to what was previously our main business selling to homes, we are gradually increasing sales to projects while reducing operations to around 60% of peak levels. This will enable us to minimize the impact of loss on valuation of inventory resulting from market changes on our consolidated results. In North America, where growth is forecast in the medium and long term, and where the risk of economic fluctuations is lower than in Vietnam, we will carry out large-scale investments, with a particular focus on measures to combat degradation at our US bases, and raise productivity to expand our North American business.
Our strategy to strengthen the foundations for growth involves particularly focuses our energies on improving intangible assets. One aspect of this is our Brand strategy, another is continuing from the previous plan in strengthening our human capital. Take MESSCUD, the medical waste disposal business that we developed and launched in 1988, as an example. We commercialized this service with the intention of securing a source of revenue separate from our conventional steel product lines, but as well as detoxifying and disposing of medical waste using the high temperatures that EAFs produce during operation, the iron components of the waste can be partially recycled for use in our steel products. In this way, MESSCUD is helping to circulate iron resources.
We often speak of our ambitious wish to work in harmony with the natural environment, but from a management standpoint, activities that do not lead to profit are not viable. This harsh truth will not change, but we are shifting to an age where companies that act more ethically are looked on more favorably by society. Taking this into account, we must once again publicize our history of combined efforts in steelmaking and the disposal of medical and industrial waste, to build a brand out of the originality of our business model. Specifically, in May of this year, we started sales of what we call “Ethical Steel,” steel products manufactured from medical waste that has undergone a certain level of detoxification.
With regard to strengthening our human capital, we continue to develop workplace environments and systems that enable employees to work dynamically and in good health. Under NeXuS 2023, we were able to qualify for certification in the Certified Health & Productivity Management Outstanding Organizations Recognition Program, but going forward we Will endeavor to further level-up our personnel, welfare, and training systems. We will also make the investments and create the systems needed to do so. Alongside this, employees need to benefit financially for working for this company, so I would like us to steadily increase profits and continuously raise base salaries beyond the pace of price rises. Additionally, I would like to see employees grow while building ties with their colleagues and those outside the Kyoei Steel Group, and we should create mechanisms to boost their aspirations, and a corporate culture that furnishes them with a robust spirit of taking on challenges, as well as sales capabilities.
As part of our efforts toward carbon neutrality, when we were formulating the previous plan, we gave ourselves the target of reducing our CO2 emissions by half by FY2031 compared to FY2014 levels. We also disclosed information based on TCFD recommendations and submitted answers to CDP, and made progress with establishing internal systems. Our business divisions are also switching the fuels they use, reducing their energy intensity, and expanding solar power generation. At our site in Yamaguchi Prefecture, our activities to plant olive trees have been a powerful force for change in employees’ awareness of efforts toward a resource-circulating society. In the new plan, too, we are continuing these kinds of initiatives, and aiming to reduce CO2 emissions, but also to help bring about a circular economy. Centered on our Research Center for Sustainable Technologies, we will expand the range of applications that make effective use of resources and steel slag produced by EAFs.

Improving overseas business profitability, but also improving corporate value, including invisible value

 

As of August 2024, our price-to-book ratio (PBR) is lower than 1.0, which shows that we have not done enough to persuade the markets. Our capital costs stand at around 7%, and our ROE target under the new plan is 8%, but in the medium or long term I would like us to achieve a level of more than 10%. I would therefore like us to steadily implement the measures of the new plan and achieve its targets, in order to raise our profit levels and build a system that allows us to stably record operating income of 25 billion yen. To do so, it will be vital to raise capital efficiency. Rebalancing our business to North America and away from Vietnam is part of this. In terms of how profits are distributed, we hope to raise the dividend payout ratio from 30%, where it has traditionally stood, to 35%, and strengthen shareholder returns, while striking a balance with growth investments and investments in our human capital.
At the same time, it is imperative that we enhance our “invisible value,” which is a source of our competitiveness as a company. In addition to strengthening our brand and human capital strategies, we are working on innovation, such as through collaborations with universities looking at making effective use of slag or dust, or recycling resources. Making ourselves a company with future promise, and that employees can be proud to work for, through initiatives like these, will go a long way toward increasing our corporate value.

Being a corporate entity that considers itself a member of civil society, and can achieve firm but flexible growth

 

In 1979, the year after I entered work, I saw an episode of an NHK TV drama that followed a disabled person who had been left behind in the period of rapid economic growth, and how challenging society was for someone with a disability at that time. It shocked me. Since that time, there has been progress toward accessibility, and in recent years, ideas about inclusion and normalization have become more widespread. While they still face many challenges, the environments put in place for people with disabilities make their lives much easier than in the past. Looking at how society can change in this way, I get a real sense that even as society’s needs change with the times, and even facing difficult problems, individuals making intentional changes is the first step to changing society.
Of course, our objective as a publicly listed company will continue to be to increase profits through our business, and to this end we must work hard in various areas and seek to maximize profits. However, now in the 21st century, the ideas behind the SDGs are spreading globally, and even in the current, fiercely competitive environment, we are called on to show interest in other people and the natural environment. For us to survive the ages to come, we have to recognize that we are a part of civil society. I firmly believe that it is vital that we have room in our hearts for others as we robustly grow our company. I hope that each and every employee, myself included, and even in the face of a harsh reality, can make Kyoei Steel a truly essential company by asking ourselves what society needs from a company and acting accordingly, as we firmly and flexibly strive toward raising profits.