initiatives to enhance returns on capital
TRANSCRIPT
Today, I will explain our initiatives to enhance returns on capital.
Initiatives to Enhance Returns on
Capital
April 11, 2019Hidetaka MatsuishiCorporate Executive Vice Presidents and CFORicoh Company, Ltd.
I will show you the page that Mr. Yamashita presented a little while ago. Last year, we embarked on a project under his control in which we embarked on an
initiative to make management more capital-conscious.
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Simultaneously deploy growth strategies, enhance returns on capital, and reform governance
Pursuing RICOH Take Off
Implement RICOH Ignite growth strategies, reaching targets for FY2022 and generating sustainable growth thereafter
Enhance returns on capital and materialize growth strategies by deploying appropriate capital policies and investments
Driving growth strategies by properly evaluated and incentivized corporate governance system
Growth strategiesdeployment
Enhance returns on capital
Corporate governance reforms
I will briefly background this initiative. As I am sure you know, perspectives on enhancing corporate value have changed.
The Japanese government rolled out the Stewardship and Corporate Governance codes after formulating its Japan Revitalizaton Strategy in 2013.
The Corporate Governance Code was revised last year. Among the changes was a new guideline on managementʼs giving due consideration to the cost of capital.
The idea is for managements to remain aware of costs and risks while endeavoring to enhance returns on equity and optimize corporate value.
This translates into boosting capital and income gains and thereby enhancing total shareholder returns.
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2013 2014 2015 2016 2017 2018
Changing Corporate Value Improvement Perspectives
Japanese governmentʼs
strategy economic
revitalization(Third Arrow of
Abenomics)
StewardshipCode
introduced
CorporateGovernance Code
introduced
Itoh Report*1
(ROE 8%)
StewardshipCode revised
CorporateGovernance Code revised
Capital costs
Scale expansion
Scale optimization
Corporatevalue
optimization
Capital costs
Costs and risks awareness
ROE
Returns awareness
Enhancing total shareholder returns
Capital gains(Share price)
Income gains(Dividend)ROE
*1: Japanʼs Ministry of Economy, Trade and Industry commissioned Professor Kunio Ito of Hitotsubashi University to chair the following project: Competitiveness and Incentives for Sustainable Growth: Building Favorable Relationships between Companies and Investors, with the final report being called the Ito Report.
The second backdrop to our initiative was how the capital markets see Ricoh. While our dividend yield has been stable, our ROE and share price growth rates have
been high volatility. Our ROE declined in FY2017 after we posted significant losses as a result of
structural reforms and efforts to optimize assets, including by posting impairment losses.
You will note that our share price has risen somewhat recently. I believe that we have to transform our earnings structure to stabilize the volatility
we have experienced.
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Capital Market Assessments
-15%
-12%
-9%
-6%
-3%
0%
3%
6%
9%
12%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
05年度 06年度 07年度 08年度 09年度 10年度 11年度 12年度 13年度 14年度 15年度 16年度 17年度 18年度
Share price growth rate
ROE
Record sales and earnings Global
financial crisis
Great East Great East Japan
Earthquake
Corporate Corporate Restructuring and Growth
Project instituted
Dividend yield (right axis)
Dividend yieldROE
(right axis)
Note: FY2018 figures are forecasts
Ricoh Resurgent
Share price growth rate
8% ROE
FY 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
We will need to overhaul our earnings and business structures
The third backdrop element I want to cover is our total shareholder return. There is a gap between the valuation of our stock and TOPIX and benchmarks of
other companies. In that respect, management must endeavor to improve our evaluation among
investors and eliminate our overall market gap by focusing on returns on capital.
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RICOH120%
Company A135%
Company B151%
TOPIX(including dividends)
184%
80%
100%
120%
140%
160%
180%
200%
FY2012 FY2013 FY2014 FY2015 FY2016 FY2017
Total Shareholder Return
Share price(valuation)
gap
Improve evaluation from investors and eliminate valuation gap through management focusing on returns on capital
Total shareholder return (Accumulated dividends over years one through five)
We have fully deployed growth strategies to drive sustainable expansion and lift corporate value over the medium and long terms. We will cultivate numerous growth businesses.
We need to thoroughly manage investment and business portfolios in a range of fields.
We believe that having management keep close tabs on shareholdersʼ equity and returns on capital will enable us to deliver sustainable growth and improve medium-and long-term corporate value, thereby lifting returns to shareholders and other stakeholders.
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Management that Pursues Sustainable Growth and Lifts Corporate Value over the Medium and Long Terms
ResurgentFY2017〜
IgniteFY2018〜
Take OffFY2020〜
Deliver value to shareholders
and other stakeholders
Deliver value to shareholders
and other stakeholders
Management conscious of returns on capital
Materialize growth strategies
Pursue capitalefficiency
Materialize growth strategies
Pursue capitalefficiency
Portfolio management
Drive sustainable growth and
improve corporate valueover medium
and long terms
Structural reforms Launch growth strategies Overhaul governance Strengthen management systems
Fully deploy growth strategies Reform operational foundations
supporting growth strategies
¥185 billion in operating profit ROE over 9.0% Reform business structure
Need to make more robust investment and business portfolio management in fully pursuing growth strategies with conscious of returns on capital
This page shows where specific efforts are heading. Over the years, our ROE approach has been to focus on improving corporate value
over the medium and long terms. We will progress based on properly defined business operations and capital policies.
On the business management front, we will manage investments by deploying ROIC requirements for each business and business unit KPI management to contribute to operational profitability.
Our capital policy is to optimize our interest-bearing debt and shareholdersʼ equity structure.
At the same time, we seek to generate shareholder returns including consistent dividends.
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Returns on Capital-Centric Business Operations and Capital Policies
Investment capital
Financing
Investments
Debt costs (interest payments)
Investorsʼ anticipated
returns
ROE
Business operations
Improve corporate value over medium and long terms
Capital policies
ROIC exceeding capital costs:business and investment management
Key performance indicator management by business strategy
Optimize debt-to-equity ratio
Shareholder returns Reduce capital costs
Debt
Shareholdersʼ equity
Mar
ket Cr
edito
rsIn
vest
ors
Business investments
Returns
Investment
Capital costs
Pursue returns exceeding capital costs
We look to expand our ROIC tree in line with business strategy and departmental characteristics.
The application of ROIC extends to businesses and regions. Existing, growth, and new businesses inherently differ inherently, so we will manage them with different KPIs.
We also want to use meaningful KPIs linked to activities in the field while also benchmarking top companies.
For existing businesses, management encompasses such elements as prices, cost rates, and inventory turnover rates. We will maintain and more tightly manage such indicators.
KPIs for new businesses will include return on investment, impairment risks, and internal rates of return.
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Example ROIC Tree Matching Business Strategies
ROICROIC
Business ABusiness A
Business ABusiness A
Boost NOPATBoost NOPAT Profit marginimprovementProfit marginimprovementFixed costsreduction
Fixed costsreduction
Selling price ratesSelling price rates
Cost ratesCost rates
Note: Including by reviewing and withdrawing from low-profitability existing businesses (reducing invested capital)
・・・
・・・etc.・・・etc.
・・・etc.・・・etc.
・・・
Note: Prioritize growth over medium and long terms
KPI
CapitalpoliciesCapitalpolicies
Boost NOPATBoost NOPAT
New business ANew business A
New business BNew business B
OptimizeInvestment capital
OptimizeInvestment capital CCC improvementCCC improvement
Fixed assets turnover
Fixed assets turnover
Optimize cash reserves
Optimize cash reserves
ROEROE Optimizeinvestment capital
Optimizeinvestment capital
Inventory turnover period
Inventory turnover period
Production automation rates
Production automation rates
M&A investmentsM&A investments
Capital (R&D) investments
Capital (R&D) investments
ROIROI
Impairment riskImpairment risk
IRRIRR
・・・etc.
・・・etc.
・・・etc.
Deploying using ROIC tree in line with business strategy and departmental characteristics
Pursue efficiency goals
Pursue growth
goals
This page maps our operational and capital policies. We aim to maximize investment returns and corporate value while paying due accord to capital costs and maintaining financial health.
We will maximize ROIC through the ROIC and portfolio management efforts described earlier.
The Investment Committee that we launched last year has begun looking at ROIs and managing the risks and opportunities of individual investments while keeping tabs on internal rates of return, discounted cash flows, and other benchmarks.
We will continue our policy of reducing holdings, notably of companies that do not deliver returns or whose performances contribute nothing to our results.
We have halved our cross-shareholdings in recent years to 23 stocks. This level is very low among listed companies.
We seek to diversify debt sources while maintaining our credit rating. We have endeavored to pursue stable dividends under our 19th Mid-Term
Management Plan. We are switching to a policy of paying stable dividends, targeting a consolidated payout ratio of 30%.
Our stock buyback policy is to repurchase shares flexibly based on business conditions. This should help us optimize capital costs and deliver suitable returns on equity, thereby maximizing corporate value improvements.
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Capital Policies Map
Maximizecorporate
value
Total shareholder
returns
Total shareholder
returns
New Customer
value
New Customer
value
Suitableshareholder
returns
Suitableshareholder
returns
Optimalcapital costs
Optimalcapital costs
ROE/Capital Costs
Dividend payout ratio(also refer to DOE)
Keep tabs on capital costs and financial health while maximizing investment returns and corporate value
ROIC management ROIC business management
– Hurdle rate exceeding capital costs + spread
– Balance sheets management
Maximize returns on invested capitalMaximize returns on invested capital
Capital policy Sufficient capital
Maintain financial health
Maintain financial health
Investment management (through committee) IRR exceeding capital costs
with risks Business strategy → ROI
Reduce policy shareholdings Benefits and risks greater than
capital risks
Debt policy Maintain credit rating Diversify debt sources
(direct ratios)
Stock buyback policy Repurchase shares flexibly
based on business conditions
Dividend policy Deliver stable dividends,
targeting consolidated payout ratio of 30%
Here, you see our roadmap to deploying ROIC. Our Investment Committee currently employs such benchmarks as the hurdle rate
and internal rates of return. This year, we are trialing business ROICs while using the ROIC in frontline activities. Our next step will be to manage performance by setting companywide goals,
deploying business ROIC trees, and managing our business portfolio.s The step after that will be to set PDCAs while refining ROIC. That effort would also
encompass automation through information technology. People often say that ROICs tend to have diminishing equilibriums. Still, we will keep
tabs on business phase positionings while putting ROIC management in place in a way that works for Ricoh.
In todayʼs presentation, I presented some thoughts on challenges ahead of us, and we have much to decide. Nonetheless, I would appreciate your understanding of where we are heading.
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Step 3 StabilizeStep 2 MaterializeStep 1 DeployToday
Trial assessment comparing business ROICs with previous year results
Use ROIC tree in frontline activity management trials
Set companywide and business ROIC targets and manage predicted performances
Practice ROIC tree-based PDCAs
Use ROIC in managing business portfolio
Refine ROIC based on business conditions
Use ROIC tree to set PDCAs (including using data aggregation systems for automation) Employ hurdle
rate reflecting capital costs in investment decisions
Three steps to delivering a solid ROIC
ROIC Roadmap
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Forward-Looking Statements
Note: In this document, fiscal years are defined as follows: FY2018 = Fiscal year ended March 31, 2019, etc.
The plans, prospects, strategies and other statements, except for the historical events, mentioned in this material are forward-looking statements with respect to future events and business results. Those statements were made based on the judgment of Ricoh's Directors from the information that is now obtainable. Actual results may differ materially from those projected or implied in such forward-looking statements and from any historical trends. Please refrain from judging only from these forward-looking statements with respect to future events and business results. The following important factors, without limiting the generality of the foregoing, could affect future results and could cause those results to differ materially from those expressed in the forward-looking statements:a. General economic conditions and business trendb. Exchange rates and their fluctuations c. Rapid technological innovation d. Uncertainty as to Ricoh's ability to continue to design, develop, produce and market
products and services that achieve market acceptance in hot competitive marketNo company's name and/or organization's name used, quoted and/or referenced in this material shall be interpreted as a recommendation and/or endorsement by Ricoh. This material is not an offer or a solicitation to make investments. Please do not rely on this material as your sole source of information for your actual investments, and be aware that decisions regarding investments are the responsibility of themselves.