NTN Recovery Scenario from COVID-19

July 15, 2020: NTN Recovery Scenario from COVID-19, following Consolidated Financial Results for 2019.

Transcript

1. 1 ----- Global Web Meeting ----- NTN Recovery Scenario from COVID-19 (Explanation to NTN Senior Managers around The World) July 15, 2020 Tetsuya Sogo, CFO of NTN Corporation < Please look at P31 of PPT “NTN Consolidated Financial Results for 2019” >
2. 2  This is the final page of my explanation, and I believe this is the most important page.  This chart shows the Basic Concept and Target of our Recovery Scenario that is the Precondition for the Commitment Line of 100 billion yen.  First of all, I would like to make a clear definition of Recovery. What is Recovery?  Definition of Recovery is the Capability for NTN to Create Corporate Value, which has to be achieved in 2023, at the end of our next Mid-Term Management Plan.  Assuming that the Expected Return of our Shareholders in Japanese Stock Market is 8%, as you know, we designed that our Consolidated WACC, Cost of Capital is 5%, so our commitment of Consolidated ROIC, Return on Invested Capital is 5% in 2023. Our Main Bank, Mitsubishi agreed to this target, as the minimum requirement.  Our final target of Net D/E Ratio is less than 1.0, however it will be almost impossible to achieve that level in 2023 without the major Equity Finace that may cause the Dilution and Risk of Stock Price Decline. So our Main Bank agreed to 1.5, as the target of Net D/E Ratio in 2023. Separately, we will keep paying attention to our Stock Price, and Finance HQ will keep studying the Possibility and Pratical Scheme of Equity Finance.  In order to achieve ROIC 5%, we do not rely on the Volume. We basically do not need Investments to increase our Production Capacity. The target of Sales in 2023 therefore is 700 billion yen, and Operating Income is 42 billion yen, EBIT Margin is 6%.  We are going to develop the detail action plans, and we need Structural Reform to proceed this Recovery Plan.  By the way, What are the current major problems at Global NTN Group excluding the impact of COVID-19? From my financial point of view, the biggest problem is that NTN is not creating the Corporate Value, but destroying the Value a lot recently especially in Japan, Americas region and European region.  Consolidated ROIC is barely positive, but way below Consolidated WACC that is 5%. Our negative FCF is causing a very high level of D/E ratio, and our financial structure is too much leveraged and very risky.  There are 3 major factors that are causing our negative FCF situations
3. 3 1) Decreasing EBIT Margin 2) Low level of Asset Turnover Ratio, especially for Inventory Turnover 3) High level of Investment in comparison with the level of Depreciation  People say that “The major cause of Company Failure is Company Success.” I am afraid that NTN still cannot forget the success experience in the past before Lehman Shock, and cannot change the basic Corporate Attitude yet. It is “Boiling Frog Theory”. I would like to explain these 3 major factors one by one. 1) Decreasing EBIT Margin (Solution=Structural Reform①: Fundamental review of marketing and pricing strategy) I think this is closely related to the traditional Japanese Monozukuri Culture. Monozukuri means manufacturing. NTN always aimed to achieve the highest level of productivity and quality at the same time with continuous cost reduction. NTN was very successful company by making all OEM customers happy by such competitive advantage in manufacturing with KAIZEN spirit. But now, NTN cannot make profit by this kind of traditional overall cost leadership strategy, because Korean or Chinese competitors are getting stronger and gaining big presence in the markets of our core businesses such as Constant Velocity Joints and HUB bearings. Professor Philip Kotler, Father of Marketing at Kellogg, said; “There is no golden rule in marketing to win, but there is only one clear rule, -- If you try to make all of your customers happy, your company will fail. -- ”
4. 4 We have to focus on our marketing and pricing strategies toward the future profitable “Product Portfolio” and “Business Portfolio”. We have to stop selling negative profit product to strengthen our Product Portfolio, and increase the ratio of Aftermarket business to strengthen our Business Portfolio. We have to keep improving our manufacturing capabilities, however we have to clearly understand that we cannot make all customers happy. We do need strong Marketing and Pricing strategies to improve our EBIT Margin as soon as possible. For your reference, I would like to introduce some other words of Philip Kotler; “The sales department is not a whole company, but the whole company better be a sales department” “There is no such thing as a commodity. It is simply a product waiting to be differentiated.” “You don’t sell to distributors. You sell through them and with them.” 2) Low level of Asset Turnover Ratio, especially for Inventory Turnover (Solution=Structural Reform②: Strengthen production control and inventory control) Asset Turnover Ratio especially for Inventory Turnover Ratio is our big weak point in comparison with our competitors. We did not focus on this subject effectively for a long time, while focusing on such as Machine Running Ratio (MRR) and Cycle Time. Our level of productivity such as MRR or Quality standard has been very high, but our level of Inventory turnover has not been improved. We have to focus on Total Lead time and Total Throughput, and improve our speed to generate profit and improve our ROIC.
5. 5 We are now trying to introduce TPS, Toyota Production System and TOC, Theory of Constraints to our functions of Production, Production Control, and Logistics in Japan. We have to improve our Cash Generating Speed. We also expect this challenge will make it possible to flexibly utilize our OEM production lines for Aftermarket production to expand our Aftermarket Business without another big investment Our manufacturing people should also be getting more sensitive to prioritize the production of profitable products for Aftermarket, rather than Machine Running Ratio or Cycle Time. 3) High level of Investment in comparison with the level of Depreciation (Solution=Structural Reform③: Break out of self-sufficiency) It has been another NTN Culture that “Do it by yourself to get know-hows and profit”. We therefore have invested a lot for all processes such as Forging, Turning, Heat Treatment, Grinding and Assembly, and we enjoyed high level of EBIT Margin before Lehman Shock. But such a situation has changed under the globalization, and we are not making enough profit, and a large amount of Investment much more than the amount of Depreciation is causing our negative FCF. It has become more and more difficult for NTN to be equipped with adequate financial resources to respond effectively to higher and wider requests for global complicated markets, and get enough return from our investment. To reduce the level of investment, NTN should build cooperative relationship with outside organizations such as suppliers and customers so that NTN can expect complementary resources and synergies. This kind of Strategic Partnership should be a relationship of win-win founded on mutual trust and respect.
6. 6  These 3 factors are the Fundamental Changes for NTN to create Corporate Value in 2023. We have to motivate all NTN people globally toward this direction, by learning as an individual, as a team, as an organization to Measure, Manage and Maximize the Total Value of NTN Group.  This Recovery Scenario is nothing without sharing, communicating, exchanging ideas and experiences in Global NTN Group. I am expecting each of you to discuss this Recovery Scenario with your Middle Management People. Strong Networking of middle management all over NTN is very important to establish the Learning Organization toward our Value Creation, because it is only Middle Management who can solve the contradiction between the ideal concepts of Top Management and the Reality of each working place.  Please review the current systems, rules and ways to do your business to change the behavior of your people toward the direction of Value Creation with Challenging Culture of Learning Organization, that is the most important transformation for global NTN Corporation.  I am expecting each of you to be always a growth minded leader, who can inspire the people, organization and market. No Guts, No Glory!! Thank you very much.