Management that takes into account capital costs and stock prices (financial and capital strategy)

For information on the Itoki Group‘s actions to achieve cost of capital and stock price conscious management, as well as a collection of financial and non-financial data, please refer to the following.

The fiscal year 2023 financial results marked the conclusion of the previous medium-term management plan, with all levels from sales to net income reaching new records and achieving results that significantly exceeded our performance forecasts. In particular, operating profit reached an actual value of 10 billion yen before strategic expenses. Our performance is characterized by conscious expense recording in human capital investment, increased labor costs, enhanced education and training, and concentrated investment in the renovation of our own offices, which directly leads to improved productivity and engagement. In particular, office investments have produced great results and are also being used in proposals for office creation.
This performance is largely due to the results of the structural reform project that began three years ago. Strengthening profitability in areas such as sales, production and supply, asset efficiency, building materials, new product development, human resources policies, and digital transformation strategies has led to an improved revenue base. In particular, in the financial capital strategy, we thoroughly managed the balance sheet and optimized asset efficiency through the sale of non-business assets and the reduction of cross-shareholdings. The improvement in "earning power" in terms of improved operating profit is sustainable, and further growth is expected in the future. The project with Advantage Advisors was a success, and contributed to financial strengthening, including the acquisition of treasury stock at the time of exit.
To further improve our earnings and financial base, under the new medium-term management plan, we will implement initiatives such as improving asset efficiency across the group, accelerating financial settlement, improving forecast accuracy, improving the cash conversion cycle, promoting ROIC by business, and restructuring our business portfolio. Through these measures, we aim to achieve sustainable growth and strengthen our competitiveness.

In the new mid-term management plan, we are further promoting our financial capital strategy and strengthening management that is conscious of capital costs and stock prices. In order to achieve our management indicators aimed at becoming the top in the industry, we received a timely request from the Tokyo Stock Exchange last year for policy disclosure, and have steadily implemented PBR improvement measures based on the structural reform project. As a result, PBR has improved to a level well above 1.

For the first time, we disclosed our expected cost of equity capital at 9-10%. There is no correct answer to the calculation method, and there are various views, but we have deliberately set a strict hurdle rate, taking into account that we are essentially debt-free. Although some outside sources have pointed out that we view our cost of capital lower, we have set a strict rate internally as we move forward with expanding our equity spread. We appreciate the opinions of investors and analysts, and the stewardship of our shareholders, and will continue to focus on improving the accuracy of our forecasts and obtaining fair valuations through information disclosure. The 7Flags and ESG strategies in our medium-term management plan for 2026 are systematic elements for improving PBR, and all of our strategies can be explained financially. We aim to achieve the strongest financial position in the history of Itoki by achieving our medium-term management plan and implementing best practices.

We recognize that our business operations and financial capital strategy have entered a new phase, and so we have formulated a "cash allocation" that determines how much of our funds should be allocated to strategic investments, human capital investments, and shareholder returns.

The company estimates that it will be able to generate 65 to 75 billion yen in total over three years, with 25 billion yen set aside for strategic investment including M&A, 5 billion yen for R&D, 10 billion yen for capital investment, and 10 billion yen for human capital investment. It will also consider flexible share buybacks and aim for a dividend payout ratio of 40%.

Regarding capital investment, we use the weighted average cost of capital (WACC) as a hurdle rate and evaluate investment profitability with ROIC. Going forward, we aim to expand ROIC by company and business. As part of our mid-term management plan, we have set ROE at 15%, and improving the current profit margin is particularly important in the three-way breakdown of ROE. We will promote the improvement of operating profit margins through our key strategy, 7 Flags.

As part of our business portfolio, the change in the sales composition ratio of these two businesses in the final year of the medium-term management plan will be roughly flat. However, based on the improved profitability of Workplace Business, which accounts for 70% of the consolidated results, we plan to increase the profit composition ratio of this business by approximately 7 percentage points.

In terms of P&B management, we will improve gross profit and gross profit margins through a sales performance evaluation method that pursues gross profit from sales, reduce costs and compress assets through production and logistics reforms, improve asset turnover by improving asset efficiency, set a target equity ratio of approximately 40%, and appropriately manage leverage.

Our policy is to hold working capital equivalent to one to two months' worth of monthly sales. As for reducing cross-shareholdings, the ratio to shareholders' equity is currently within 4%, and we will reduce them after comprehensively assessing the rationality of holding them, striving to improve capital efficiency, improve our financial position, and generate FCF. This time, we have clearly positioned a 10 billion yen investment frame over three years in cash allocation for human capital investment in working environment investment, education investment, and engagement investment. This is based on the recognition that employees are the main players in corporate growth, and strengthening human resources is essential for medium- to long-term growth.

In particular, to strengthen human capital in our financial capital strategy, we will promote the development and supply of accounting professionals, the sophistication of internal controls through the systematic strengthening of triple audits, and the improvement of asset management as a professional facility management company. Offices will change from a cost to an investment target, which will help improve engagement scores. In addition to "offices that increase productivity," "offices that make you healthier," and "offices that people want to come to," we can expect further prospects in the future, such as reskilling and professionalization through "offices that people want to learn."

Regarding returns to shareholders, our basic policy is to provide continuous and stable dividends as a key management priority. In addition, taking into consideration our consolidated business performance, we will implement a dividend policy aiming for a dividend payout ratio of 40%.

For fiscal year 2023, we have increased the dividend per share from the initial forecast of 25 yen to 42 yen, with two increases of 7 yen and 10 yen, resulting in a dividend payout ratio of 32.2%. Furthermore, for fiscal year 2024, we have forecast a dividend per share of 52 yen, an increase of 10 yen from the ordinary dividend, resulting in a dividend payout ratio of 36.1%.

In recent years, even in the face of tough current-term profit conditions, the Company has been able to provide stable dividends without reducing ordinary dividends. In accordance with the above policy, we will continue to comprehensively consider strengthening profitability and our financial situation, and will aim for a dividend payout ratio of 40% at an early date, including capital policies such as share buybacks that contribute to medium- to long-term corporate value, in order to provide shareholder returns that benefit all shareholders.