President and Chief Executive Officer
In fiscal 2000, ended March 31, 2000, NKK Corporation made a number of significant achievements. Despite volatile business conditions, the Company surpassed fiscal 2000 goals for downsizing personnel, increasing effectiveness in facilities investment and reducing borrowings through a series of innovative reforms. The Company also succeeded in implementing crucial structural changes, including reorganizing its steel bars and shapes operations into NKK BARS & SHAPES CO., LTD., as well as spinning off Toyama Works into NKK MATERIAL CO., LTD., Keihin Works' welded pipe business into NKK WELDED PIPE MANUFACTURING CO., LTD., and its coated steel business into NKK STEEL SHEET & STRIP CORP.
During the period under review, domestic raw steel production rose 7.7%, to 98 million tons, reflecting recovery in demand for steel sheets in Southeast Asia as a result of the region's economic turnaround. However, Japanese steel sales continued to dwindle as domestic manufacturing companies curtailed output. The Engineering Division faced intense competition due to further industry deregulation and a reduction in public works investment.
In this sluggish environment, consolidated net sales dropped 6.8%, to ¥1,685.4 billion. Operating income soared to ¥61.9 billion, owing to an improved profit structure following major fixed-cost reductions achieved through restructuring. However, reorganization of operations proved costly and the Company recorded a net loss of ¥45.9 billion. This was despite a 57.7% improvement over the previous year.
Consolidated sales in the Steel Division decreased 7.8%, to ¥1,235.9 billion, while those in the Engineering Division fell 0.1%, to ¥435.7 billion. Meanwhile, sales for Other Fields, encompassing urban development, large-scale integrated circuits (LSIs) and information technology (IT), dropped 7.8%, to ¥89.5 billion.
Responding to New Challenges
We consider fiscal 2000 to be a new beginning for NKK. Despite the harsh domestic business environment, we made notable progress in securing our position as a leading competitor in the steel industry. The need for self-imposed reforms was underscored by a series of rapid transformations, including the use of international standards pertaining to management and accounting, and external factors such as the growing number of mergers and alliances taking place within the steel industry and among our customers.
NKK's medium-term group business plan, announced on February 3, 2000, spans a three-year period from fiscal 2001 to 2003. The plan focuses on creating value for investors and shareholders. Further improvement of the Company's financial position and earnings structure will boost its position in capital markets. We aim to establish a strong corporate group with a sturdy earnings structure that will help NKK overcome the challenges it faces and build a solid foundation for the next stage of growth.
Strengthening Our Consolidated Financial Position
We will continue to strive to make better use of assets and further reduce borrowings to better our earnings capability. To accomplish this, NKK will focus on improving consolidated ROA and free cash flow, two key indicators of financial strength. NKK is aiming for a minimum ROA of 5.5% and free cash flow of ¥400 billion, supported by proceeds from the sale of assets, in an effort to reduce borrowings by ¥400 billion, to ¥1.2 trillion.
NKK has divided its Group into independent profit units responsible for managing their own performance, based on ROA and free cash flow indicators.
At our Steel Division and in Environmental Solutions, two key areas in which we have been focusing management resources, strengthening profitability is an indispensable step toward heightening our value in the market.
International Steel Operations
Highly Competitive Technologies
Technological development and IT will play key roles in NKK Group growth strategies. In particular, we will develop the utilization of upstream technologies to enhance mass production capabilities for high-quality, low-cost steel products. We will also promote the development of distinctive products, mainly for use by the automotive industry, to boost customer satisfaction. In the Engineering Division, we plan to respond to market needs by increasing the cost competitiveness of our products and prowess in environmental technologies.
In addition, we are targeting superior growth and earnings in the industry by raising the efficiency of operations, improving customer service and developing new businesses through the full-scale utilization of IT.
Management Restructuring and Reworking Corporate Culture
From April 1, 2000, to speed up the decision-making process and improve management efficiency, we reduced the total number of directors and introduced a corporate officer system. Another step toward rebuilding management was the adoption of methods to monitor the performance of individual divisions, based on ROA and free cash flow targets, as well as performance-based wages for employees.
Outlook for Fiscal 2001
In the steel business, the maturing domestic market and harsh economic conditions will continue to present us with challenges, although demand in the global market is projected to expand. We expect tough competition in the environment business.
To ensure that we are fully prepared to endure the competition we have ventured into several business tie-ups and trimmed down certain areas of our operations. Several significant events related to this have occurred during April to June 2000 and will play a valuable role in our future.
The first was our tie-up with Kawasaki Steel Corp. As two of our steel works are in close proximity with those of Kawasaki Steel, we have agreed to cooperate in the areas of distribution, facilities renewal and maintenance and raw materials purchasing to reduce cost and boost production efficiency.
In May 2000, we announced our intention to commence a shipbuilding alliance with Hitachi Zosen Corp., owing to similar goals for cost reduction and other management schemes.
In June 2000, we decided to become partners with IBM Japan, Ltd. The U.S.-based computer giant will acquire 49% of our subsidiary, NK-EXA CORP. A detailed outline of future operations appears in the Information Technology section of this report.
Lastly, we announced our decision to withdraw from the LSI business. Despite the fact that LSI operations performed favorably in fiscal 2000, we realize that significant capital investment would be required to progress further in the chip industry. As a consequence, we have decided to sell our LSI business to Fujitsu Ltd.
NKK is striving to establish a strong financial position not easily influenced by fluctuations in the business environment. Our primary commitment continues to focus upon creating value for investors and shareholders. We aim to use the results we achieved in fiscal 2000 as a basis for progressing steadily forward and completing our medium-term plan by 2003.
We are confident that the ongoing series of reforms which we have outlined in our medium-term plan and the related strategies which we will implement to realize these goals will satisfy the expectations of shareholders. As my message indicates, the NKK Group is gearing up to improve results in the coming fiscal year and beyond.
On behalf of the management and staff, I thank you for your support to date and look forward to your continued cooperation.