Chairman of the Board
N KK entered fiscal 1997 on an encouraging note, having recovered its competitiveness under a just-finished restructuring program launched in 1994. As we began to implement a new three-year management plan to strengthen our positions in the domestic and overseas markets for growth continuing in the next century, however, a series of extremely unfavorable economic developments at home and around Asia turned fiscal 1997 into a disappointing year.
The Japanese economy suffered several setbacks during the year, the first being a sharp weakening of demand after the government raised the consumption tax two points to five percent in April. Shortly thereafter, in June, a devaluation of the Thai baht triggered the start of monetary and financial crises in Asia. Japan's financial industry was then rocked by fears of instability.
The cumulative result of these setbacks was the first year of negative growth for the Japanese economy in over two decades, since the oil crisis in 1974. Moreover, the Japanese economy plunged into recession.
On a non-consolidated basis, NKK's net sales fell to ¥1,112.0 billion. Operating income shrank to ¥51.8 billion as the Engineering Division's earnings weakened in the wake of reduced spending on public works. Net income dropped to ¥11.1 billion, due in part to losses from a blast-furnace outage at our Keihin Works.
The stalled economy reduced the need for steel products. The construction industry was hurt by stagnant demand from civil engineering due to reduced public spending, and falling investment in housing. Demand from the manufacturing sector, despite a surge in shipbuilding, held at the previous year's level due to slumps in other industries, including automobiles.
Exports increased on the strength of sales in the U.S. market, as well as in Asia, where our vigorous sales efforts were effective despite the region's economic crisis. As a result, steel shipments held at the previous year's level.
The division achieved net sales of ¥728.2 billion, basically unchanged from fiscal 1996. Operating income was also stable, despite the blast-furnace outage, due to effective measures to further save energy and resources, reduce personnel and trim costs.
We received orders for oil pipelines, municipal waste disposal facilities, cold rolling-related facilities, LNG carriers and several bridges during the year. Reductions in public-sector investment, a stagnant private sector and turmoil in the Asian economy, however, greatly reduced the division's overall sales.
Operating income fell substantially, despite strenuous cost cutting. The order backlog totaled ¥426.9 billion at the year-end and further weakness in new orders was expected amid a persistently difficult business environment.
Facilities and Funding
We focused strategically on facility construction projects to reduce fixed costs and strengthen competitiveness. We added a coil laminating facility to the tin-free steel line at our Fukuyama Works during the year and finished relining the works' No. 2 blast furnace shortly after the year-end. Capital investment amounted to ¥64.9 billion on a construction basis and ¥76.8 billion on a payments basis.
Shelf registration enabled us to acquire flexible, low-interest funding in Japan during the year, including issuance of straight bonds worth ¥50 billion in May and ¥20 billion in June.
Although the government is expected to introduce full-scale measures to stimulate the economy, including increased public investment and special tax cuts, a rapid recovery in consumer spending is unlikely due to rising unemployment. The economy will remain stagnant in fiscal 1998.
We will adhere to our three-year management plan to enhance competitiveness and improve the NKK group's overall strength.
Sales efforts will remain vigorous and we are continuing to develop innovative products. At the same time, we will expand company-wide cost cutting, pursue socially responsible new businesses such as waste-plastics recycling, reinforce group-wide sales capabilities by sharing strategic information, and enhance cash management within the group. We will take a flexible, forward-looking approach to deregulation, including repurchasing company stock on the market when appropriate.
We remain committed to our social responsibilities, including in the field of environmental protection, where we will continue working to help reduce greenhouse gases by conserving energy and resources as well as recycling resources.
As we face the challenges of fiscal 1998 with renewed dedication to our fundamental goals and obligations, we would deeply appreciate the support and cooperation of our shareholders and friends.
Chairman of the Board