Interview with the CFO

When making various management
decisions, I always try to think
in numerical terms and strive to
enhance corporate value.

Ryo Hirooka
Director, Representative Executive Officer & CFO

2024 marks your 12th year as CFO of the HOYA Group. What have you valued most in your role?

I make a wide variety of decisions in our daily business operations, and I try to think of everything in terms of numbers. I think it’s essential for a CFO to look at things from the perspective of “What does this initiative mean for us in terms of numbers? Is it really going to contribute to enhancing our corporate value?” For instance, when I hear abstract terms like “strategic investment” used in management meetings, I see that as my cue to exercise caution and to further quantify exactly how this investment is going to increase corporate value for us.

Following the March 2023 recommendations by the Tokyo Stock Exchange, there has been a surge in activities aimed at improving capital efficiency among listed companies in Japan. This Company has prioritized capital efficiency in our management for over 20 years. What are we doing to improve it even further? Which key metrics are we focusing on?

Long before I became CFO, the Company already had a solid foundation, including a quarterly budget management system established by my predecessors. This has allowed us to improve capital efficiency in our daily operations in an organic way, without the need for any special measures. Rather than specific initiatives, I think it’s more important to use rigorous financial metrics when making important decisions, for example. Our metrics are multifaceted, but the payback period for cash-based investments is one that we prioritize. Profitability is the cornerstone of our cash generation, making profit margin an essential metric. It does vary by business, but in our Life Care business, for instance, we use a profit margin of 20% as an implicit benchmark. Based on this benchmark, we consider the payback period on a cash flow basis, taking into account tax rates and other factors. Of course, some investments, like updating existing facilities, can be recouped quickly, while others, like M&A investments, may take longer. In any case, it’s essential to make decisions on the premise of recovering the invested capital on each and every project. Maintaining cost awareness in our everyday business activities also aids in improving capital efficiency.

In addition to pursuing profitability and payback periods for each project, do you also consider methods such as increasing financial leverage to improve capital efficiency?

To be frank, I find little value in such technical maneuvers. While we are not averse to taking on debt, and borrowing to fund acquisitions that exceed our equity is certainly possible, such options should only be considered when there is a genuine opportunity for growth. In my view, altering our capital structure through financial leverage without a specific purpose is putting the cart before the horse. I intend to remain steadfast on this point going forward.

You mentioned capital structure. Our Company currently holds over 520 billion yen in cash and deposits. What do you see as being an appropriate level for our cash reserves, and how do you envision allocating future cash flows?

More than 80% of our cash and deposits are held in foreign currencies such as US dollars and euros. Due to yen’s recent depreciation, these amounts seem very large when converted back into yen. That said, we recognize that our current level of cash and deposits is quite substantial relative to our operational requirements, and we aim to prevent excessive accumulation. Regarding allocation, with our operating cash flow consistently exceeding 200 billion yen annually, we plan to allocate 50 to 60 billion yen for capital expenditure and about 40 billion yen for dividends, with the exact amounts depending on currency exchange trends. In the absence of M&As, our standard policy is to return the remaining funds to our shareholders through share buybacks.

From a CFO's perspective, what do you consider to be the main management challenges facing the Company?

Acquiring businesses with medium to long-term growth potential is a recognized challenge among our management team. There has been an increase in discussions about expanding our business domains, especially through M&As. Our existing businesses are highly profitable, and it’s exceedingly rare to find M&A opportunities that meet the payback period criteria for internal investments I mentioned earlier. Viewed in isolation, M&As can be seen as fundamentally diluting corporate value. These are complex issues with no clear-cut answers, but our approach is to seek out assets that can offer synergies with our existing operations, and where any negative impacts can be absorbed by the Group as a whole.

Last, could you describe the kind of CFO you aspire to be?

As a corporate executive, I value integrity. While it's perhaps human nature for self-interest to occasionally influence our thoughts, I always try to go back to the question “Will this benefit the Company?” when making decisions. I also try to avoid confining myself to traditional CFO responsibilities, but instead consider issues from a broader management perspective.