NIPPN (NIPPON FLOUR MILLS)

Message from the Management


Hiroshi Sawada Chairman, President, CEO & COO

During fiscal 2010, despite some signs of a bottoming out in domestic production on the strength of a recovery in exports, the Japanese economy continued to face considerable uncertainty. Capital spending and the employment environment remained sluggish, and concerns over the impact of deflation persisted.

The food industry also continued to operate in a challenging environment. With the economic conditions remaining difficult, consumer confidence deteriorated and competition became increasingly severe.

In these circumstances, the Nippon Flour Mills Group dedicated itself to achieving the objectives of its two-year medium-term business plan, the 08/09 SG100 New Business Plan, which started in April two years ago. Under the plan, the Group took steps to expand its operations and bolster its profitability.

Marking the fiftieth anniversary of the development of premixes in the fiscal year under review, the Group also launched new premix products for business use. Among these products, the NIPPN Selection series, in particular, have earned a very good reputation among customers who require a small volume of premixes.

As a result of these efforts, the Nippon Flour Mills Group recorded net sales of ¥261,586 million, down 5.5% year on year, operating income of ¥12,549 million, up 17.5%, ordinary income of ¥12,802 million, rising 31.5%, and net income of ¥7,892 million, an increase of 63.4% for the fiscal year under review. The outlook for the Japanese economy, meanwhile, is likely to remain uncertain. Despite the possibility of growth with a recovery in the global economy, government support for individual household budgets, and other factors, risks that could slow the economy remain severe.

In the food industry, competition among companies is expected to escalate in the future, as the domestic market is likely to contract, given the declining population and the aging of society. Personal spending meanwhile remains sluggish, due to a weakening of the employment and income environment.

In the flour milling industry, the operating environment remains difficult, as the Japanese government reduced its sales prices for five types of imported wheat by 14.8%, and 23% on average in April and October 2009, in view of the decline in international wheat prices. It further cut the sales prices by 5% in April 2010.

With this backdrop, without being satisfied with its achievements to date, the Nippon Flour Mills Group will view the severe business environment as presenting new business opportunities. The Group has established the 10/11 Medium-Term Business Plan SG130, which is designed to ensure sustainable growth.

With the current business environment experiencing drastic changes and given the persistent uncertainty, the Group set the period of the 10/11 Medium-Term Business Plan SG130 at two years, fiscal 2010 and 2011. During this period, while maintaining its long-term vision (consolidated net sales of ¥500 billion and an operating income of ¥25 billion in the long term), the Group will act to strengthen its corporate structure to ensure sustainable growth in the future, and will aim to achieve consolidated net sales of ¥300 billion, operating income of ¥13 billion, and earnings before interest, taxes, depreciation and amortization (EBITDA) of ¥20 billion in the final year of the Plan. In achieving these goals, the Group will strive to fulfill its responsibility to its stakeholders, while generating the cash flows needed for investment in research and development and for capital spending, both of which are required for sustainable growth. Ultimately, the Group aims to create a competitive edge and bolster its corporate value.

The details of the 10/11 Medium-Term Business Plan SG130 are as follow.

Numerical targets (consolidated) for the final fiscal year (FY2011)

Net sales: ¥300 billion
Operating income: ¥13 billion
Earnings before interest, taxes, depreciation and amortization (EBITDA): ¥20 billion

Basic strategy

(i)	Continue to promote low cost operations. Carry out effective management based on the vertical organizations under the company system. Enhance the speed of commercialization of large-scale capital investments. Propose and execute new cost-cutting measures by introducing new methods.
(ii)	Reexamine the business structure and the business portfolio. Reexamine the potential and profitability of the existing businesses. Pursue the category-leader strategy by focusing management resources on growth businesses. Develop new business fields.
(iii)	Optimize overall group management. Optimize overall management from a Group perspective. Bolster Group management by refining the focus.

(i)

Continue to promote low cost operations.

Carry out effective management based on the vertical organizations under the company system.
Enhance the speed of commercialization of large-scale capital investments.
Propose and execute new cost-cutting measures by introducing new methods.

(ii)

Reexamine the business structure and the business portfolio.

Reexamine the potential and profitability of the existing businesses.
Pursue the category-leader strategy by focusing management resources on growth businesses.
Develop new business fields.

(iii)

Optimize overall group management.

Optimize overall management from a Group perspective.
Bolster Group management by refining the focus.

To ensure that it achieves sustainable growth, the Group has established significant capital investment plans, with the total investment reaching ¥20 billion. Some of the plans are, in fact, already being executed. Details of the plan are as follows.

Large-scale capital investment plan

(i)	Expansion of the flour milling lines and the establishment of new silos for raw materials at Kobe-Konan Mill
(ii)	Consolidation of the Takasaki plant of NIPPN Frozen food Co., Ltd. into Ryugasaki Plant
(iii)	Upgrading of the production facilities of Chiba plant of NPF Japan Co., Ltd., a manufacturer of pet foods
(iv)	Consolidation of the operations of Matsuya Flour Mills Co., Ltd., a manufacturer of buckwheat flour, into its Kaminokawa mill, and the consolidation of the operations of Mizuho Food Co., Ltd., a manufacturer of rice flour and other products, into the Kaminokawa region
(v)	In the overseas business, a 70% expansion in the production capacity of the premix plant of NIPPN (Thailand) Co., Ltd. by November 2010, with the expansion of its production line. NIPPN (Thailand) Co., Ltd. is the Company’s subsidiary in Thailand, located in the middle of Southeast Asia, where economic growth is likely to continue.

To coincide with the commencement of the 10/11 Medium-Term Business Plan SG130, the Nippon Flour Mills Group has been undertaking a series of organizational and structural reforms (details given below), including the introduction of the company system as of April 1, to ensure that the Group can promptly and flexibly respond to the rapidly changing business environment.

Organizational and structural reforms

(i)	Establish a Flour Milling Company and a Food Company. Create the Nakashoku Division, Health Care Division and Pet Care Division in Other Businesses.
(ii)	Integrate two companies that manage donut shops, and establish a holding company.
(iii)	To strengthen internal control and the compliance system, reorganize the Internal Control Office as the Internal Control Department.

Through the initiatives described above, the Nippon Flour Mills Group will continue to restructure its operations in the future, to further strengthen the competitiveness of all business divisions and cut costs. We are determined to grow as a multifaceted global food enterprise, through active investments in growth areas both in Japan and overseas.
We hope that we can continue to count on your support.

June 2010