Institutional Investor & Outside Directors Round Table

To execute the medium-term business strategy "CS B2024," which was formulated by backcasting from "At your side 2030," and to realize the vision, the advice and supervision of management by Outside Directors is highly important. Aiming to deepen engagement with the capital market, Mr. Mitsuhiro Iso of Nomura Asset Management and our five Outside Directors exchanged views on how to enhance Brother's corporate value.

Mitsuhiro Iso : Iso joined Nomura Asset Management Co., Ltd. in 2003 after working for a life insurance company. As a buy-side analyst, he has been in charge of the electronics sector (electronic components, consumer electronics, precision and office equipment, etc.) for 20 years. Since 2022, he has been also serving as a department head.

Nomura Asset Management : Established in 1959, Nomura Asset Management is one of the largest asset management companies in Japan, providing asset management services to a wide range of clients from private investors in Japan to institutional investors such as public pension funds outside Japan.
The company recognizes that medium- to long-term sustainability, including ESG, is one of the key management tasks that support the "virtuous cycle of investment (investment chain)," and requires its portfolio companies to manage their businesses with an emphasis on sustainability, while also promoting sustainability-oriented business management within the company.

Nomura Asset Management has established a basic policy of responsible investment in its investment management and encourages portfolio companies to achieve what we consider to be "desirable management practices." I would like to hear your thoughts on how you are monitoring the management of the Brother Group in order to enhance its corporate value and achieve sustainable growth. First, regarding the strategic themes outlined in "CS B2024," what kind of progress and challenges have been seen in each of the two areas: enhancement of the Industrial area and business model transformation in the Printing area?

I believe it is safe to say that we are making steady advancements in the three aspects of securing steady earnings in the Printing area, expanding the industrial equipment business, and expanding the Domino Business. We are also focusing on developing new businesses; however, since it takes time and tends to be smaller-scale if we stick only to our own technologies, we need to make efforts to expand the scale of our business by incorporating new external technologies as well. This issue is being actively discussed at the Board of Directors meetings.

This medium-term business strategy was formulated by backcasting to achieve our vision, and is more challenging than our previous medium-term strategies, which were mere extensions of past ideas. Although the medium-term business strategy is at the halfway point, I feel that there are many tasks that need to be accomplished in the future. My focus is on the formulation of the HR policy and the introduction of a new HR framework. The importance of taking on challenges is emphasized, and reward programs based on results have been included. The foundation for encouraging behavioral change toward achieving our vision is being laid, so it is important to make sure that it sticks.

Our concern in formulating the vision was how to transform our business portfolio and how to grow the business by anticipating the shrinking demand for printing on paper. In industrial equipment, we have remarkable development capabilities, including the launch of a new series of SPEEDIO products with excellent energy-saving performance. Although we are currently facing headwinds due to the Chinese economic slowdown, in India and other growth markets, we are steadily taking steps and making steady progress toward our goals. While we are still in the trial-and-error stage of business model transformation in the P&S Business, I have advised the Company to envision what is required beyond office digitalization and consider joining forces with startups and emerging forces as needed.

Now that you have been in your position for two years, what have you noticed through your interactions with Brother's technical team?

I have visited many manufacturing sites over the past year and was impressed by their highly advanced manufacturing technology and efficiency. The sophistication of manufacturing is outstanding. The superiority of production technology and production efficiency is indeed very important, but for further advancement, I hope that more and more enthusiastic and unique engineers will emerge and create something new.

We are aware of the problem that our performance is not reflected in our stock price despite our steady earnings. I believe that one of the reasons is that although we are taking on new challenges, our efforts to promote ourselves may be insufficient, perhaps due to a lack of outward communication. We need to continue our efforts to gain an understanding of investors and other stakeholders, including the results of our business portfolio transformation. We also need to increase the speed of our efforts in new businesses. As I mentioned earlier, I believe it is necessary not only to consider what we can do with our own technologies, but also to make a decision to develop a larger business plan and acquire the necessary technologies and human resources from outside the company. I believe that if the growth stories are better understood for the transformation of the P&S Business, expansion of the Industrial Equipment Business and Industrial Printing area, followed by the development of new businesses, we will be able to see a clearer picture of the improvement in our corporate value.

Since large amounts of cash are accumulated each year, we would like to see them used for growth investments, and if growth investments, including M&A, cannot be made, we would like to see them returned to shareholders. Some companies have a policy to return all cash exceeding a set amount of cash level to the shareholders. When excess capital builds up and capital efficiency declines, it also affects the value of the company.

M&A success and upfront investment in the future

I would like to ask you about M&A, one of the policies of Brother's medium-term business strategy. How do you evaluate Brother's M&A in the past? Also, what kind of investments are the "prior investments for the future" indicated in the medium-term business strategy?

I think that the M&A of a trading company or an investment fund is different in character from that of Brother, a manufacturer. I have a background in a trading company, and I am aware that for a trading company, it is important to firmly capture returns by using indicators such as internal rate of return (IRR) and return on invested capital (ROIC) and taking other measures. For manufacturers such as Brother, it is necessary to execute M&A in line with the Group strategy and growth story. I believe that acquiring Domino^*1 and making Nissei^*2 a wholly owned subsidiary were vital to our expansion into the Industrial area, and although there were some challenges in executing PMI, I believe that this experience will be useful in future M&A. As for the prior investments for the future, I believe that we need to further strengthen the utilization of outside technology and human resources through M&A and venture investments to achieve further expansion in the Industrial area, transformation in the Printing area, and the creation of new businesses for the future business portfolio.

1. Domino Printing Sciences, a British-based industrial printing company
2. Nissei Corporation

Although we have received some evaluations saying that it took too long for the Domino Business to become profitable, I believe that the new technologies Brother has acquired and the growth of Brother's employees during the course of these hardships have become great assets. We can expect further results in the future.

As one of the materialities identified to achieve the Vision, Brother has been working on reducing CO₂ emissions. What are the progress and challenges?

With regard to Scope 1 and 2 through Brother's own efforts, we are making steady progress toward our CO₂ emission reduction targets. Since Scope 1 and 2 emissions account for about 10% or less of the total emissions of the three scopes, we are also focusing on reducing Scope 3 emissions, and are steadily working to reduce emissions from areas where we can reduce emissions through our voluntary efforts, such as raw material procurement and transportation. Brother will address the reduction of CO₂ emissions from the use of its products by further improving the environmental performance of the products, especially their energy-saving performance. Since there is no doubt about the impact of GHG emissions on climate change, humanity needs to gather its wisdom and take all possible measures as soon as possible. I hope that Brother will not limit itself to its own reduction efforts, but as a leader of the local economy, will actively communicate and work to inspire public opinion on the issue of climate change.

In the materiality "Realizing a diverse and active society," your goal is to strengthen talent pipeline for healthy gender balance in management positions and establish an environment for achieving diverse ways of working. How do you assess the progress and challenges?

When President Sasaki took office in 2018, he stated that he would promote talent development and AI/DX, which I remember was an innovative policy at the time. How do you see the results and challenges of these initiatives?

Regarding the development of managerial human resources, Brother is making progress in terms of pooling managerial talents and conducting assessments incrementally. The system for developing talents through on-the-job training is quite solid, and I believe it would be even better if a dynamic talent development mechanism could be established based on this system, organically integrating off-the-job training and progressive talent assessments. On the other hand, I feel that acquiring external talents may be necessary, especially for areas of AI and DX. Since the use of AI and DX is essential for the transformation of the P&S business model, one option to aid the lack of resources would be to invite external resources.

I assume that the Nomination Committee is discussing the top management succession. What are your thoughts on the qualities and qualifications required of top management?

I feel that Brother is a company that fits the phrase "At your side." perfectly. Brother achieving high profitability as a result of the efforts to stay close to its customers, identify their needs, and successfully turn them into business is the result of its excellent corporate culture, which I hope Brother will continue to value in the future. On the other hand, I believe that Brother is now in a different phase than it has been in the past. In my view, the Company has moved from the stage where it has worked hard to deepen existing businesses to a stage where it is boldly pushing forward with growth investments, including M&A, with an emphasis on financial strategies and capital policies. I believe that once such an aggressive stance is appreciated, share price valuations will change. I expect deeper discussions to be had at the Board of Directors meetings.