President Yasuyuki Hotta
Yasuyuki Hotta
Corporate Profile
Code No.
TSE 1st Section
Machinery (Manufacturing)
Yasuyuki Hotta
1-10-1 Nakase, Mihama-ku, Chiba, 261-8577, Japan
Stock Information
Share Price Shares Outstanding Market Cap. ROE (actual) Trading Unit
¥526 109,221,188 shares ¥57.450 billion 7.2% 100 shares
DPS (Est.) Dividend Yield (Est.) EPS (Est.) PER (Est.) BPS (actual) PBR (actual)
¥10.00 1.9% ¥39.36 13.4x ¥542.41 1.0x
* Share price as of closing on May 29, 2013. Number of shares outstanding as of most recent quarter end does not include treasury shares.
Consolidated Earnings Trends
Fiscal Year Sales Operating Profit Ordinary Profit Net Profit EPS (¥) Dividend (¥)
March 2010 96,592 6,976 6,248 3,079 27.23 7.00
March 2011 106,059 6,341 5,929 3,063 27.36 7.00
March 2012 108,446 4,638 4,388 2,480 22.71 7.50
March 2013 111,275 6,558 6,521 4,039 36.98 9.50
March 2014 Est. 120,000 7,200 7,100 4,300 39.36 10.00
* Estimates are those of the Company.
This Bridge Report presents KITZ CORPORATION's earnings for the fiscal year March 2013.
Key Points
Company Overview
KITZ is a comprehensive manufacturer of valves and other fluid control equipment and devices. While most people are familiar with valves used around "water meters," "gas meters," and "water heaters," few are aware of the applications of KITZ products outside of the home that are provided to customers in a wide range of industries. At the same time, KITZ boasts of a highly efficient integrated manufacturing system that uses bronze, cast iron, ductile cast iron (cast steel with greater strength and ductile characteristics), stainless steel and other materials to manufacture several tens of thousands of different products. In addition to selling brass and other bars to valve makers, KITZ also operates fitness clubs and hotels. KITZ is the number one manufacturer of valves, and the number two manufacturer of brass bars within Japan. The KITZ Group is comprised of 32 companies.
<Overview of KITZ's Business Segments>
KITZ's business is divided into the valve manufacturing, brass bar manufacturing, and other business segments. During fiscal year March 2013, each of these segments accounted for 72.8%, 18.5% and 8.7% of total sales respectively.
Valve Manufacturing Business
Valves are used to "pass," "stop," and "control the flow" of fluids and gases in various pipe systems (water, air, gas and other substances), and they are used in office and residential facilities, water works facilities, fresh and sewage water facilities, fire prevention facilities, machinery and industrial use manufacturing equipment, and chemical, medical, petrochemical product manufacturing facilities, semiconductor manufacturing facilities, petroleum refining and other industrial complexes, and various other applications. KITZ is one of the leading valve manufacturers in the world with high market shares of corrosion resistant bronze and highly economical brass valves, and high value added ball, butterfly and stainless steel valves. The Company boasts of integrated manufacturing processes including the casting process, and it became the first company in Japan to acquire the "ISO9001 International Quality Standard Certification." With a strong lineup of various types of valves made of various materials, KITZ provides its products to a wide range of fields including facilities in the construction and plant engineering industries, in addition to applications in the environment, energy, and semiconductor realms. The Company is also pursuing a strategy to increase the global cost competitive nature of its products by fortifying its overseas manufacturing facilities. During fiscal year March 2013, overseas sales accounted for approximately 34% of total sales.s types of valves made of various materials, KITZ provides its products to a wide range of fields including facilities in the construction and plant engineering industries, in addition to applications in the environment, energy, and semiconductor realms. The Company is also pursuing a strategy to increase the global cost competitive nature of its products by fortifying its overseas manufacturing facilities. During fiscal year March 2012, overseas sales accounted for approximately 26% of total sales.
Brass Bar Manufacturing Business
In the brass bars business, KITZ combines copper with zinc to create brass, tin and phosphorous to create phosphor bronze, and nickel and zinc to create nickel silver, which are then used in the dissolution, casting, rolling, pulling, forging, heating, and forming processes to create sheets, strips, pipes, bars, wires and other forms. The KITZ Group's brass bar business is handled by KITZ Metal Works Corporation which uses the raw material of brass to manufacture brass bars sells them. (Brass bars are used not only as materials for valves, but also in the manufacture of water faucets, gas equipment, electrical appliances and other various products.)
KITZ Group's Second Medium Term Management Plan (FY3/14 to FY3/16)
The KITZ Group is currently in the course of implementing its Long Term Management Plan "KITZ Global Vision 2020," which is a growth strategy designed to take KITZ to its 70th year anniversary in 2020. In light of the results of its First Medium Term Management Plan (FY3/11 to FY3/13), which was profoundly impacted by the Great East Japan Earthquake and the pronounced strengthening in the yen, KITZ has restructured its corporate strategy to be implemented in its second Medium Term Management Plan covering the period to fiscal year March 2014 to 2016.

The Second Medium Term Management Plan entails a strategy designed to break the earnings reliance upon the construction related applications for general use valves and to improve profitability of industrial use valves used in overseas oil and gas projects as a means of improving overall earnings. Consequently, the overall KITZ Group will implement efforts to raise quality in all of its business activities.
<First Medium Term Management Plan (FY3/11 to FY3/13) Review>
(1) Measures for Achievements and Ongoing Issues
Outcomes from Centralization of Marketing Structure and Production Consolidation of Three Domestic Brands
Centralization of information aggregation and strategy for sales and marketing in the country and overseas, and integration of domestic marketing structure for the three Japanese brands of KITZ, Toyo, and Miyoshi were successful in consolidating production, reducing costs and fortifying competitive strengths. In addition, the establishment of a new project management and a new integrated management structure led to an improvement in profitability. Furthermore, KITZ is currently in the process of renovating its Group Management Information systems.
Fortification of Multiple Function Business Bases, New Business Cultivation, and Cost Reductions and Production Structure Restructuring are Ongoing Issues
With regards to the overseas business deployment, single function bases will be restructured to perform multiple functions including sales, marketing, engineering, inventory management, maintenance, and services. In addition, overseas business is also being expanded through M&A and alliance activities, and supplemental businesses are being cultivated and developed for new areas. Furthermore, amongst other ongoing issues are the ability to realize cost reductions through restructuring of the production structure and sharing of common designs for various global products, in addition to efforts to reduce costs through optimization of production structure for brass valves, stainless steel valves, and ductile steel valves, for which there is regional variation in demand.
(2) Business Conditions
Valve Manufacturing Business
After the Lehman Shock, overly high expectations for an economic recovery contributed to a divergence from plans. In addition, failure to achieve an improvement in cost competitiveness due to intensifying competition over industrial valves used particularly in overseas projects contributed to an increase in unprofitable products and stagnant orders. Furthermore, delays in introduction of new products in growth fields, fortification of product lineup, and strengthening of overseas sales bases caused sales to fall short of plans.
Brass Bar Manufacturing Business
Due to the relatively low value added to brass bar products, deterioration in profitability and subsequent losses occurred during times of large fluctuations in the copper market with materials sourcing prices rising above selling prices. Furthermore, the market share lost during the merger between Kyoto Brass Co.,Ltd and KITZ Metal Works Corporation in 2009 has yet to be recovered.
KITZ Wellness Co., Ltd. was expected to open four new facilities between fiscal years March 2011 to 2013, but the occurrence of the Great East Japan Earthquake and the greater than expected slowing in the economy prevented it from achieving these openings. In addition, delays in refurbishment of air conditioning and other facilities at Hotel Beniya contributed to declines in customers. At the same time, the Suwa Garasukoubou Co.,Ltd was sold as part of the management's policy of selection and concentration.
<Second Medium Term Management Plan (FY3/14 to FY3/16)>
Through the pursuit of synergies within the KITZ Group and the policy of selection and concentration, KITZ seeks to strengthen its position as a global company by leveraging its Group management resources in growth fields to strengthen its overall corporate structure. Moreover, the Company will pursue further improvements of quality in all of its business activities (Management, development, production, and sales).
(1) Improve Earnings Structure: Improve Profitability and Expand Earnings of Industrial Use Valve Business, Create Business Bases with Multiple Functions
KITZ is endeavoring to improve its earnings structure by reducing its dependency upon general use valves by expanding earnings and improving profitability of industrial valves. As part of this strategy, KITZ will improve earnings by choosing optimal locations for production of main products and restructuring its product supply structure, in addition to increasing the speed of the management's decision making process by decentralizing the management of overseas operations through a shift in responsibility to overseas bases. Through these moves, overseas bases will provide one stop shopping capabilities and be responsible for multiple functions including sales, marketing, engineering, inventory management, maintenance and services. Also, KITZ will increase capital investments in and strengthen its research and development function for products in the growth realm of oil and gas, and plant instrumentation markets, in addition to strengthening its ability to conduct markets analysis, M&A, and form alliances for the expansion, complementing and new entry of the business.
(2) Group Synergies
Within the KITZ Group, a full review of its competitive strength and creation of its new structure will be conducted in addition to new product launches in the realms of gasoline stations and water works related applications as part of the Group's new business development efforts.
(3) Continued Selection and Concentration
Reorganization and integration of the KITZ Group to raise its global competitive capability and reviews of both product line-ups by plant and product supply structure will be conducted to achieve an optimized product supply structure.
<Numerical Targets>
Fiscal Year March 2013 Earnings Results
Sales, Ordinary Income Rise 2.6%, 48.6% Year-Over-Year
Sales rose by 2.6% year-over-year to ¥111.275 billion. The valve manufacturing business saw growth in Asia, North America, and Europe to act as a driver of overall sales growth, and was able to offset weak demand and lower prices in the brass bar manufacturing business.

Operating income rose by 41.4% year-over-year to ¥6.558 billion. Acceptance of price hikes, an increase in sales volumes, and the disappearance of the impact of an unprofitable large gas processing plant in the Middle East allowed operating income of the valve manufacturing business to rise by 27.4% year-over-year. KITZ was able to secure profitability in the brass bar manufacturing business despite the decline in sales with operating income rising 65.3% year-over-year due to progress in cost reductions.

A decline in interest payments due to reductions in interest bearing liabilities contributed to a 48.6% year-over-year increase in ordinary income. The sale of property owned by Miyoshi Valve Co., Ltd. led to a loss of ¥105 million and contributed to an overall extraordinary losses of ¥207 million. However, a decline in the tax rate allowed net income to rise by 62.8% year-over-year to ¥4.039 billion.

While sales were basically in line with the estimates, operating income fell below the estimates by about ¥650 million. This shortfall is attributed to ¥100 million lower than expected sales to semiconductor manufacturing equipment applications, ¥200 million weaker than expected domestic sales, a ¥200 million larger than expected procurement costs resulting from the weakening of the yen during the fourth quarter (some of the products sold domestically are procured from Thailand, Taiwan and China), and a ¥200 million valuation loss on inventories.
Valve Manufacturing Business
Sales rose by 7.0% year-over-year to ¥84.472 billion, with sales within Japan rising by 1.2% year-over-year to ¥55.658 billion. Sales to the semiconductor manufacturing equipment industry fell by 28% year-over-year due to weak capital investments trends in that industry, while sales to the construction industry grew by 4% year-over-year. Sales to the water works industry rose by 13% year-over-year due to hot sales of earthquake disaster related products for water and sewerage, and sales to the oil and gas industry trended favorably.

In addition, overseas sales rose by 20.3% year-over-year to ¥28.813 billion. By geographic region, sales in Asia rose by 19% year-over-year, but economic slowing caused sales in China to drop by 17% year-over-year and declines in large projects led to a 29% year-over-year fall in sales in the Middle East. Sales in the ASEAN region rose by 49% year-over-year on the back of fortified marketing capabilities in the region. Moreover, strong demand from oil and gas development applications allowed sales in North America to rise by 25% year-over-year, and sales in Europe rose by 17% year-over-year.

Operating income of the valve manufacturing business rose by 27.4% year-over-year to ¥8.803 billion. A declines in sales to the semiconductor manufacturing equipment industry and weaker pricing caused operating income to decline within Japan. However price hikes, increased sales volumes, and the disappearance of the impact of an unprofitable large gas processing plant project in the Middle East (contributed to a ¥700 million increase in operating income) allowed operating income in overseas operations to rise by a large margin.
Brass Bar Manufacturing (Handled by KITZ Metal Works Co., Ltd.)
During fiscal year 2012, demand within the Japanese for brass bars stagnated at 14,850 tons per month resulting in a 4.8% year-over-year decline. In addition to this weak domestic demand, a price decline of 8% due to fluctuations in the materials market caused sales to fall by 10.6% year-over-year to ¥17.948 billion. However gradual fluctuations in the materials market allowed KITZ to secure profitability in this business, and successful efforts to reduce costs allowed operating margin to rise from 1.3% to 2.5% from fiscal year March 2012 to 2013. Consequently, operating income rose by 65.3% year-over-year to ¥441 million.
Sales declined by 5.8% year-over-year to ¥8.855 billion. While sales of the fitness clubs operated by KITZ Wellness Co., Ltd. remained in line with the previous year's levels, the collapse of the interior of a tunnel on the Chuo Highway leading from Tokyo to the hotel facilities operated by Hotel Beniya Co., Ltd. contributed to a decline in group users and caused sales to fall by 5.5% year-over-year. In addition, the sale of the "Suwa Glass no Sato" business (Glass artwork sales) contributed to a ¥396 million decline in sales. Other business operating income fell by 6.9% year-over-year to ¥330 million. Despite lower sales of the hotel operations, reductions in labor costs and restraint in product and material purchases contributed to a profit increase, while the operating income of the fitness business decreased by 2.6% year-over-year.
(3) Trends by Company
On a non-consolidated basis, sales, operating income, and ordinary income rose by 15.2%, 137.9% and 100.2% year-over-year to ¥65.188, ¥3.468, and ¥3.853 billion respectively. At the same time net income fell by 49.6% year-over-year to ¥2.541 billion. Sales rose by ¥8.610 billion year-over-year on the back of a ¥4.176 billion increase in sales to Toyo Valve Co., Ltd. (its manufacturing division was absorbed by KITZ, and thereafter OEM products are being provided to Toyo Valve), and a ¥3.567 billion increase in overseas sales. With regards to profit, operating income grew by 2.4 times on an increase in sales to group companies in North America and other regions, and the disappearance of the impact of an unprofitable large gas processing plant project in the Middle East. At the non-operating level, the disappearance of dividends from Toyo Valve was offset by an improvement in foreign exchange related loss of ¥38 million in fiscal year March 2012 to a gain of ¥137 million in fiscal year March 2013, and a ¥79 million decline in interest payments.

With regards to subsidiaries in the realm of construction and water works, both sales and profits of Toyo Valve declined due in part to the spinoff of its manufacturing division. However high profitability earthquake resistant valves trended favorably and profits of Shimizu Alloy Manufacturing Co., Ltd doubled. In the realm of products sold to plant and energy related applications, Taiwan Kitazawa, KITZ Corporation of Kunshan (stainless steel, China), KITZ Corporation of Jiangsu Kunshan (Ductile steel, China), and Perrin GmbH (Germany) all saw growth in both sales and profits. Furthermore, while KITZ America saw a decline in profits due to transfer pricing adjustments, its sales grew by a strong 36% on the back of strong demand from oil and gas development applications.

At the same time, KITZ SCT Corporation recorded a loss due to weak capital investments in the semiconductor manufacturing equipment industry. Also, KITZ Micro Filter Corporation, which manufactures precision filters for use in filtration equipment, saw declines in both sales and profits. Earnings of KITZ Metal Works Corporation, which manufactures brass bars, are described in 'Trends by Business Segment' section of this report.
At the end of the current term, total assets rose by ¥4.991 billion from the end of the pervious term to ¥99.972 billion. An improvement in cash flow allowed cash and equivalents to rise, and an expansion in business contributed to growth in accounts receivables. In addition to capital investments of ¥3.545 billion in the valve manufacturing business, investments for the system upgrade (led to an increase in intangible fixed assets), and a rise in tangible fixed assets was recorded due to the establishment of a sales subsidiary in Singapore. At the same time, a decline in interest bearing liabilities and an improvement in foreign exchange translation accounts (-¥4.670 billion to -¥2.849 billion) allowed net assets to grow by a large margin. Capital adequacy ratio also improved by 2.9% points from the end of the previous term to 59.3% at the end of the current term.
With regards to cash flow, increases in profits and effective inventory management strategies allowed the net inflow of operating cash flow to increase from ¥2.217 billion in the previous term to ¥7.885 billion in the current term. Investments on systems and the establishment of a subsidiary caused the net outflow in investment cash flow to increase. However, free cash flow (operating cash flow plus investing cash flow) improved from a net outflow of ¥291 million in the previous term to a net inflow of ¥3.366 billion in the current term. Moreover, the margin of outflow in investing cash flow grew due in part to ¥3.545 billion in capital investments, ¥851 million for investments in software and other acquisition of intangible fixed assets, and a ¥531 million acquisition of shares in the Singaporean company associated with the change in scope of consolidation, despite the inflow of ¥513 million from the sale of the plant property owned by Miyoshi Valve Co., Ltd.
Establishment of a Subsidiary and M&A to Fortify Industrial Use Valves for Petroleum Refining and Petrochemical Applications in ASEAN Region
As part of a strategy of fortifying its overseas operations, KITZ established a subsidiary in Singapore in October 2011 called KITZ Corporation of Asia Pacific Pte. Ltd. (hereafter called KITZ Singapore) to oversee business operations in the ASEAN region, and made the distributor Mikuni Engineering (Singapore) Pte. Ltd. its subsidiary. Mikuni sells primarily industrial use valves including modification and maintenance in automation of manual valves and others. Since the establishment in 1981, Mikuni has taken the central role in sales of KITZ Group's industrial use valves as the general agency in Singapore. Through the M&A of Mikuni, KITZ tries to fortify sales of its industrial use valves to applications in petroleum plants, which are seeing large investments in Singapore, and in petrochemical applications. Therefore the Company seeks to raise its market share through more detailed services and direct marketing of general use valves for use in building and water works applications throughout the ASEAN region.
Establishment of the European Management Company
In order to oversee the expansion of business in the European region, KITZ changed the name of its German subsidiary KITZ Armaturen GmbH to KITZ Europe GmbH in January 2013 in reflection of its new fortified function of overseeing the European operations. KITZ Europe GmbH will manage all of the KITZ Group business bases operating in Europe and is expected to contribute to a quicker decision making process and cultivate stronger synergies within the Group. Sales details of the three brands of products sold in Europe are provided below.
Fiscal Year March 2014 Earnings Estimates
Sales, Ordinary Income to Rise 7.8%, 8.9% in FY3/14
KITZ estimates call for sales to rise by 7.8% year-over-year to ¥120.0 billion. The main valve manufacturing business is expected to see sales growth of 7.7% year-over-year, and production recovery and price hikes in the brass bar manufacturing business are expected to allow sales of brass bars to rise by 11.4% year-over-year. The fortification of sales bases in the valve manufacturing business is designed to leverage the strength in the ASEAN markets, and strong demand from oil and gas applications in Europe and North America is expected to allow sales to grow. Within Japan, construction and water works related demand is expected to trend favorably with a recovery in capital investment expected to boost sales of industrial use valves.

With regards to profits, an increase in materials market pricing are expected to be absorbed by higher sales and improvements in productivity, allowing the gross margin to rise by 1.0% point to 24.5%. Despite large increases in selling, general and administrative expenses arising from IT investments, R&D expenses and investments for the launch of smaller facilities targeting senior citizens as a means of preventing the need for attended care in the fitness club business, operating income is still expected to rise by 9.8% year-over-year to ¥7.2 billion.

Dividend payment is expected to be raised by ¥0.5 to ¥10 per share (¥5 dividend payment at the end of both the first half and full year). Moreover, the Company maintains a dividend payout ratio of 25% but has recently indicated that it will adopt a higher level of "payout ratio of 33% of net income including acquisition of treasury stocks."

On a non-consolidated basis, KITZ estimates call for sales, operating income and ordinary income to rise by 4.8%, 0.9% and 3.8% year-over-year to ¥68.3, ¥3.468, and ¥4.0 billion respectively. At the same time net income is expected to decline by 1.6% year-over-year.
Valve Manufacturing Business
Sales and operating income are expected to rise by 7.7% and 5.0% year-over-year to ¥91.0 and ¥9.250 billion respectively. On the back of increases in sales in Asia, North America, and Europe, overseas sales are expected to rise by 12% year-over-year to ¥32.2 billion. Within Japan, sales are expected to rise by 6% year-over-year to ¥58.8 billion. As for overseas market, sales in North America, Europe, Asia, ASEAN, and China are expected to rise by 15%, 17%, 9%, 14%, and 6% year-over-year respectively. Within Japan, demand for valves from the construction, water works, and equipment manufacturing industries is expected to trend strongly. Sales to semiconductor manufacturing equipment industry related applications are expected to rise by 21% on the back of strong orders from Korean semiconductor manufacturers. A recovery in capital investments is expected to lead to increases in demand from general chemical, food, and paper industries. Furthermore, building construction arising from the disaster recovery activities is expected to begin on a full scale basis from the latter half of 2013 onwards, and expected to boost demand from the next term forward. With regards to profits, increases in materials pricing, IT investments, and R&D expenses, and weak product pricing trends anticipated within Japan are expected to be offset by higher sales and reductions in cost of sales through improved productivity.
Brass Bar Manufacturing Business
Sales and operating income are expected to rise by 11.4% and 13.2% year-over-year to ¥20.0 and ¥0.5 billion respectively. Production volumes are also expected to rise by 3.3% year-over-year to 3,100 tons per month. Copper prices (Electrolytic Copper) are expected to rise to ¥750,000 which is 8% higher than the average price of the previous term. The launch of a new "lead free material" product is also expected to contribute to an expansion in sales. Furthermore, a reduction in costs including processing fees are expected to complement the higher sales to allow profit margins to improve.
Sales and operating income are expected to rise by 1.6% and 6.0% year-over-year to ¥9.0 and ¥0.35 billion respectively. Effort to raise the value added services through the introduction of new machines and the opening of smaller facilities targeting senior citizens as a means of preventing the need for attended care will be promoted in the fitness club business. Sales are expected to rise by ¥119 million year-over-year to ¥5.718 billion, but the launch of facilities for the new business base is expected to lead to higher fixed costs and cause operating income to decline by ¥24 million year-over-year to ¥281 million. At the same time, sales and profits of the hotel business are expected to increase due to the disappearance of the negative impact from the tunnel collapse.
Among the most significant points of KITZ's Second Medium Term Management Plan (FY3/14 to FY3/16) is the focus upon the growing of Commercial valves arising from growing construction demand based on an increase in population in Asia, and an expansion in industrial use valves from oil and gas development applications in Asia and North America. The Company also tries to fortify its product lineup for upstream processes (exploration, development, production) and strengthening of its pricing competitiveness through restructuring of its production structure and design sharing within the Group in the realm of industrial use valves, in addition to facilitation and fortification of its sales bases in Singapore. Furthermore, KITZ is considering the cultivation of the gasoline station applications as a new business endeavor. The outlook for general use valves, of which KITZ boasts a high market share and a high earnings generation capability, is bright given the economic recovery and the impending start of full scale disaster relief construction activities from the next term onwards. Given the efforts outlined in the Plan, near term earnings appears to be stable and growth can be expected to continue longer term even after the cyclical factors and disaster related reconstruction demand ends. In other words, KITZ's longer term growth potential even beyond the end of the Second Medium Term Management Plan from fiscal year March 2017 onwards appears attractive.
This report is intended solely for information purposes, and is not intended as a solicitation to invest in the shares of this company. The information and opinions contained within this report are based on data made publicly available by the Company, and comes from sources that we judge to be reliable. However we cannot guarantee the accuracy or completeness of the data. This report is not a guarantee of the accuracy, completeness or validity of said information and or opinions, nor do we bear any responsibility for the same. All rights pertaining to this report belong to Investment Bridge Co., Ltd., which may change the contents thereof at any time without prior notice. All investment decisions are the responsibility of the individual and should be made only after proper consideration.

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