Portfolio: Integral Corporation and Nitto FC

Kaname Watanabe was born one year before the establishment of the Japanese fertilizer manufacturer his family established, Nitto FC. By the time the company’s patriarch turned 70, it was clear that the younger generation would not be taking over the reins, and private equity soon emerged as the preferred alternative.

Several GPs were reviewed as potential partners, with Integral Corporation eventually leveraging a connection at mutual counterparty Nomura Securities to secure an exclusive negotiating position. It privatized the Nagoya-based company via a tender offer in 2019, paying about JPY30 billion ($273 million). This represented an approximately 30% premium to Nitto’s market capitalization.

With the exit of most of the founding family leadership – Kaname Watanabe has stayed on as chairman – Integral deployed Makiko Hayase, a partner at the private equity firm with experience in heavy industries and technology, as president and CEO.

“Our mission is to pass Nitto FC on to someone – hopefully already within the company,” Hayase says. “They have 70 years of history, and we want to help them get to 100 years.”

The first order of business is cultural change. Hayase is charged with transforming a traditional, strongly founder-driven operating model into something more communal, where employees are meaningful stakeholders with greater direct responsibility for the fate of the company.

Integral has identified five senior staff members in their 40s as candidates for future management team leadership. These are executives who have shown passion for the business but have historically had little decision-making power.

“They must think about what they want to do for the next 10 years, and to do that, they need to look at the market and decide what they want to do for the company,” Hayase says. “Next-generation management is now discussing the mid-term strategy with us, which is something they’ve never done in the past. This is their first time actually thinking about what the next steps should be for the company.”

Tatsuya Oda, a director at Nitto responsible for manufacturing, notes that from the boardroom to the factory floor, internal communication has changed since the acquisition. Planning is driven by professional managers, rather than the founding family. Every department holds meetings with Hayase and other representatives from Integral on a weekly basis.

“The communication from top management to employees has increased dramatically, and this has forced employees to think. Some employees are starting to think proactively and act based on their own thinking,” Oda says.

“Under the prior top-down management, employees used to stick to the plans set down by management and plans were often stopped midway. Now the plans are created based on discussions. I expect the good results from this cultural change to be realized soon.”

Crisis management

Integral’s culture gambit has helped Nitto navigate some notable challenges in a short holding period to date, not the least of which has been COVID-19. The pandemic has had a minimal impact on fertilizer demand in the agriculture industry, which represents 60% of revenue. However, the remaining 40% is in the harder hit real estate sector, where Nitto leases properties to hotels and office space.

Job rotations and the introduction of new human resources management system have helped cope with the challenge. Perhaps more importantly, a number of difficult-to-manage properties – either due to their complexity or distance from the Nagoya area – have recently been offloaded.

“We used to decide on the real estate sales based on opinions of the owner CEO and the real estate department,” says Isamu Mizutani, a director at Nitto. “In the past two years, we have started to employ the bidding process for sale and are able to sell at the market price that is understood by all parties. Also, the long-term cashflow concept is introduced in the real estate management.”

Mizutani expects stable profit from the real estate business going forward as it continues to evolve. “COVID-19 has changed the real estate market, including the office and store concept, and we expect that software – service – rather than hardware – buildings – will become important in real estate business.”

Oda points to another episode in which a factory for fertilizer-based snow melting products in the Hokkaido region was experiencing technical and environmental issues. Discussions with Integral on the matter spanned the snow melt market forecast, raw material procurement, and product pricing.

“This discussion happened very quickly, and we were able to build a new plant last winter to replace the old plant,” he says. “We were able to solve the work environment issues and also eventually achieve a better production efficiency.”

These efforts, along with the steady nature of the agriculture sector, has kept the business stable these past two years. Nitto’s headcount has remained around 300, local market share has held at 8%, and no customers have dropped off despite a gradual contraction in Japan’s land usage for farming.

Indeed, the Japanese fertilizer market shrunk 2.4% on average for the 10 years to 2019, according to research by Nitto and the Japan Fertilizer & Ammonia Producers Association. Nevertheless, net sales came to about $155 million in 2020, versus $145 million in 2018. In 2019, Nitto logged $117 million in sales during its last three quarters as a public company.

Incremental change

There are plans to improve sustainability by shifting raw material sourcing from the global potash mining industry to the local restaurant waste and food byproducts space. But this is seen as a long-term plan that faces multiple technical hurdles.

In some ways, however, the stasis has been more about diplomacy. Integral is not an agriculture company, which made its arrival on the scene a matter of some rumor and unease among the industry’s conservative circles.

“We need to be careful not to push things too hard. There were a lot of things we thought we could do to change the industry, but we’ve chosen to focus on internal changes instead,” Hayase says.

“Nitto’s clients know the private equity model, so they know we’re going to exit, and there was some shock. Some of them asked me directly if we were going to sell the business. I told them they will see that Nitto FC has changed, but that doesn’t mean we’re going to end the business or cut our clients.”

Many of the practical internal changes have included optimization of operating capital such as in the reduction of inventory volumes. The philosophy of the founding family was to maintain high levels of inventory across products so as to be able to fulfil orders immediately and at any given moment. Nitto mostly deals in non-organic chemical fertilizers, which don’t go bad on the shelf.

As a result, the main plant was so packed with unsold product, Hayase notes that there wasn’t enough space to move around. Even worse, it was tying up the cash. In the past two years, Nitto has managed to pare back inventory levels 10%.

“Now management has more freedom. It’s always better to have cash than products or machinery. Products and machinery can end up being excess inventory – cash can be turned into anything,” she says.

“I always ask companies, why does A plus B make D instead of C? Sometimes they can answer, and sometimes they just say, ‘Oh, it’s just always been that way.’ It’s my job to push them to think, why has it always been that way. Is it because of the family or the culture of the industry? If something is not understandable, we try to fix it – nothing drastic, but step by step.”

Team ethos

The key mechanism for implementing the new culture has been the creation of 11 teams, each focused on various mainstays of the PE value-add playbook. The real estate working group is one of the most successful, having streamlined the property portfolio, while the new business development group is exploring both agricultural and non-agricultural uses of fertilizer.

The standout product in this area is Peat Wash, a facial cleanser made from peat moss that launched last winter. Earlier this year, a nitrogen-rich and finely granulated fertilizer specially designed for dispersal via drone was also introduced to the mix. There are now 31 fertilizer product types, encompassing approximately 500 separate line items.

Oda suggests that the group in charge of work environment improvement made the biggest impact by bringing a longstanding factory dust problem under control. The raw materials for Nitto’s products are largely in powder form and scatter easily when moved in the plant. It’s not toxic, but it’s more than a nuisance.

“The working group looked into how the dust was formed in the workplace and applied dust collection facilities to reduce the dust floating in the workplace,” Oda says. “This was the biggest workplace issue from the past and the working group was able to reduce the dust to the appropriate level. Dust collection facilities are going to be installed in other plants by the end of 2021.”

For Masayuki Goto, a director at Nitto, the working groups as a concept made their biggest mark in terms of contribution to cultural transformation. By adding to employees’ experience with the business cycle and allowing them to reach conclusions based on their observations and internal discussions, the program has opened up an entirely new way of looking at their careers and the company.

“It is similar to introducing Copernican theory in the Old World,” Goto says. “Things changed from owner-centric to employee and business goal-centric. Changes in daily operations are not so huge, but the theory behind our operations has changed drastically.”

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• Topics
• North Asia
• GPs
• Industrials
• Buyouts
• Japan
• Integral Corp.
• Agriculture
• manufacturing