Steel Partners Calls on Noritz to Enhance Core Business, Divest Money Losing Operations
Steel Partners Japan Strategic Fund (Offshore), L.P. (“Steel Partners”) announced today that it has sent a letter to Noritz Corporation (TOKYO:5943) (“Noritz” or the “Company”), calling on the Company to take immediate steps to improve its performance by focusing on its core tankless water heating business and divesting unprofitable non-core operations. If the Company does not take steps to improve operational and financial performance, Steel Partners said it is prepared to seek shareholder support to change the Company’s management and its Board of Directors.
In the letter, dated June 12, 2008, Steel Partners said Noritz management continues to ignore its earlier recommendations for operational improvements and value enhancement, resulting in a continuing deterioration in the Company’s performance.
“The response from management has been to do nothing while continuing the trend of missed budgets and worsening performance, as can be seen in the Company’s first quarter earnings release for FY 2008,” wrote Warren Lichtenstein, managing partner of Steel Partners. “If this trend continues and you ignore your promises to your constituents, we intend to seek the support of other shareholders to change management and may seek to increase our ownership stake.”
Steel Partners noted that for at least the last nine fiscal years the Company has failed to achieve an 8% return on equity, the minimum required by the Japan Pension Fund Association for the support of an incumbent Board of Directors.
Steel Partners said Noritz needs to focus on its “market- and technology-leading” tankless water heater business and close or sell its system bath business, which has not been profitable in decades. Describing water heater sales in the United States as “shockingly low,” Steel Partners noted that Noritz is missing an opportunity to expand internationally amid growing consumer demand for energy-efficient appliances.
“Noritz should be a leader in the U.S. market and across the world, yet management readily concedes the market to other Japanese and foreign competitors despite Noritz’s leading technology,” Mr. Lichtenstein wrote. “These opportunities cannot and should not be lost because management’s attention is continually diverted to money losing, non-core businesses.”
Steel Partners is currently the largest single shareholder in Noritz, owning 9,500,000 shares, or approximately 18.7% of the Company’s outstanding shares.
Text of the letter follows: June 12, 2008 Noritz Corporation 93 Edo-machi, Chuo-ku Kobe 650-0033 Japan Attention: Shigeharu Kanzaki President and Representative Director Steel Partners Japan Strategic Fund (Offshore), L.P. P.O. Box 2681 GT, Century Yard, 4th Floor Cricket Square, Hutchins Drive George Town, Grand Cayman Cayman Islands, British West Indies Dear Mr. Kanzaki: As you know Steel Partners Japan Strategic Fund (“Offshore”), L.P. (“Steel Partners”) owns approximately 18.7% of the outstanding capital stock of Noritz Corporation (“Noritz” or the “Company”) and is Noritz’s largest shareholder. Over the years and especially during the past six months, we have had several in-person meetings and telephone conference calls with management to provide our detailed views on ways to improve corporate value for the benefit of all stakeholders. While we valued the dialogue we have had with management, management’s continued failure to achieve its budgets and reluctance to implement our suggestions and advice has left us questioning whether management gave our meetings or calls serious consideration. As we all know, for at least the last nine fiscal years the Company has failed to achieve an 8% return on equity, the minimum required by the Japan Pension Fund Association (“PFA”) for the support of an incumbent Board of Directors. Therefore, we offered our help and advice so that senior management could obtain PFA support. We note that if our suggestions were implemented, we believe Noritz would have achieved a minimum 8% return on equity as well as enhancing the value of the Company to the benefit of all stakeholders. Unfortunately, the response from management has been to do nothing while continuing the trend of missed budgets and worsening performance, as can be seen in the Company’s first quarter earnings release for FY 2008. At our February 2008 meeting in Tokyo, we were told management believed the PFA’s guidelines were too aggressive, and that the Company was concerned with achieving the 8% target. We were also told that our recommendations were one way to improve corporate value, but that management had a different plan that it deemed to be superior. We now know that this is not true and that management clearly does not understand the need to implement appropriate change as the Company’s first quarter results clearly show continued financial deterioration. The Company is on its way to missing yet another budget, which would make it the seventh time in eight years. It is hard to defend or support management or a management plan that has resulted in annual budgets and mid-term plans being missed year after year as the following table indicates, and when Noritz is significantly less profitable today than it was five years ago. Missed Operating Profit Plan in 6 of the last 7 years (Yen Billion) ———————————————————————- 2001 2002 2003 —————– —————— ————— Plan Actual Plan Actual Plan Actual ——– ——– ——– ——— ——- ——- Operating Profit 9.0 7.7 8.0 6.9 8.0 8.1 % Variance -14% -14% 1% —————- —————————————————– 2004 2005 2006 2007 ————— ————- ———— ———– Plan Actual Plan Actual Plan Actual Plan Actual ——– —— —— —— —– —— —- —— Operating Profit 9.6 7.7 7.5 6.9 8.0 5.8 9.0 2.4 % Variance -20% -8% -28% -73% ————— —————————————————— Source: Company annual reports and other publicly available documents. Next Steps Noritz needs immediate focus. Management has clearly demonstrated that it cannot properly manage each of the disparate businesses within the Company. We see no reason for the Board to continue to allocate capital to unprofitable business segments that year after year have consistently failed to earn their cost of capital. To increase corporate value, we have repeatedly suggested that the Company needs to aggressively grow its market- and technology-leading business segments while selling or exiting unprofitable business segments and those businesses that cannot earn their cost of capital. Steel Partners strongly believes Noritz has an outstanding brand and portfolio of products offering world-class technology. We also believe in the long-term prospects of Noritz’s business, particularly the water heating product business in today’s environment of rising energy prices and environmental concerns. In the U.S. market for example, Noritz sold only 62,000 tankless gas water heater units in 2007, which represents only 1% of the total gas water heater market, a shockingly low number considering the United States’ demand for energy and consumers’ interest in money-saving appliances. Noritz should be a leader in the U.S. market and across the world, yet management readily concedes the market to other Japanese and foreign competitors despite Noritz’s leading technology. These opportunities cannot and should not be lost because management’s attention is continually diverted to money losing, non-core businesses. We again recommend that the Board immediately discontinue or sell it money losing system bath business. Based on our past meetings with management, this business has not been profitable in decades. As you can see in the chart below, the system bath industry is highly competitive. Most of Noritz’s competitors are much larger and deliver poor operating margins. We see no way for Noritz to successfully compete in this segment and management’s decision to continue to go defies logic. Japan Unit System Bath Total Market – FY2006 TOTO Ltd 23.5% INAX Corp 22.2% Matsushita Electric Works, Ltd 19.5% Hitachi Housetec 9.6% Sekisui Hometechno 9.4% Noritz 2.5% Other 13.3% Source: Nikkei Shijou Senyuritsu 2008 and Company estimates. One of management’s excuses for not shedding the system bath business is that it is the original business of Noritz. Such poor reasoning further demonstrates management’s inability to be proactive and to adapt to the ever-changing marketplace. We note that General Electric (“GE”) recently announced that it plans to sell its appliance business to the highest bidder after being in this business for over 100 years. GE was one of the original entrants in this market. GE’s rationale was that it could earn higher returns on its invested capital in other businesses. In a similar spirit, Noritz needs to adopt a disciplined approach to capital allocation that prioritizes higher returns over retaining business segments for the sake of heritage. The same competitive landscape exists in the system kitchen business where substantially larger competitors dominate. Matsushita Electric Works, Ltd., the #4 competitor in this market, recently announced that it will close two of its kitchen plants in order to improve profitability, which highlights the brutal market realities of this business. We urge the Company to seek a buyer for the system kitchen business. Japan Unit System Kitchen Total Market- FY2006 Takara Standard Co. 19.8% Clean-up Corp. 17.2% Sun Wave Corp. 16.9% Matsushita Electric Works, Ltd 12.3% Micado Co 7.7% Noritz 1.5% Other 24.6% Source: Nikkei Shijou Senyuritsu 2008 and Company estimates. Even under the most optimistic market forecasts for both of these business segments (which is clearly not warranted based on the Company’s performance for the last 8 years), Noritz will never be able to achieve the market share necessary to achieve an acceptable return on its invested capital. The combination of an overall shrinking market, large, well-capitalized competitors offering superior products, and a lack of product innovation/differentiation suggest that Noritz’s best course of action is to exit these businesses and focus on and reinvest in business segments where it can increase long-term profitability for all stakeholders. Steel Partners remains positive regarding the long-term prospects for the Company’s tankless water heater products. However, success can only be assured by making significant changes to the current management plan and not by ignoring the realities of business. We believe that focusing on the core water heating business, closing or selling unprofitable operations and returning excess capital are the most effective ways for Noritz to improve corporate value. The Company’s failure to make these changes confirms our belief that the Board and management care little about providing acceptable returns on shareholders’ capital, creating jobs for its employees and improving value for all stakeholders. We remind the Board that its members have fiduciary obligations to shareholders. We continue to caution management against making any acquisitions since it is quite obvious that management’s focus should be on managing its current business, not integrating another. Mr. Kanzaki, earlier this year you told shareholders, including Steel Partners, that you would take personal responsibility if the Company does not achieve its goals. Unfortunately, we are pessimistic that such goals and budgets can be achieved under your leadership. First Quarter 2008 results showed further deterioration from last year both in sales (-3.8%) and operating profit (-37.0%). If this trend continues and you ignore your promises to your constituents, we intend to seek the support of other shareholders to change management and may seek to increase our ownership stake. Steel Partners also reserves it right to call an extraordinary general meeting to seek meaningful change at the Company including the right to nominate an alternate slate of directors. Should you wish to discuss any of these matters, I am prepared to meet you in New York or Tokyo at your earliest convenience. Best regards, Warren Lichtenstein
About Steel Partners
Steel Partners Japan Strategic Fund (Offshore), L.P. is a long-term relationship/active value investor that seeks to work with the management of its portfolio companies to increase corporate value for all stakeholders and shareholders.