Executive Interview

The business environment in Japan in fiscal year 2010 generally shifted toward a gradual recovery. While economic stimulus measures helped the Japanese economy’s upward momentum, a temporary slowdown in exports caused a lull that was offset by a pickup in manufacturing output. Overseas, solid expansion continued in China and elsewhere in Asia, while a moderate recovery trend was discernible in Europe and the United States.

For the azbil Group, fiscal year 2010 was the first year of our new four-year mediumterm plan, which we designated as the “period of growth.” In response to our rapidly changing business environment, we focused on reforming our business structure with an emphasis on overseas expansion, particularly in the fast-growing Asian market, as well as environmental preservation and energy conservation, where we anticipate new demand due to tougher regulations.

As a result, net sales for fiscal year 2010 increased 3.3% year on year to \219.2 billion, operating income increased 20.3% to \14.9 billion, and net income increased 27.0% to \7.9 billion. Looking at results by business segment, sales and income declined in the Life Automation business, which sells gas and water meters and provides nursing care and health support and other services. The main factors in the decline were reduced demand for LP gas meters and the suspension of operations due to the Great East Japan Earthquake. However, results steadily rebounded in the Building Automation business, which delivers products and services for HVAC and security, mainly to offices and other commercial buildings, and the Advanced Automation business, which provides products and solutions for production sites such as plants and factories. As a result, both businesses recorded solid performance.

Although the azbil Group’s operating environment is recovering, the recovery has been weaker than we expected. Because of that, coupled with the unforeseen consequences of the unprecedentedly large earthquake near the end of the fiscal year, we did not achieve the results we had planned. Still, we were able to increase sales and income, and achieved a number of successes with our business measures. Overall, I feel positive about our performance for the year.

(Billions of yen)

* Plan revised during the fiscal year (original plan: \9.5 billion)

The azbil Group is promoting business structure reform – “creating new businesses” – in response to the rise of newly industrialized countries in Asia and elsewhere and structural changes to the market such as environmental issues, the falling birth rate and aging population, new technologies, and higher added value. The cornerstones of this initiative are the international solution business and the solution business for environmental preservation and energy conservation.

In the international solution business, we provide services throughout the life cycle of customer facilities, from installation of control systems and on-site equipment to maintenance and renewal, to keep them running in optimal condition at all times. In fiscal year 2010, ended March 31, 2011, we expanded our valve maintenance centers in each region of Asia and established the Asia Solutions Center to augment our engineering capabilities, with the aim of strengthening the azbil Group’s engineering and service network. Based on our track record of more than 10,000 systems in operation around the world, we launched an original program to evolve and extend the life of existing plants. We are also putting efforts into solutions by product line. For example, we strengthened product development tailored in detail to the needs of customers in each region, an approach that has produced substantial results in North America. In addition, we are making market inroads through collaboration with local companies in various countries. In China and Korea, for example, we deployed the energy-saving expertise developed by the Building Automation business in Japan to win orders for a number of large-scale HVAC projects in cooperation with local enterprises.

In the solution business for environmental preservation and energy conservation, we expect rapid expansion in the data center market due in part to the trend toward cloudcomputing services. To deepen and expand our presence in this market, where saving energy is a pressing issue, we fortified our ability to provide solutions using our product lineup as well as our ability to use and analyze the azbil Group’s extensive proprietary data. We are also promoting collaboration between businesses. For example, our Building Automation business has provided a variety of solutions for clean rooms in semiconductor fabs and other facilities because a large amount of energy is consumed in their HVAC systems. We built on this by leveraging the products and technologies of the Advanced Automation business to realize energy savings in utility facilities that supply energy to clean rooms and in production facilities. This led to projects that developed into energy conservation solutions for the entire production site.

With concerns about power shortages in Japan this summer due to the effects of the Great East Japan Earthquake, inquiries about total energy-saving solutions for offices and production sites are increasing. We expect more opportunities to provide value that only the azbil Group can deliver through combining the capabilities of the Building Automation and Advanced Automation businesses.

In the Life Automation business, we began cultivating the market for the Kikubari™ residential central air-conditioning system. For example, we developed a new system for houses of between 99 and 115 square meters, which account for approximately half of Japan’s detached housing market. We also ran television ads promoting Kikubari. Kikubari utilizes the expertise of the Building Automation business to save energy in residences. At the same time, it helps to prevent shock from sudden changes in temperature and eliminates pollen and house dust to create comfortable, healthy living spaces. By setting reasonable prices, we hope to provide comfortable, energy-efficient, and clean indoor environments to many more customers.

The azbil Group energetically undertakes CSR activities as one of the key issues of its mediumterm plan. These activities can be broadly divided into “basic CSR” and “proactive CSR.”

“Basic CSR” encompasses the azbil Group’s fundamental responsibilities as a corporate citizen, including compliance and environmental preservation. In particular, concern for the global environment is a key theme. We are aiming for a reduction of 10% or more in the azbil Group’s total CO2 emissions by fiscal year 2013, ending March 31, 2014, compared with the level of fiscal year 2006, ended March 31, 2007.

Our “proactive CSR,” on the other hand, involves “social contribution via business operations” that leverages the Group’s strengths as well as “voluntary social contribution activities.” Our high-value-added solutions combining products and services save energy in office buildings and factories, helping customers to reduce their CO2 emissions. This in turn contributes significantly to reducing the global environmental load, and we take pride in that. Not only do we contribute to society via our business operations, but we also think at all times of sustainable activities linked to those operations, including using carbon credits obtained in the ESCO business at local events.

In essence, our CSR activities and business activities are inseparable. The strength of the azbil Group is that CSR management combining these two activities is ingrained at the operating level.

Returning profits to shareholders is one of the top management priority issues of the azbil Group. Our basic policy is to maintain stable dividends while striving to increase the dividend payout, taking into account consolidated performance, levels of return on equity (ROE) and dividends on equity (DOE), as well as retained earnings for strengthening the business structure and developing future businesses.

For fiscal year 2010, we increased total dividends to \63 per share, as announced at the start of the period. In fiscal year 2011, some uncertainty remains in the business environment in Japan due to the effects of the earthquake and other factors, but we will aim for consistent returns and forecast total dividends of \63 per share. As a result, we expect DOE of 3.5% and a payout ratio of 63.7% for fiscal year 2011.

Since it was founded as Yamatake Shokai Co., Ltd. in 1906, Yamatake has been meeting the needs of society through automation with the aim of “freedom from drudgery.” This philosophy has been carried on progressively over the years, such as in “Savemation” (saving through automation) and in the present Group philosophy of “human-centered automation.” The Group symbol, azbil, representing the “human-centered automation” philosophy, was formulated five years ago, and has since been gaining recognition in Japan and overseas. We therefore decided to change the company’s name from “Yamatake” to “Azbil” on the occasion of its 105th anniversary. Key Group companies in Japan will also adopt names that begin with “Azbil.”

This name change will unify the Group philosophy, the Group name, and the names of domestic and international Group companies. The azbil Group is a corporate entity that contributes to solving its customers’ issues with both products and on-site solutions through its multiple points of contact with customers. By making contact with customers through the single brand “azbil” at various sites and settings, we will raise recognition of the azbil Group, strengthen and establish our brand globally, and further promote unified Group management so that our employees worldwide can work together to tackle new challenges.

Over the past several years, our operating environment has changed along with unexpectedly rapid structural changes in the market. We will therefore further transform our business structure by “creating new businesses” and focus on realizing a world of automation created by human ingenuity and technology.

There are many companies that offer automation, but not many of them go as far as providing products together with solutions that solve problems at the customer’s site.

Furthermore, the azbil Group is proud to be the only one that conducts business with a “human-centered” concept. The needs of our customers are about more than just changes in the business environment. By further accelerating development of products and solutions, we aim to be an automation enterprise that is unique in the world.

The azbil Group will continue to evolve step-by-step to meet the expectations of our shareholders, customers, local communities, and other stakeholders.