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Interview with the CEO

Interview with the CEO

Q1 How would you sum up the year ended March 2016?

We maintained the basic trend of increases in both revenue and earnings, while making further progress with business structural reforms and initiatives to strengthen the corporate structure.

Within Japan, the introduction of a policy of negative interest rates for the first time did not do anything to alter the cautious stance of manufacturing industry toward capital investment, while overseas, economic growth slowed in China and other emerging economies. Nevertheless, in the year ended March 2016, the azbil Group achieved increases in both revenue and earnings for the third consecutive year.

Revenue in our Advanced Automation (AA) business declined slightly as capital investment remained sluggish, while the transfer of our health, welfare, and nursing care business during the previous year caused revenue in our Life Automation (LA) business to decrease (down by around ¥3.4 billion). However, the Building Automation (BA) business saw revenue rise against the background of urban redevelopment in the Tokyo metropolitan area and construction demand ahead of the Tokyo 2020 Olympic and Paralympic Games, as well as steady demand for refurbishment and services due to efforts to make existing buildings more energy-efficient. As a result, consolidated net sales rose 1.0% year on year to ¥256.9 billion.

Looking at profit and loss, we incurred one-off costs from increased research and development expenses aimed at bringing new products to market, as well as the launch of our new core information system and the resultant unification of job profit-andloss management procedures. However, the effect of increased revenue, a decline in goodwill amortization expenses, and the positive impact of structural reforms on income in our LA business resulted in consolidated operating income rising 11.7% year on year to ¥17.1 billion. We have posted approximately ¥3.0 billion as a goodwill impairment loss (one-time amortization of the balance) from our consolidated subsidiary Azbil Telstar, S.L.U., but the net income attributable to owners of the parent rose 15.3% year on year to ¥8.3 billion.

Although results in the year ended March 2016 did not reach the levels indicated in our plan at the start of the year, we maintained the basic trend of increases in both revenue and earnings overall, while making further progress with business structural reforms and initiatives to strengthen the corporate structure. Accordingly, I believe that we have succeeded in paving the way for measures that will lead to future growth.

Q2 How do you feel about the year ending March 2017, which will mark both the 110th anniversary of the company’s founding and the 10th year since it adopted azbil?

I feel that more active efforts to communicate to the market the unique value provided by the azbil Group are vital.

Yamatake Shokai Co., Ltd., the forerunner of the azbil Group, was founded in 1906 as a trading company importing machine tools and other instruments from the U.S. and Europe. Its founder, Takehiko Yamaguchi, established the company out of a wish to liberate Japanese workers from their toil of harsh and excessive work. After the war, the company lost no time in introducing the innovative concept of automation (measurement and control technologies) and expedited the domestic production and in-house development of instruments. In addition, we made wide-ranging contributions to Japanese economic growth via process control in the petrochemical and chemical fields and heating ventilation, and air-conditioning control of large buildings.

Our pursuit of automation resulted in the value that we provide evolving from “freeing people from drudgery” to “creating contentment.” As such, when we celebrated our centenary in 2006, we established a new Group philosophy centering on “human-centered automation.” Behind these words lies our desire to contribute to society through our commitment to focusing on people and realizing a world of automation created by human ingenuity and technology. Our current name, “azbil (automation zone builder),” was introduced at that time to symbolize the Group.

When we first instituted this Group philosophy, it was hard for people to understand the meaning behind this combination of “human-centered” with automation, which tended to be associated with machine control. However, the concept of creating new value through cooperation between humans and automation technologies is now discussed as a perfectly natural thing, not only in manufacturing industry, but also in a variety of other fields. I believe that this is due in part to the fact that the azbil Group has been putting this into practice in buildings, manufacturing equipment, and everyday settings over the last ten years.

I feel that more active efforts to communicate to the market the unique value provided by the azbil Group are vital, taking pride in the fact that we had the foresight to anticipate and respond to these changes at the cutting edge of automation.

Q3 What is the state of progress with the medium-term plan, whose final year coincides with these key milestones?

We are steadily working to reform and strengthen the corporate structure in response to the ever-changing business environment and new challenges.

Our four-year medium-term plan, which finishes in the year ending March 2017, sets out three key initiatives under the azbil Group’s philosophy of human-centered automation: becoming a long-term partner for the customer and the community by offering solutions based on our technologies and products; taking global operations to the next level, with global expansion by moving into new regions and making a qualitative change of focus; and becoming a corporate organization that never stops learning, so that it can continuously strengthen its corporate structure.

At the same time, the business environment is changing constantly and although the 2020 Olympic and Paralympic Games will be held in Tokyo, capital investment within Japan remains sluggish and growth is starting to slow in the emerging economies that had been driving the global economy. Increasing awareness of international issues such as global environmental conservation, and technological innovation arising from the evolution of the Internet environment can also be seen.

Amid this situation, we are steadily implementing ongoing business reforms and efforts to strengthen the corporate structure, as the new challenges that we face and the actions that we need to take have become clear. These challenges include ensuring expansion of both our BA and AA businesses in overseas markets, a growth field for the company; preparing for the post-2020 era, when demand triggered by redevelopment of the Tokyo metropolitan area and the Olympics will have died down; putting in place sales and production systems capable of adapting to changes in domestic and overseas business environments and market structures; and building a profitable structure into our LA business, which is our third core business segment.

In our BA business, we transferred the sales and service functions of our Shinagawa branch to new branches that we established in Osaki, Kasumigaseki, and Toranomon in the year ended March 2016. The purpose of this is to enable us to work more closely with customers, in response to demand in the new and existing building fields, which are both thriving in the Tokyo metropolitan area. In addition, we are expanding our stable revenue base with a view to future business opportunities throughout the life cycle of buildings. In the year ending March 2017, we plan to devote even greater efforts to global expansion with the launch of new products overseas.

In our AA business, we have achieved greater efficiency in mature industrial fields and stepped up the shift of personnel and other resources into the HA/FA* field and overseas markets, which are forecast to grow. Furthermore, anticipating major changes in global technological trends, such as the IoT (Internet of Things) and big data, we will create business models tailored to the market environment and promote innovative change to establish a high-profit structure in our three business units in the year ending March 2017.

We will also work on bolstering our research and development system and reorganizing our production systems, with the next medium-term plan in mind.

* The azbil Group has identified as a priority area automation in advanced industries such as electrical/electronics, semiconductors, automobiles, and chemicals (downstream) as well as domestic demand-oriented industries such as food and pharmaceuticals, together with the companies that produce manufacturing referred to collectively as HA/FA (Hybrid Automation/Factory Automation), and the azbil Group is actively engaged in growing this HA/FA business.

Q4 Please tell us about the positioning of the LA business and efforts to ensure the profitability of the Life Science Engineering (LSE) field.

After paving the way for the recovery of our business results in the LSE field, we will bring sustainability and stability to the LA business as a whole to make it our third core business segment, now that it has returned to profit.

For many years, the azbil Group sought to expand business operations in its two main business segments: the BA business, which focuses on the automation of buildings (HVAC: heating, ventilation, and air-conditioning), and the AA business, which focuses on the automation of plants and factories. However, in 2006, the gas and water meter company that is now Azbil Kimmon Co., Ltd. became a subsidiary and we established a third core business segment in the form of the LA business, focusing on automation in the lifeline and lifestyle fields, which include health, welfare, and nursing care and residential central air-conditioning systems.

In 2013, the company that is now Azbil Telstar, S.L.U., which has unique technologies and products in the Life Science Engineering (LSE) field, became a subsidiary. The addition of the life sciences field made our LA business operations our third core segment after BA and AA businesses, as well as accelerating our global expansion.

Our determination to grow our LA business stems from our objectives of avoiding an excessive concentration on a single market, building a diverse business portfolio with a variety of market structures, and ensuring the long-term sustainability and stability of the azbil Group, while still maintaining our focus on human-centered automation.

New investment and the amortization of goodwill arising from M&A exceed earnings in the LA business, which has also suffered from the harsh business environment. Accordingly, to ensure that it has a structure capable of steadily generating some level of profit as our third core business segment, we carried out a radical review of the LA business, examining the feasibility of each of the business’s component fields and synergies throughout the Group as a whole. This culminated in our withdrawal from the health, welfare, and nursing care field in the year ended March 2015. We are also pursuing a clear strategy of selection and concentration in the lifeline, life sciences, and lifestyle fields. Furthermore, we consolidated our gas meter factories to achieve greater manufacturing efficiency, transformed our sales model and system for residential central air-conditioning systems, and undertook bold structural reforms in the LSE field by liquidating unprofitable subsidiaries and reducing staffing, while at the same time stepping up our efforts to bring new products to market. As a result, we succeeded in returning the LA business to profit in the year ended March 2016.

While the business results of the Spanish company at the heart of the Azbil Telstar Group are improving, we have posted the roughly ¥3.0 billion balance of goodwill as a one-off impairment loss, due to the severity of the downturn in business at the Dutch and Brazilian subsidiaries. By doing so, we will address foreseeable future risk factors, while at the same time approving the underwriting of a capital increase to improve the company’s financial position. Starting in the year ending March 2017, we will place the recovery in business results in the LSE field on a sound footing, based on the global pharmaceutical and functional food markets.

Q5 Please explain to us what is being done to strengthen the research and development system and reorganize production bases within Japan.

We will consolidate our research and development bases to create a new point of contact with customers, offering enhanced functionality. In addition, we will promote greater efficiency at our production bases worldwide.

In preparation for our next medium-term plan, which starts in the year ending March 2018, we have decided to strengthen our research and development system within Japan and reorganize our production system. We aim to complete both processes in the year ending March 2020.

We have already put in place research and development frameworks in Japan, the U.S., and Europe that enable us to work closely with customers to propose solutions, so we will now move on to the next phase with the launch of new initiatives at our core research base in Japan. More specifically, we will consolidate the azbil Group’s research and development resources at the Fujisawa Technology Center (Fujisawa City, Kanagawa Prefecture) and put in place advanced development and testing environments, thereby achieving greater efficiency in research and development activities and expediting new product development.

At the same time, we will enhance the functions of the Fujisawa Technology Center as our energy management solutions site, so that it can serve as a showroom for proposing energy-efficient solutions. Although the concept of “human-centered automation” has come to be accepted, it is not easy to give people a true sense of the effects of cutting-edge technology and new products. Accordingly, I want to make the Center a new point of contact with customers, where they can gain a real sense of the possibilities offered by the azbil Group’s technologies, while ensuring that these lead into business and collaborative innovation.

As far as the reorganization of our domestic production system is concerned, we will consolidate our Shonan and Isehara factories in Kanagawa Prefecture into a single mother factory supplying highadded-value products worldwide. In conjunction with our factories in China and Thailand, we will also rearrange our domestic and overseas production lines into the optimal configuration.

The total investment associated with consolidation of our research and development bases and reorganization of our production system is due to be around ¥8.0 billion over three years. We anticipate that this investment will contribute to developing and enhancing products in energy management and other businesses, and to eventually reducing our fixed costs by approximately ¥2.0 billion annually.

Q6 Economic growth in China and other emerging economies is slowing; please tell us about the progress of global expansion and its future direction.

We are seeing some progress in our efforts to upgrade our physical resources, such as subsidiaries and facilities, so I believe our next challenge is to develop and secure personnel with a global outlook.

Recently, the outlook for the global economy has become increasingly uncertain, but when you take into account the business environment that will prevail after the Tokyo 2020 Olympics and Paralympics take place, it is clear that building our revenue base in overseas markets—which still offer plenty of regional and qualitative scope for business expansion—will be the engine of growth for the azbil Group going forward.

In terms of regional expansion, we have already established overseas subsidiaries everywhere from China and other parts of Asia, North America, and Europe to the Middle East and Latin America, actively developing sales and service bases there. With regard to qualitative change of focus, in our BA business, we have put in place innovative remote maintenance infrastructure that enables us to provide the same high-quality energy efficiency solutions and maintenance services as we do in Japan. We have also begun to launch new products developed with a view to their deployment in global markets, such as BA systems for overseas markets.

Thus, we are seeing some progress in upgrading our physical resources, so the next key area of focus will be enhancing our intangible resources; specifically, we will need to develop personnel capable of increasing points of contact with local customers and secure staff with the talent to manage our overseas subsidiaries. Accordingly, we are devoting considerable effort to developing such personnel with a global outlook via the Azbil Academy, which we established in 2012.

Overseas net sales in the year ended March 2016 totaled ¥49.0 billion, which meant that overseas sales were equivalent to 19.1% of total net sales, almost meeting the target of 20% set in the medium-term plan. From the year ending March 2017, we will promote the development of personnel with a global outlook, while bringing to overseas markets advanced solutions that deliver the same levels of safety, peace of mind, comfort, environmental conservation, and energy efficiency as those demanded by the mature Japanese market.

Q7 The azbil Group achieves a high level of shareholder returns. What are your thoughts on the shareholder return policy and financial strategy?

We will seek further improvements in the dividend level, to reflect the prospects for increased revenue and the fruits of business structural reform, and provide our shareholders with even greater returns.

Our basic policy on shareholder returns is to maintain solid and stable dividends, striving to improve capital efficiency as represented by such indicators as the return on equity (ROE) and also taking into account the dividends on equity (DOE) level, while maintaining sound financial foundations, in order to achieve sustainable growth and enhance corporate value.

For the year ended March 2016, in addition to acquiring 600,000 of our own shares (between May 14 and June 8, 2015), we paid a total dividend of ¥67 per share, including the interim dividend, as announced. In the year ending March 2017, we intend to increase the ordinary dividend by ¥2 to ¥69 per share for the year, to provide our shareholders with even greater returns, reflecting the prospects for increased revenue going forward, as well as the fruits of business structural reform and initiatives to strengthen the profit structure. In addition, as 2016 marks the 110th anniversary of the company’s founding and the 10th anniversary of its adopting azbil, we plan to pay a commemorative dividend of ¥5 per share, as an expression of our gratitude to all of our shareholders for their support over many years. As a result, we intend to pay an annual dividend of ¥74 per share in the year ending March 2017.

To ensure that we continue to provide solid returns to our shareholders, we have set the long-term goal of achieving ROE of 10% or higher. Accordingly, as well as continuing to undertake business structural reforms aimed at increasing capital efficiency, we will invest in future growth, including M∧A, and continue to maintain a sound financial footing to ensure that we can continue our business and meet our supply obligations, even in the event of a major natural disaster or other unforeseen circumstances.

Trends in Cash Dividends Per Share

Q8 How does the Group practice CSR-focused management?

Having identified basic themes and goals, we practice basic CSR and proactive CSR.

The azbil Group positions the fulfillment of our fundamental obligations to society as a corporate citizen as “basic CSR,” while regarding our contribution to society through our business operations and our voluntary activities that benefit society as “proactive CSR.” Approaching CSR from both of these perspectives, we practice CSR management toward all stakeholders, having identified the goals that we should achieve in regard to the basic themes of compliance, risk management (quality and product liability, and disaster preparedness and BCP), business management that values people, contribution to the global environment, Group management and enhancement of our governance framework, and contributions to society.

The azbil Group has remained true to the DNA of the company founded more than a century ago to “free people from drudgery.” For us, there is thus no contradiction between our Group philosophy of human-centered automation and contributing to society. In other words, it is simple for us to understand the link between the day-to-day activities of our employees and our contribution to the world. I believe that this is also significant in motivating our employees.

CSR Management

Q9 Please tell us about your efforts to reinforce the governance framework to achieve sustainable growth and enhance corporate value.

We have strengthened both our unique systems for ensuring that governance functions appropriately and our frameworks for communicating these to shareholders and investo.

We have been working on bolstering our governance framework for some time, having appointed our first outside director in 2007. In 2014, we increased the number of outside directors to three, constituting one-third of the Board of Directors. Then, in the year ended March 2016, we took the opportunity presented by the application of Japan’s Corporate Governance Code to appoint an executive officer in charge of corporate communications, who promotes even more constructive dialogue with shareholders and investors by ensuring that they understand that the governance framework is functioning properly, as well as enhancing functions for feeding back external views to management.

We have reviewed the Regulations of the Board of Directors and other related rules and regulations, and have put in place various systems of our own. These include establishing our Independence Standards for Outside Executives and specifying that the number of outside directors on the Nomination and Remuneration Committee must exceed the number of representative directors on the committee. Furthermore, we have prescribed Corporate Governance Operational Guidelines, to ensure that we practice appropriate and efficient corporate governance.

On the practical side, while promoting dialogue with shareholders and investors, we hold frequent meetings with our outside directors, who have a wealth of experience in overseas business, corporate law, and investment management companies. We benefit from their valuable advice when we are exploring global expansion and new business, as well as when making decisions on business restructuring and withdrawal.

Q10 Please tell us about the prospects for business results for the year ending March 2017, which marks the final year of the medium-term plan.

I want us to achieve increases in both revenue and earnings for the fourth consecutive year, to clearly demonstrate sustainable growth.

Sluggish capital investment in manufacturing industry and the slowdown in economic growth in emerging countries make it difficult for us to achieve the targets that we set when originally formulating the medium-term plan. However, the year ending March 2017 marks a milestone in our efforts to achieve a major transformation, as we will see the outcomes of the medium-term plan, so I want us to achieve increases in both net sales and operating income for the fourth consecutive year, to clearly demonstrate sustainable growth in the year ending March 2018 and beyond.

In addition to growth in our BA business, where the domestic business environment remains steady, we anticipate that structural reforms will bear fruit in our LA business. As such, although the AA business environment is expected to be severe, due to capital investment trends in domestic and overseas manufacturing industry and the impact of exchange rates, we plan consolidated net sales of ¥260.0 billion (up 1.2% year on year) and consolidated operating income of ¥19.0 billion (up 10.9% year on year).