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Interview with the CEO

We are aiming to enhance our unmatched ability to provide unique automation solutions for our customers and society as we transform the Group for sustaining growth.

Kiyohiro Yamamoto
President and Chief Executive Officer

Q1. Your first year as President was challenging with the worldwide COVID-19 pandemic. How do you view the Group’s performance in fiscal year 2020?

A1. The conditions certainly were challenging, and our top priority was the health and safety of our employees. At the same time, it was clear that the azbil Group is making a meaningful contribution to creating a sustainable society through our automation technologies and continuation of installation, engineering, service, and production activities, particularly to medical facilities and other key facilities and equipment to social infrastructure.

Throughout the pandemic, our priorities have been on the safety of our employees and customers and on ensuring that we continue to provide customers with the essential services needed to maintain uninterrupted operation of important facilities and social infrastructure. We were able to do so largely because of the reforms to our business and operating structures that we completed under the previous two Medium-term Plans.

The relevancy of our business to a sustainable society became abundantly evident as the pandemic brought new ways of living. The automation technologies we offer, such as those enabling work to be done online and from remote locations and providing carefully controlled sophisticated air conditioning and better ventilation, create living and work environments that are both safe and comfortable.

Our products and services are also playing an important role in mitigating the effects of climate change. The Group’s measurement and control technologies reduce CO2 emissions from large buildings, factories, and plants, and many of our customers are using our products and services to help them achieve carbon neutrality. The azbil Group as a whole emits about 0.02 million metric tons of CO2 per year, but the total CO2 reduction effect that our technologies are producing at our customers is about 3 million tons annually, or about 150 times our own emission volume.

During the year, I was also reassured about the Group’s potential for future growth into the long term from the increasing demand for automation to address social issues going forward. This is largely because automation technology, leveraging the latest IoT, AI, cloud and sensing technologies, will serve in solving the challenges Japan is facing such as a graying population and declining birthrate, new work styles, and aging infrastructure.

I also believe the Group’s proactive efforts to enable work-at-home and remote work are allowing our employees to use their time and workspaces more efficiently. This is increasing productivity, which I think will be an asset in the future.

Q2. Please discuss your view on the Group’s performance in fiscal year 2020 and the results of the previous two Medium-term Plans.

A2. I believe the business and operating structure reforms under the recently completed two Medium-term Plans limited the impact of the harsh business conditions on our performance.

In Japan, the numerous urban redevelopment projects supported solid demand for equipment and systems for large scale buildings, and the capital investment activity drove steady demand for advanced manufacturing systems. The labor shortage in Japan led to strong demand for rationalization and labor-saving technologies as well as for maintenance of equipment and systems. At the same time, it is a fact our business was impacted to some extent by the global economic contraction during the pandemic, as we saw several investment plans postponed as well as temporarily slower sales activities. As a result, we recorded moderate year-on-year declines in both net sales and profit in fiscal year 2020, with sales amounting to ¥246.8 billion and operating income of ¥25.7 billion.

Despite the harsh business conditions, our improved operational efficiency enabled us to hold the operating income margin at 10.4%, very near the 10.5% in fiscal year 2019, while a rise in net income helped maintain ROE above 10%, at 10.4% compared to 10.9% last year. The improvement in operational efficiency was achieved under the Medium-term Plans from fiscal year 2013 to fiscal year 2019. During that time, we nearly doubled operating income from ¥13.9 billion to ¥27.2 billion and expanded the operating income margin from 5.6% to 10.5%. Return on equity similarly rose from 5.4% to 10.9%. I believe these results demonstrate the success of our profit-oriented management since the global financial crisis of 2007-2008, which has enabled us to significantly limit the potential damage to our performance compared to past times of economic crisis. The business and operating structure reforms and steps to improve profitability are guided by three fundamental policies: Being a long-term partner for the customer and the community by offering solutions based on Azbil’s technologies and products; taking global operations to the next level by expansion into new regions and a qualitative change of focus; and being a corporate organization that never stops learning, so that it can continuously grow stronger.

All of our efforts to strengthen our product and service offerings follow these policies. They were also behind our strategic decision to raise the business ratio of the lifecycle solutions businesses in the Group’s three segments of Building Automation (BA), Advanced Automation (AA), and Life Automation (LA). The measures we have implemented have increased the value we provide to customers and improved our profitability. We have also been expanding our global operations with the aim of developing them into another engine for business growth. We currently have sales and service operations in 23 countries, and in 2018 we established the Strategic Planning & Development Office for Southeast Asia in Singapore.

In addition, we are upgrading our production capabilities. We are introducing state-of-the-art technology to our lead development site at the Fujisawa Technology Center and the Shonan Factory, which together serve as a combined mother factory for the Group’s global operations. We are also investing in technology development as another source for business growth. Our focus is on developing sensor technology, which is a key component of the booming IoT field, and on new products integrating AI, IT, and cloud technologies.

The new Medium-term Plan sets a course for ongoing reform and strengthening of our business and operational structures. The plan also provides a clear roadmap for further expanding our global business and harnessing the power of digital transformation as we systematically and methodically continue to improve our operations and enhance our business performance and potential.

The Shonan Factory (top) and Fujisawa Technology Center (bottom)

The Shonan Factory (top) and Fujisawa Technology Center (bottom)

Q3. What are the main objectives and initiatives of the new Medium-term Plan, and what will be the biggest challenges?

A3. The Medium-term Plan has several initiatives designed to apply the Group’s “human-centered automation” philosophy and steadily and swiftly bring about the transformation needed to deliver us to our next phase of growth to 2030.

I think it is important in these business conditions to reaffirm our business character and strengths that we have ever built up until now. Management must also be steadfastly committed to making quick and bold decisions to change what we need to make our business better in the future.

What should not change is our Group philosophy of “human-centered automation” and the unique business model it gives us. The azbil Group’s core assets are not just its ability to develop, manufacture, and sell state-of-the-art equipment and systems for measurement and control. We also have the ability to provide long-term solution services with high-level safety, security, and efficiency, including advanced engineering technology for onsite installation and maintenance.

A comfortable space requires more than steady temperature control; it also needs to create air and space quality that harmonize with various external factors and conditions. We provide equipment for buildings, plants and factories, houses, and societal lifelines. To create the optimal conditions for the people who live and work at each site, we must not only possess a thorough understanding of the customer’s site, but also have the ability to tailor our products to each site’s unique conditions. In addition, providing maintenance and other services during the 10 or 20-year equipment lifecycles requires us to continually make our products and systems more competitive and constantly improve our onsite engineering and service capabilities.

At this moment, many Group employees are hard at work at customer sites trying to find solutions to complex problems. I know their dedication because I myself did similar work when I was helping launch an energy management business. It’s absolutely true that “The solution always exists at the worksite.” That’s why our employees are side by side with our customers worrying, thinking, and devising ingenious solutions. These employees are the fundamental source of the azbil Group’s competitive advantage.

I believe that setting clear targets and key performance indicators and carrying out the PDCA cycle as quickly as possible will be critical. When business conditions and technologies are changing as rapidly as they are, this speed is absolutely essential and will go a long way to determining our competitiveness in the years ahead.

The new Medium-term Plan was designed for these conditions. It was purposely designed to provide easy visualization of our objectives for the three business segments and for the Group’s development, production, and human resources functions that support the segments. The plan’s objectives are based on long-term targets that we updated to take into account the changing business climate, new technology trends, and the changing structure of society, as well as what we want the Group to be three and ten years in the future. The aim of the plan is to set the Group’s growth on an upward trajectory with all Group employees using their originality and ingenuity at onsite locations and feeling proud about contributing to the sustainability of society.

A whole new panoply of demand for automation technology has been created everywhere to accommodate the new ways people are working, such as to ensure safe ventilation with evolving concept of office workspace. New opportunities for business growth are also surfacing, such as from the growing demand for sophisticated air conditioning technology that focuses on segmented spaces and provides a balance of comfort and energy efficiency.

The Medium-term Plan was formulated for the Group to thrive in this environment. The plan includes initiatives to transform the Group to be able to meet customer needs and respond to social issues in Japan and overseas and to generate Group synergies while developing customized business models for each segment. The plan also sets specific performance goals of reaching ¥300 billion in net sales and ¥36 billion in operating income, with an operating income margin of 12%, in fiscal year 2024. At that point, the plan will deliver us from a transformation phase to a growth phase propelling us toward ¥400 billion in net sales and ¥60 billion in operating income, with an operating income margin of 15%, in fiscal year 2030.

Building out three growth fields to propel segment growth

To keep pace with the changes in customer needs and social issues, we are focusing on expanding business by fully leveraging the azbil Group’s strengths and unique solutions to develop the three growth fields of new automation, environment and energy, lifecycle solutions. Building out our business in these three fields will open up new avenues for growth in each of the BA, AA, and LA businesses.

The growth potential in the new automation fields has become increasingly apparent over the past year. Our approach to expanding the new automation fields is to directly boost our customers’ such competitive advantages as comfort and productivity by providing the added value of “improved quality of space and productivity” at their facilities. Improvements in these areas normally lead to increased consumption of energy and resources, but we will provide another layer of added value by keeping the consumption of energy and resources at a minimum, which strategically is provided in the environment and energy fields.

Technology in the new automation fields will have the dual challenge of tackling social issues, which will no doubt be a very competitive field, while also being more environmentally friendly. Our onsite experience, specialized expertise, and extensive data will be our differentiating factors and will be the resources that will enable us to maintain an optimal balance between quality and environmental impact. In short, I believe the azbil Group has the set of unique strengths for success in the fields.

The added value of a lifecycle business is the continuous provision of value over long periods. For customers, the provided value becomes a foundational element for their operations and businesses; for us, providing the value becomes a recurring business that will infuse a steadily growing flow of profits to the Group into the future.

Over time, as we broaden our presence in the three growth fields, our business scale will steadily grow along with our contribution to a sustainable society.

The BA, AA, and LA businesses already have presences in these domains that can be further developed with automation technology. We will be advancing five initiatives to meet changes in needs and markets as they emerge around the world, such as the changes caused by the COVID-19 pandemic. The ultimate objectives of the five initiatives that follow are to generate business growth and establish steadily rising profits in all three business segments.

Increase investment to strengthen our product and service development capabilities

We will meet new needs for automation and develop new products and services to drive growth in each business by augmenting our edge devices such as sensors and actuators at customer sites and by improving our cloud computing applications for optimally using and controlling big data gathered from customer sites. Guided by our technology development strategies to meet changing customer needs and provide new added value in those two areas, we will aggressively invest to strengthen our abilities to develop new products and services. Part of this will be to construct new laboratories with state-of-the-art facilities at the Fujisawa Technology Center, our lead site for research and development.

Increase contact points with customers

The new social issues and changing business environment are creating the need for new solutions through new automation at our existing customers and opening up business opportunities in new markets and business fields. While using digital transformation (DX) to strengthen and streamline our sales capabilities, we will invest resources in our focus markets in Japan and overseas to build on our connections with current customers and to continue cultivating new customers around the world.

Expand business by addressing social issues

To alleviate the pressing social issues of climate change, aging infrastructure, the prevention of contagious diseases, and Japan’s shrinking labor force, we will create safe and secure office and production spaces and develop new solutions, such as virtual power plants, that reduce energy demand and enable conversion to alternative renewable energy sources.

Boost DX and strengthen employee DX proficiency

Cloud and application software technology is a common element in boosting the added value of our services with AI and big data and in developing business related to virtual power plants and other emerging technology fields. We will train employees and hire dedicated DX staff to ensure we have a fully developed DX structure for our onsite engineering and services, which are key Group strengths.

Form strategies to establish continuous profit margin growth

As we develop strategies for business growth, we will continue and expand the strategies of the previous Medium-term Plan that have improved our ability to generate profit. Management will emphasize profit improvement, which will include lowering costs by introducing new products and using DX to improve business efficiency, as we actively work to attain our fiscal year 2030 target of operating income margin of 15%.

Q4 Companies are increasingly being evaluated in terms of the United Nations’ Sustainable Development Goals and environmental, social, and governance criteria. How is the azbil Group incorporating social responsibility into its business operations?

A4 Management is using the SDGs as guideposts for our mission to contribute “in series” to the achievement of a sustainable society.

The Medium-term Plan sets taking action on social issues as one of the primary means for expanding our business, and we are harnessing the azbil Group’s unique capabilities to address social issues. In the environment and energy fields, for example, we are reducing the environmental impact that is usually associated with “improved quality of space and productivity” and supporting customer efforts to attain carbon neutrality. In fiscal year 2020, we set specific environmental targets for the Group comprising select SDGs in four core categories along with specific targets and key performance indicators for fiscal year 2030. The core categories are the two business fields of environment and energy and new automation, and two areas of general corporate activities, which are supply chain and social responsibility along with health and well-being management and an organization that never stop learning.

Among these, I am personally most passionate about global warming and environmental issues. Our automation technologies contribute in two ways, by reducing energy waste through efficient energy usage and in turn by reducing demand for energy. Product recycling and renewable energy technologies also contribute greatly. The value of our automation technology is that it can lower energy demand while providing quality of space and maintaining productivity at living, office, and production sites. This is one of the ways that azbil is contributing “in series” to the achievement of a sustainable society. I find this extremely motivating and hope to inspire Group employees in Japan and overseas to take action on the SDGs.

We are also engaging in measures to improve our non-financial reporting of the Group’s environmental, social, and governance status. Fortifying our corporate foundation will support not only sustaining growth for the Group, but will enable us to contribute meaningfully to realizing a sustainable society. Our investment in business growth will be aggressive in the areas of technology (intellectual capital), manufacturing equipment (manufacturing capital), and human resources (human capital).

Our CSR management practices focus on contributing to a sustainable society through our business activities founded on tour Group philosophy of “human-centered automation.” As for our management practice of putting people first, for example, in all of our operations, we will continue actively applying and enforcing the Ten Principles of the United Nations Global Compact in the areas of human rights, labor, environment and anti-corruption. Our CSR management also prioritizes risk management, thorough ethical and legal compliance, and environmental and social contribution.

Our efforts to strengthen our CSR activities were recognized by the Government Pension Investment Fund, which in fiscal 2020 selected four ESG indexes in which azbil is a constituent. Yet, it is imperative that we continue diligently strengthening our corporate governance to continue ensuring fairness, neutrality, and transparency in our management practices. Recent measures include steps to establish a structure to facilitate constructive dialogue with all stakeholders, which is essential to realizing sustaining business growth and continuing to increase our corporate value into the medium to long term.

Q5 How will the Company return profit from its business growth to shareholders and investors?

A5 We are committed to strategically investing to increase our corporate value and to implementing a disciplined capital policy. In line with these commitments, we plan to raise the fiscal year 2020 year-end dividend and the total annual dividend for fiscal year 2021. We will also consider supplementing shareholder return through share buybacks. As part of our disciplined capital policy, we have created an internal control index for our capital investment activities that includes our own formula for ROIC reflecting the specific conditions of our business investments. Management practices an active awareness of capital costs and is geared toward achieving targets for ROE.

I stress the importance of keeping long-term objectives in mind while taking the current situation into account. Shareholder return remains a management priority. Our basic policy is to maintain a stable dividend and seek to raise dividends while considering the overall circumstances of our consolidated business performance, dividend on equity ratio (DOE), return on equity (ROE), and the strategic need to ensure adequate internal reserves for current and future business development and a sound financial foundation.

Following this basic policy and in consideration of our business performance, which even in the harsh operating environment exceeded our projections, we have decided to increase the fiscal year 2020 year-end dividend payment to ¥30 per share, a ¥5 increase from our original plan, which will bring the full-year dividend payment to ¥55 per share. The DOE ratio will thus be 4.0% for fiscal year 2020, and we will continue advancing the Medium-term Plan to continue steadily increasing DOE. Looking ahead to fiscal year 2021, based on our outlooks for business growth and our earnings performance, we plan to raise the ordinary dividend by ¥5, which will increase the full-year dividend to ¥60 per share.

As mentioned earlier, we will be aggressively investing in technology, equipment, human resources, and other areas necessary for establishing sustaining growth and raising corporate value. In keeping with a disciplined capital policy, we also plan to act on our commitment to returning value to shareholders by improving ROE and distributing dividends. We also plan to provide value by flexibly repurchasing up to three million shares, or up to ¥10 billion worth, of outstanding azbil shares.

In fiscal year 2021, we began using ROIC as an additional key management indicator with ROE to further strengthen our corporate governance and as an additional guide for raising our corporate value and maintaining a disciplined capital policy. I believe strong awareness of capital costs is increasingly critical and plan to emphasize its importance in our management activities.

Q6 Do you have a message for stakeholders?

A6 The azbil Group is engaging in a concerted effort to transform itself by pursuing the substantial opportunities for growth in the automation business. The Company and our stakeholders will share the benefits of the growth we achieve over the long term.

We fully embrace the idea of stakeholder capitalism as it reflects the values that the azbil Group has adhered to since its inception.
We have always had strong relationships with our stakeholders, and I wish to continue engaging in constructive dialogue, while maintaining an objective perspective on the business environment and our business performance.

How business conditions will be in the aftermath of the COVID-19 pandemic is still anything but certain, but I think there will be an exponential increase in demand for the Group’s core competencies of automation technology, installation, services, and engineering. It is truly rewarding and I take pride in the fact that our drive to increase the use of automation contributes “in series” to the achievement of a sustainable society. At the same time, the increasingly fierce competition in all markets means that we need to mobilize the full power of our capabilities to succeed. The azbil Group is putting all of its energy into transforming itself for future growth, and I look forward to pursuing the significant opportunities ahead.