Message from the CFO

Reviewing the Previous Medium-Term Management Plan

In April of 2020, the first year of the previous medium-term management plan, we issued a total of 20 billion yen in commercial paper to ensure adequate cash reserves in preparation for a sudden drop in performance due to the COVID-19 pandemic. To also prepare for cash flow problems at subsidiaries, we provided means for supplying necessary operating funds. Despite the headwinds predicted from the pandemic, Shimadzu achieved record-breaking sales and operating income for the third straight year, due to some of Shimadzu’s strongest business segments and products being indispensable for society, including for people’s health, but also due to Shimadzu employees around the world rallying to meet the challenge. Even cash on hand more than doubled to 150 billion yen, from 70 billion yen at the end of March 2019. That has dramatically improved financial stability over the past three years.

Executing Strategic Investments

The new medium-term management plan specifies a capital allocation plan for ensuring those cash reserves actually result in growth. Based on a slogan of “Strategic Investments,” we will execute strategic investments necessary for sustained growth, while also ensuring financial health. We will strengthen investments for achieving business growth in the area of social value creation and focus efforts on strengthening development/manufacturing/DX-related infrastructure.
The current outlook is that we will be able to secure at least 300 billion yen of operating cash flow for growth investments during the next 3 years. We plan to allocate half of that for strategic investments, 80 billion yen for capital equipment investments, and 73 billion yen for R&D. The acquisition of Nissui Pharmaceutical (currently Shimadzu Diagnostics Corporation) last year was the largest M&A investment by Shimadzu ever, but we plan to act even more aggressively during the coming three years. On the other hand, it is also a fact that Shimadzu has much less M&A experience than competitors who have achieved growth through repeated M&A activities. Therefore, to increase our experience level, such as our ability to identify, assess, and act on opportunities with a sense of speed, in April 2023 we launched a Corporate Venture Capital (CVC) fund in partnership with the venture capital firm Global Brain. With a total of 5 billion yen in assets available, the scheme enables investments of up to 200 million yen with the approval of the CTO and CFO. The main purpose of the CVC fund is to invest in and support startup companies that have technologies or knowledge that are highly compatible with Shimadzu, and to ensure the investments result in acquiring technologies needed for achieving additional growth of Shimadzu products or services, for deploying new businesses, or for generating new business opportunities.

ROIC Management

The new medium-term management plan also introduces “ROIC management” as a key element of the financial strategy. ROIC (return on invested capital) values indicate how much profit was earned from respective capital investments. Adoption of the ROIC performance indicator has been validated from all sorts of perspectives since the previous medium-term management plan. ROIC values publicly disclosed in financial reports are for consolidated operations, but for the current medium-term management plan, we intend to calculate internal ROIC targets for each division and product business unit (BU), in an effort to strengthen businesses and products from the perspective of capital efficiency. However, there are some problems in introducing ROIC values. For example, ROIC values for smaller BUs are affected just by changing the percentage of expenses borne by the BU. ROIC values will be used to not only improve capital efficiency, such as by reducing assets or resources, but presumably also for investment decision-making. Therefore, we are still trying to determine the best way to use ROIC values so that targets can be specified while maintaining fairness for different sizes of BUs. One major role of the Finance and Accounting Department is to instill the importance of making continuous improvements to investment effectiveness.

Strengthening Internal Controls and Governance

In 2022, a compliance violation (legal/regulatory violation) occurred at a Shimadzu subsidiary. Therefore, thorough measures are being implemented to ensure “compliance is prioritized above all else” throughout the entire Shimadzu Group. Financially, that means using case studies from other companies or other means to analyze variables and indicators in financial data in order to identify any signs of accounting fraud and then establish systems for preventing violations before they occur. Accordingly, we have been reevaluating accounting-related regulations and accounting process rules, which serve as the foundation for compliance in accounting, from the perspective of internal controls and responding to changes in business conditions. The effectiveness of governance will be improved by ensuring rules are securely integrated into routine practices. In addition, in order to increase financial literacy throughout the Shimadzu Group, we will train human resources with systematically acquired accounting knowledge, station those people in business divisions and key Group companies, and implement other measures to strengthen internal controls and governance.

Shareholder Returns

Starting with FY 2023, the first year of the new medium-term management plan, we have changed our policy for shareholder returns to “maintaining a dividend payout ratio of at least 30 %” and “continuing dividend increases,” while also taking into consideration overall profit and cash flow circumstances.
Meanwhile, many investors have indicated they simultaneously want both “consistent dividend payments” and “business expansion and shareholder returns based on investment in growth.” Therefore, we intend to satisfy shareholder and investor expectations by actively investing profits into growth opportunities to achieve growth and also by increasing the stock price.
For FY 2023, we are planning to increase dividend payments for the tenth consecutive year. However, in order to achieve continuous dividend increases in the future as well, the most important factor will be investing in growth. We would appreciate your understanding and support for that approach.

Comment to Shareholders and Investors

Our objective is to maximize the Shimadzu Group's corporate value. Though we sometimes receive harsh feedback from shareholders and investors, opinions that can contribute to increasing our corporate value have been widely reported and shared at Board of Directors meetings and elsewhere. We remain committed to actively maintaining a dialogue with shareholders and investors, while also pursuing both sustained growth and increased shareholder value.

Biography of Akira Watanabe,
Director, Senior Managing Executive Officer, 
CFO, in Charge of Corporate Strategy Planning and Corporate Communications

Apr. 1985   Joined Shimadzu Corporation
Jul. 1999   Transferred to Shimadzu Precision Instruments, Inc.
Apr. 2007   Deputy General Manager, Sales & Marketing Department, Semiconductor Equipment Division
Apr. 2009   General Manager, Turbo Molecular Pump Business Unit and concurrently Deputy General Manager, Sales & Marketing Department, Semiconductor Equipment Division
Apr. 2011   General Manager, Sales & Marketing Department and concurrently General Manager, Turbo Molecular Pump Business Unit, Semiconductor Equipment Division
Jun. 2013   Deputy General Manager, Semiconductor Equipment Division and concurrently General Manager, Sales & Marketing Department and General Manager, Turbo Molecular Pump Business Unit
Jul. 2014   Deputy General Manager, Industrial Machinery Division and concurrently General Manager, Sales & Marketing Department
Jun. 2016   Corporate Officer, General Manager, Industrial Machinery Division
Apr. 2019   Managing Executive Officer, General Manager, Industrial Machinery Division
Apr. 2020   Managing Executive Officer, General Manager, Industrial Machinery Division and concurrently General Manager, Fluidics Systems Division
Apr. 2022   Senior Managing Executive Officer, CFO in Charge of Corporate Strategy Planning and Corporate Communications (current)
Jun. 2022   Director, Member of the Board (current)
Akira Watanabe