Review of the First Year of the Medium-Term Management Plan
For the first year of the medium-term management plan, record-breaking results were achieved for the fourth consecutive year in both sales and operating income, driven by growth in businesses outside Japan (with a 57.9 % overseas ratio) and favorable exchange rates. Contributing factors included record sales of key models in healthcare and green transformation fields, such as liquid chromatographs, mass spectrometer systems, gas chromatographs, and testing machines. Additionally, converting backorders to sales and ensuring pricing adjustments or other proposals for added value offered played a significant role. However, it is also true that without the exchange rate effects, the beginning-of-year growth estimates could not have been achieved. This was due to worsening market conditions in China, reduced capital equipment investments that Japan's medical systems faced, stagnation in semiconductor equipment investment levels, and other factors.
Growth investments, including strategic investments in human capital and R&D, progressed mostly according to plan. In terms of M&A, we acquired Biomaneo, a clinical software company in France, a GC microreactor business in North America, and other smaller investments. Although these acquisitions were relatively small, we were able to acquire companies that will serve as the foundation for future overseas group growth.
Implementing ROIC Management
In FY 2024, we will continue to make growth investments in areas that create social value and strengthen the infrastructure for human capital, development, manufacturing, and DX measures. In particular, R&D investments are estimated to be 28.0 billion yen, accounting for 5.3 % of sales, but we will strive to achieve the target 5 % specified for the second year of the medium-term management plan.
We will also implement ROIC management practices. From FY 2024 we will introduce ROIC as a management indicator for each division and business unit to manage the discrepancies between forecasts and actual results. Though it may be necessary to make follow-up refinements to how invested capital is calculated for each business and business unit, we will proceed with specifying ROIC as a KPI for measuring performance. Our intention is to combine financial KPIs, consisting of mainly financial indicators, such as the operating margin and capital investment turnover ratio, and operational KPIs, including the number of sales leads and production lead times, to configure a hierarchical tree of KPIs with ROIC at the top. That would presumably allow management to link all corporate targets, including management and front-line targets, to actions that can be optimized for overall performance. This approach will take some time before the KPIs are fully adopted, but we will use systems to automate factors and enlist the entire company in an effort to improve management efficiency.
Management with an Awareness of the Cost of Capital
The cost of capital for the Shimadzu Group is considered about 7 to 8 %. As Shimadzu is currently debt-free, the cost of capital is essentially equal to the shareholder cost of capital, which makes it important to achieve ROE and ROIC values that exceed the shareholders’ cost of capital. Currently, the ROE level is 12.5 % and ROIC is 11 %, which are higher than our cost of capital, but we intend to continue efforts to both decrease our cost of capital and increase the capital efficiency (ROIC and ROE) in order to increase corporate value in the medium-to-long term and achieve sustained growth.
Also, reviewing our business portfolio is an unavoidable issue for increasing capital efficiency. For the aircraft equipment segment, which was designated in the medium-term management plan as a business for reorganization, performance improved significantly from FY 2023, due to its own efforts and favorable changes in business conditions.
Nevertheless, it remains designated as a business for reorganization because the business model itself did not change. For the medical systems and hydraulic equipment businesses, which both have low operating margins, we will try to improve performance by implementing imaging transformations and promoting recurring revenues for the former and expanding sales of higher value-added products like quiet gear pumps for the latter.
We will also increase engagement with shareholders and investors. Through dialogue, we will listen to the voices of the stock market and continue fair disclosure to reduce information asymmetry. Last year, when I conducted investor relations outside Japan for the first time since being appointed CFO, I met with 16 British investment companies.
Though the overall investor responses to the medium-term management plan were positive, some investors also expressed some rather harsh views. The views we judged helpful for increasing Shimadzu's corporate value were reported and shared at Board of Directors meetings and elsewhere in order to improve management practices.
Shareholder Returns
The Shimadzu Group intends to compensate shareholders and investors by actively investing profits into growth opportunities to improve performance and by increasing the share price.
Starting with FY 2023, the first year of the new medium-term management plan, we changed our shareholder returns policies to “maintain a dividend payout ratio of at least 30 %” and “always pay shareholder returns,” while also taking into consideration overall profit and cash flow circumstances. As a result, we increased the dividend for the tenth consecutive year and in FY 2024, we plan to increase it again for the eleventh consecutive year.
Also in FY 2024, we plan to purchase 25.0 billion yen worth of Shimadzu shares. This buyback, which marks the first time Shimadzu repurchasing its own shares, is intended to improve shareholder returns and increase capital efficiency. However, please do not misunderstand the action as indicating an equivalent decrease in growth investments. Growth investments will remain unchanged from when the medium-term management plan was prepared.
Reinforcing the Internal Controls and Corporate Governance
To ensure compliance is prioritized above all else, the Shimadzu Group has been conducting financial reviews of accounting-related regulations and accounting process rules that serve as the foundation for compliance in accounting, from the perspective of internal controls and changes in business conditions. Additionally, we have been increasing business process efficiency and strengthening governance by migrating accounting processes to shared services to standardize, digitize, and automate these processes. About 70 % of current accounting processes at Group companies in Japan have been consolidated through shared services, and we plan to increase that to 80 % for FY 2024 and 100 % for the final year of the medium-term management plan. By doing so, we plan to increase efficiency and reduce accounting processes by 15 %.
In addition, to increase financial literacy throughout the Shimadzu Group, we have been systematically teaching accounting principles to human resources and have started stationing accounting/finance personnel with relevant expertise in business divisions and key Group companies.
Comment to Shareholders and Investors
The Shimadzu Group is currently in the process of implementing major reforms for transitioning from a product-centered organization to a customer-centered organization. For example, previous sales units organized directly under business divisions started transitioning to a Sales & Marketing Division that extends across all business divisions, enabling us to offer all products and solutions to customers from a single source. Moving forward, we intend to continue achieving sustained growth by offering customer-centered end-to-end solutions. In addition, health management, environmental management, and other ESG management measures will be implemented by the entire Group, rather than being confined to individual business divisions.
Historically, the Shimadzu Group has been somewhat conservative in terms of future financial risks. However, beginning with the current medium-term management plan, in order to achieve additional growth, we will make a major course shift to a more proactive approach to financial management with strategic investments.
I am confident that those measures will allow us to reveal a new and dramatically improved Shimadzu Group in our report next fiscal year. Please look forward to it.
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) |
