CFO Message

Yoshihiko Kawamura
Senior Vice President and Executive Officer, CFO

QFirst, please give us your thoughts on
your first year since being appointed
CFO.

I have held a concurrent position as the head of the Investment
Strategy Division since April of this year, and I’m able to lookat investments and loans, so the financing and allocation ofcapital for acquisitions has been going even more smoothly
than in the past. For example, we needed about one trillion yenfor the acquisition of GlobalLogic, and we were able to movequickly in investigating capital financing procurement methods
and simulations of the short- and medium-term impact of theacquisition on financial and management performance KPIs.
In general, when you announce that you are going to undertake
an M&A project, there is a tendency for share price volatility toincrease in the short term. If you want to control that volatility,
it’s important to clearly communicate a medium- and long-term
equity story to the capital markets. In post-merger integration(PMI), the integration into consolidated management systems
is completed in a comparatively short period of just a fewmonths, but PMI takes two or three years after that to impact
performance. We focus our efforts on garnering synergies in
the medium to long term, as we amortize the intangible assets
involved in the acquisition.
In terms of the impact of integration at Hitachi ABB Power
Grids, we expect to see cost-reduction effects on a scale ofabout 100 billion yen by 2025, through the use of shared service

Q

What are your basic policies for returns
to shareholders?

There are four important non-financial KPIs: governance,
climate change measures, the value of human resources, andthe happiness of human society.
Governance can be very difficult to present in the form of a KPI,
but in addition to the diverse background and experience of thepeople who make up the Board of Directors, my goal is to beable to explain to outside parties how these directors engage
in exchanges of constructive criticism with the executive side,
as well as discussions related to ethical behavior at board
meetings.
In climate change measures, Hitachi has set a target KPI ofachieving carbon neutrality in our own operations by 2030, andwe are accelerating these activities. We need to look at thisproblem from a broader perspective, however, so I believe wemust show an aggressive stance and involvement in activities
targeting this problem, while introducing how Hitachi will
reduce CO2 emissions in an economic society and how we
can contribute to the global environment, presenting actual
examples of R&D activities and specific contributions throughbusiness.
In terms of the value of human resources, first, it is important toexplain clearly how we encourage diversity and inclusion within
Hitachi. I can say with confidence that by fostering and training
our people worldwide through day-to-day corporate activities
in which we cultivate our technical strengths, we support theinternational competitiveness of Japan as a whole. I would
like to set this as a kind of KPI, as a means of communicating
Hitachi’s contributions.
Finally, and I think that this is the most important perspective,
there is the question of whether our corporate activities
help to improve the public welfare; in other words, whether
people’s lives are more culturally oriented, healthier, and richer
because of our corporate activities. This is the starting point
for all corporate activities, so I want to keep this in mind asa corporate citizen and ensure that we continue to ask thesequestions of ourselves.
My approach to non-financial KPIs is to maintain a focus on
these four perspectives and use these as key indexes for
management as we undertake activities that tie into increased
corporate value.

Data

Hitachi Integrated Report 2021

Please tell us about your approach toM&A.

In capital allocation, we have no immediate plans for largescale loans or capital increases, but we will continue toincrease operating cash flow through growth investments
and secure funding by constantly switching out assets. We
consider returns to shareholders to be an important theme.
Our intent is to allocate about one-third of capital to eachof three areas: returns to shareholders and repayment ofloans, growth investments, and capital investments. We will
also further enhance R&D investments, targeting cumulative
investments of about 1.5 trillion yen over the three years fromfiscal 2022.
Growth investments are growth drivers that increase enterprisevalue. There are two ways of achieving our goals for growthinvestments: “organic growth,” where we increase the added
value of Hitachi’s own killer technologies, as in the case ofparticle beam therapy systems, and “inorganic growth,” whichis achieved by incorporating businesses from outside, likewhen we acquired ABB’s power grids business. Capital growthstrategies comprise regional strategies and sector strategies
with a three-dimensional approach, considering the timeline forinvestment efficiency.
In regional strategies, we monitor the status of marginalincome (increased profits in line with additional investedresources) for both the domestic and overseas business,
and we are shifting the focus toward businesses with higher
marginal income (overseas business in many cases). Moving
forward, it will become increasingly important to factor in our
global strategies and design optimum strategies specific toeach region. There are two important elements to the sector
strategies: the perspective of market positioning for Hitachi’s
products and services (positioning strategy), and resourcebased strategies, which leverage Hitachi’s technical superiorityand other resources. In addition, we will back-cast from an
ideal form of the future and study capital allocation taking into
account R&D investments, M&A targets, and the economic
and management viability of those initiatives.

In closing, please give us your thoughts
on non-financial KPI information anddisclosure of that information.

Governance

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Q

Please tell us your thoughts on capital
allocation.

Q

Sustainability

The COVID-19 pandemic, which broke out in 2020, isunprecedented in the history of modern management in that
this infection, representing a unique external variable, has
infiltrated the economic system creating a huge impact. The
thing that I emphasized first amid this crisis was returning
to the basics of financial management, that is, cash flowmanagement. We strengthened cash flow management withoverall coordination of elements such as working capital, R&Dinvestments, capital investments, and fixed costs and, as aresult, in the fiscal 2020, despite a decrease in revenues andprofit, the cash flow margin from operating activities was 9.1%,
the highest in Hitachi’s history.
We have been applying ROIC management since the firstyear of the 2021 Mid-term Management Plan. In addition tousing online meetings worldwide, we entrench this approachwithin Hitachi by conducting regular training to encourage adeeper understanding of ROIC and weighted average costof capital (WACC). I feel that by increasing the awareness of
all employees through these types of day-to-day activities,
the ROIC tree is tied directly into concrete actions in thevarious workplaces. We disclose ROIC for each sector tooutside parties as well, and within Hitachi, we can monitor
each business in even greater detail. ROIC is included in all inhouse budget and settlement-related materials so that we canconduct discussions based on this. Even amid the COVID-19crisis, we are enhancing ROIC management on a deeper level;
for example, we see businesses with a negative ROIC spread(the difference between ROIC and capital costs) as causing
damage to enterprise value, so we reexamine our businessstrategies in those cases.
In addition to taking out loans with financial institutions, Hitachi
issues corporate bonds and commercial paper. Our policy is tomaintain a debt/equity (D/E) ratio of less than 0.5x, considering
a combination of factors that includes discussions with rating
agencies. In fiscal 2020, however, the D/E ratio reached 0.54x
at the end of March 2021 because we used loans to procure
part of the capital to acquire ABB’s power grids business. We
plan to quickly get that ratio back down below 0.5x, eliminatingdebt by allocating profits from the sell-off of assets, as well
as operating cash flow, which will increase through businessgrowth.

QWe will continue our efforts to increase shareholder value throughintensive engagement with the capital markets.

Value Creation

Joined Hitachi in 2015 after serving as an executive officer at
Mitsubishi Corporation. Leveraging the experience he gained at
Harvard Business School and the World Bank, he has playeda key role as CSO (Chief Strategy Officer) since 2018 and has
driven structural reforms and the design of the 2021 Mid-termManagement Plan. He was appointed CFO (Chief Financial Officer)
in April 2020.

functions involving the new company’s indirect operations inEurope, including general affairs, HR, finance, accounting,and procurement. We are also promoting cross-selling andsynergies with Lumada in each business sector and, in somecases, the impact has already become apparent.

VisionWe will further promote management basedon return on invested capital (ROIC) andallocate the cash created through synergies
from large-scale acquisitions to enhanceshareholder returns and growth investments.

We will aim for returns to shareholders on three levels: not only
dividends and share buybacks but also increasing stock prices(capital gains). We will monitor dividend yield levels in otherbusinesses as well and aim for a stable increase in dividends
based on business growth. We will consider and undertake sharebuybacks while conducting a variety of simulations, keeping in
mind business growth, the sell-off of assets, and stock price levels.

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