2019_1q_omron_e

29/36 Questioner(1)

Thank you. I have 2 questions with regard to the waterfall chart showing Y/Y changes to operating profit on slide 5. First, you show an increase of ￥4.2 billion in added value. I believe your initial forecasts projected the Y/Y change in added value for the full year to be ￥29.2 billion, so relative to the full-year figure, progress in Q1 appears to be very low. In addition, in the slides that follow, the Q1 growth rates for operating income at IAB and HCB appear to be in line with the initial full-year guidance, yet you seem to be well short of the full-year expectation for Y/Y gains in added value. I realize that this figure incorporates a number of elements including the impact of higher sales and a higher added value ratio. Can you explain why the increase in added value was low? Are you still confident about your ability to achieve the initial forecast of ￥29.2 billion? (Oue) First, the Q1 figure reflects the impact of business mix. By nature, sales for SSB skew heavily to Q4, as much of the business is infrastructure-related. So, in looking at added value in Q1, it is necessary to take this into account. If we look at added value for the other businesses, we are investing significantly in IAB and HCB. We expect the positive benefits of these investments to be realized over time. We would expect to see the resulting increase in sales materialize later in the fiscal year. In terms of an improved added value ratio, which is effectively a higher GP margin, we expect the positive push-up to be cumulative over time. These are ongoing initiatives. You should view the current levels as in line with plan. My second question relates to changes in fixed costs. I would expect the increase you show in manufacturing fixed costs and R&D expenses to be treated as fixed costs. However, with regard to the ￥5 billion increase in SG&A, could you give me a sense for how much you would consider to be advance investments that are fixed in nature and how much you would view as variable? I do not need an exact breakdown. Also, in the event of changes to the operating environment, how much of an ability do you have to control or curb such increases? Should we assume that the higher level of spending would be difficult to reverse? (Oue) The investments that are fixed in nature are primarily being incurred for IAB and HCB. It is a little challenging to provide a simple explanation using the elements we show here. However, the increase in front office resources can probably be viewed as fixed expenses, so on that basis, roughly half of the increase in SG&A is fixed in nature. If possible, can you comment on what you might be able to do in the event of a change in operating environment? I would be interested in hearing from Mr. Nitto in your role as CFO. Obviously, if the operating environment were to change, we would be able to exert more control over expenses. At this stage, it is difficult to comment on the scale of change in the environment that would prompt us to alter our spending plans, or the possible magnitude of such changes. What I can say is that we would certainly be prepared to respond strategically and that we would take into consideration the balance between our full-year earnings forecasts and our medium- to long-term investment plans. We do have the ability to control our expense levels and would be taking this into account as we manage our business. I am sorry, but I have one final question. It may be difficult for you to respond but in your role as OMRON’s CFO, can you tell me how much of a time lag there might be between management deciding to hit the brakes on spending and when the actual cuts materialize? I am sure you have a number of risk scenarios but once you have made a decision to control spending, would cuts happen in the following month or would it take time before the cuts come through? Any color you have on this would be very helpful. From that standpoint, there would probably be a slight time lag of a couple months. Obviously, there are actions already set in motion that cannot be completely reversed but new initiatives could certainly be halted immediately. At a basic level, we would decide on a policy for the organization as a whole before proceeding. There would likely be differences in magnitude by business, but we would approach it as a firm-wide initiative. Before we get to this level, however, each business has its own plans and targets for a given fiscal year. The focus for each business is to achieve their plan targets and meet their commitments. There would be a primary level of control at the level of the individual businesses as each business seeks to achieve their targets. We would be taking such activities into account in considering the imposition of firm-wide expense controls. Therefore, the process, should it prove necessary, would consist of several phases. In previous instances this is the approach we have taken. Thank you. Next, please pass the mic to the person a little further back.