2019_3q_omron_e

29/34 Questioner(2)

(Questioner 2) Thank you. I am Mizuno of UBS. I also have 2 questions. The first is about the topline. You have talked a lot about the deterioration of the operating environment but I would like to confirm OMRON’s strategy. For Greater China, you provide data on the 4 focus domains. Given that your business is not limited to China, could you provide the Y/Y sales growth figures for the 4 focus domains in other regions? Also, can you talk about the success you are having with your strategy in regions other than China? (Oue) I cannot disclose the exact numbers. However, on an overall basis, of the 4 focus domains, Digital is weak across all regions and is down significantly Y/Y. In contrast, Automotive and Food & Beverages are up substantially. On an overall blended basis for the three months of Q3, which is the same basis as the figures presented for Greater China on slide 22, we were able to maintain positive Y/Y sales growth. (Q) Do these figures include Greater China? (Oue) Yes, this is on a global basis. (Q) Got it. (Nitto) The global trend is similar to what we saw in China. Growth is coming from the business we do in the 4 focus domains and with the focus customers, which we refer to as the G10,000 customers, although in actual fact, there are 15,000 to 16,000 focus customers. We have been able to grow or match sales on a Y/Y basis with these customers. This contrasts with the business we do through distributors, which is down overall. This framework generally underpinned the trends in each region, although there are regional differences in the relative weights of various industries, which drives regional variance in sales trends. When you look at December sales on a regional basis versus the trend up to the end of November, China sales had remained largely flat Y/Y, while South Korea sales were down Y/Y through November while the other regions reported positive Y/Y sales growth. In December on a standalone basis, sales growth in Japan, the US, and Europe dropped into negative territory Y/Y. At a high level, the major contributor to this negative sales growth was the significant sales decline in business with non-G10,000 customers, although G10,000 sales was slightly weaker as well. As such, China weakness is not the sole factor dragging down sales. Instead, sectors that were weak in China were also weak outside of China, particularly those industries around the world that provide manufacturing equipment and facilities to Chinese manufacturers. As a result of weakness in China, companies in other regions exporting into China were also impacted, hurting OMRON’s sales in those regions. This is the high level backdrop to what has happened. (Q) Understood. Thank you. My second question is about profits. You indicated that OMRON became more selective about investments from Q3. Can you provide more specifics? Can you also talk about the outlook for such investments going forward? For instance, I would not expect Q4 fixed manufacturing costs to increase on a Y/Y basis. Could you comment on whether you have already largely completed your initiatives in the EMC business? Also, on the waterfall chart on slide 7, which shows Y/Y changes to major elements of 9-month operating income, SG&A was up on increased investments in sales engineers and frontline sales. How will the scale of such investments change going forward? (Nitto) When we say selective investments for IAB, we are talking not only about capex but investments in human resources for sales engineers and frontline sales staff in IAB, as well as adding new Automation Centers, as discussed in our previous briefing. These investments have been largely completed. Additionally, on the back of the recent weakness, relative to our original hiring targets, we are being more selective on hiring now. Hiring momentum has slowed significantly. We are now limiting ourselves to hiring only the best candidates and only for positions we consider necessary. This is one way in which we are being more selective. With regard to R&D expenditures, in product development we have continued to invest to complete projects underway. However, for future investments in technology themes, we have started a thorough review of proposed R&D themes with a view to being more selective. This is how we are being more selective with regard to SG&A and R&D spend. For the ongoing structural reforms in EMC, we started investing in FY2017 but Q3 was the peak. EMC investments in Q4 should decline Y/Y. This should help you understand how we are being more selective and the fact that our investments have generally already peaked. (Q) I apologize, but I would like to confirm one point. Fixed manufacturing costs for Q3 on a standalone basis were up significantly Y/Y. Can you tell me if there were one-off factors in Q3, other than the EMC-related spending? (Nitto) If you look at IAB on an ongoing basis relative to last fiscal year, there is a need to increase capacity, given the longer-term outlook. We have been increasing investments and spending on our production bases in China. However, the increase in fixed costs during the quarter are the result of initiatives that were executed on before Q3. (Q) Understood. Thank you. (Itagaki) Next, the person in the front row please.