2019_3q_omron_e
30/34 Questioner(3)

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(Questioner 3) Thank you. I also have 2 questions. My first question is about IAB. You indicated that IAB, and EMC as well, deteriorated in December. Is it possible for you to share with us an image of the progression for October, November and December and the scale of month-on-month declines? Earlier you talked about the Y/Y progression but what were the M/M trends? (Nitto) I will repeat my earlier comments for IAB… (Q) Were those M/M figures? (Nitto) For instance, on slide 8, the monthly trends for IAB in Q3 in yen terms were as follows: October was up 4% Y/Y, November was essentially flat Y/Y and December was down 8%. (Q) I was interested in the M/M figures for this period, rather than the Y/Y comparison. Even a rough image of the M/M change on an absolute basis would be fine. (Takeda) You want the trend for October, November and December, is that correct? I cannot disclose the absolute numbers, but for IAB, very simply, the declines were progressively larger. Within this, the magnitude of the decline from November into December was significantly bigger than the previous month. (Q) Can we assume that your new forecasts are based on an expectation that December conditions will continue? (Takeda) Basically, we formulated our sales and profit plans for the months of January, February and March based on our view of the operating environment in December. In particular,… (Q) Could you comment on whether your forecasts assume the operating environment will deteriorate further or not? (Takeda) We expect conditions to get worse. (Nitto) Your question is whether we expect the magnitude of declines will continue to expand in Q4 or shrink, is that correct? In December, there was a significant M/M drop but for Q4, we expect a diminishing trend. We don’t expect to see further large-scale declines in Q4, although the trend might still be slightly negative. So… (Q) In other words, conditions will still be tough but the magnitude of M/M declines will be smaller than December. And, the drop in December was substantial. (Takeda) That’s true: the December decline was substantial. It was the largest decline. (Q) How was EMC? (Takeda) Is a rough image fine? For the three months of October, November and December, the trend for EMC was basically in line with the IAB trend. There was a turn to the negative in October and the scale of declines became progressively larger by month into December. Similar to IAB, the drop from November into December was substantial. Similarly, our outlook for January through March for EMC assumes that the operating environment and our customers’ circumstances in December will be maintained through Q4. (Q) Thank you. My second question is about what to expect for profits when comparing Q3 to Q4. Additionally, as it relates to your new forecasts, I would like some clarification. The downward revision to sales was around ¥25 bn but the expected drop in added value compared to the previous forecast is ¥17.7 bn, which implies that roughly 70% of the topline decline falls through to operating income. Can you discuss the background to why this is? Also, are there contributions from special one-time factors, inventory reductions, lower capacity utilization rates or considerations? In addition, you are projecting a relatively hefty ¥3 bn negative from forex in Q4; if you were to adjust for currency, would the decline in profit from Q3 into Q4 be smaller? How should we think about the underlying real trend? (Oue) The framework you have outlined generally is fine. The forex impact in Q4 factors in the depreciation of the EUR and the USD as well. We have also factored in a slight reduction in inventory in response to demand trends as we head into the fiscal year-end. If you take these factors into account, then the remainder is the impact of lower net sales. (Nitto) The biggest contributor to the decline in added value is the downward revision to the topline. We had expected added value to increase on higher sales, but given that we now expect sales to fall, it has a commensurate impact on added value. Our expectations for improved added value reflected the impact of higher sales leading to higher levels of production and the resulting implications for production efficiency and a higher fixed manufacturing cost ratio. As such, the shift to a lower level of sales had a meaningful impact. In Q4, we project the GP margin will fall 0.5%-points or 0.7%-points but this level will be impacted by forex levels as well as increased tariffs. In real terms on a Y/Y basis, the Q4 GP margin will still improve, so we are managing to hold firm. That said, relative to our previous forecasts, the significant change to our assumption that sales would continue to grow does have a substantial impact on our projected GP margin. In terms of the factors impacting GP margin, although there is some impact from forex and inventory, the main contributor is the downward revision to the sales forecast and the resulting decline in production levels. (Q) But you will be adjusting production levels in line with real market conditions, is that correct? (Nitto) Yes, yes. We have no intention to build unwanted inventory. (Q) Understood. Thank you. (Itagaki) Could you pass the microphone to the person next to you, please?