2019_3q_omron_e

31/34 Questioner(4)

(Questioner 4) Thank you. I am McDonald. Earlier you talked about the initiatives you will focus on as CFO. You mentioned improving expense controls a number of times. Over the last few years looking at OMRON from outside, I must say that I haven’t had the impression that the company was particularly proactive in controlling costs. I suppose one possible hint as to how OMRON is thinking about expense controls may be the trend in Eliminations & Corporate, as shown in the Reference Data booklet on page 9. On this page, you can see the negative figures for Eliminations and Corporate at the operating income level across the board. If you look at H1 and Q3, it does appear that you have been able to control costs to a certain extent. But the real question is how these costs will trend in the next fiscal year. Given that we have you, the CFO, with us today, could you comment on how much you propose to reduce these costs going forward? (Nitto) I do not have a specific absolute level at this point in time, but I will say that at this stage we do not think we need to resort to drastic measures such as large-scale restructuring or headcount reductions in order to dramatically lower costs. Under the VG2.0 medium-term management plan, we designated the first two years, FY2017 and FY2018, as a period of solid investing for future growth and the final two years, FY2019 and FY2020, as a period where we would reap the benefits of such investments. We have been investing over the last two years, focusing primarily on increasing investments for IAB and HCB. However, you highlighted HQ expenses in your question. To your point, we acknowledge that HQ expense efficiency is suboptimal. That said, the recent general trend of enhancing initiatives in governance, risk management, and ESG, does mean that, in the absence of a strong IT system, we are forced to deploy significant human resources to address such issues. To address this challenge, I believe that rather than taking a short-term approach by cutting headcount, we need to think about how to improve the way in which we work and to reassess systems. From this perspective, it probably means we need to invest more in IT, and in fact, we are planning to do so. We believe we need to seriously revisit broad-based issues such as back office roles, governance, operational procedures and practices, as well as other issues in order to determine how best to address costs. So rather than drastically cutting costs, I am focusing on ensuring that fixed costs do not increase substantially in the businesses targeted for investments to date. However, I am not currently considering significantly lowering costs from current levels, in terms of cost discipline. (Q) Thank you. Asking the question from a different angle, on page 2 of the Reference Data booklet, you very kindly provide the total SG&A and R&D expenses, broken down into SG&A and R&D. Setting aside R&D expenses, if you look at the progress of the SG&A ratio for Q1, H1 and the forecast for the full year, it is rising. As the CFO, can you state how much you want to lower the SG&A ratio over the next fiscal year? (Nitto) Rather than looking at the SG&A ratio for a single year on a standalone basis or discussing where it might be in the next fiscal year, what I will say is that we have set an SG&A ratio target under VG2.0 of 24%. Obviously, this level is impacted by fluctuations in sales. Although it will depend on the operating environment, we expect to be able to revert to positive sales and profit growth. We are focused on ensuring we fully capitalize on the investments made to date and continue to grow our business over time. This is the overarching assumption for our strategy. Within this framework of continued growth, there will be times where we will focus on controlling fixed costs, ensuring that cost growth does not outstrip topline growth. This should bring down the SG&A ratio gradually over time toward our 24% target. I do think it would be challenging to achieve a 24% level in a single year. Achieving this level under the medium-term management plan is my current objective. (Q) Thank you. I have one last simple question. On slide 20, you talk about initiatives going forward. You have included business structure reforms. When I speak to non-Japanese investors, they want to know what will happen with AEC going forward. Prospects for the largest automotive markets in the world do not look strong. Figures presented in previous Reference Data booklets show an operating margin in decline. Of course, we know that you apply ROIC in managing your businesses. As CFO, how should we view the fact that you do not include AEC as a target for business structure reforms in this slide? (Nitto) We take a portfolio approach in managing our businesses overall. On this basis, we are looking at the overall profitability of the business portfolio. Specifically the ROIC for AEC is generally over the 10% level, although the OPM is indeed low. As such, we do not consider it a business that we would target for restructuring. We position AEC as an important business. That said, if we look at individual businesses within AEC, there are still inefficient products or portfolios. When we review our businesses under PPM, we do not look at the businesses by segment but by individual business units. We do take measures to improve margins or switch out products. We are prepared to consider halting operations for individual business units. My objective with AEC is to ensure it is transformed into a business that can generate solid profits. (Q) Thank you. (Itagaki) Are there more questions? Please hand a microphone to the next person.