2020_1q_omron_e

37/38 Questioner(8)

(Questioner 8) Thank you. My first question is about EMC. It is my understanding that the reorganization of manufacturing facilities at EMC was completed last fiscal year. I believe the full-year profit target for EMC is likely to be challenging. Given EMC’s Q1 profit level of zero and no expected topline growth for the remainder of the fiscal year, how much do you think you can raise profits in Q2 and beyond? What do you expect will support EMC profits and allow you to achieve the full-year targets? (Nitto) There are several reasons for the EMC Q1 results. The first is one-off factors. The transfer of production facilities is largely complete and the reorganization is proceeding in line with plan. The one-off expenses associated with the reorganization will drop out and we are already seeing cost benefits. However, in preparation for the transfer of production facilities, we had increased inventory levels last fiscal year to give us a safety margin but, then the operating environment deteriorated, depressing sales. This impacted our plans to work down the elevated inventory. As a result, manufacturing added value made a positive contribution last fiscal year but is a drag on operating income this year. Other one-off factors are related to a slight increase in inventory months and a slight increase in reserves. The second factor is the impact of weak EMC sales to IAB, given the high added value of EMC products sold to IAB. The resulting deterioration in product mix also impacted Q1 profits. The third factor reflects the nature of EMCs business. Scale is a key factor for EMC. Structurally, the business carries relatively higher fixed costs. The reorganization was aimed at improving production efficiency through automation and other initiatives. However, amidst weak demand and falling sales, there are limits to reducing fixed manufacturing costs. Lower sales levels in Q1 had a direct impact on profits. However, the inventory-related one-offs are being resolved, which should have a positive impact on profits in 2H. We should also reap the benefits from the productivity initiatives of last year. Therefore, although it is a challenging environment, we do expect to see an improvement in profitability. (Questioner 8) Can I confirm that EMC Q1 profits were in line with the internal plan? IAB was challenged at the topline but profits were in line with plan. Is this also true for EMC? (Nitto) EMC profits were slightly below internal plan. (Questioner 8) Understood. Thank you. You have indicated that you will step up fixed cost controls. Can you talk about the scale and timing of cost control initiatives as the operating environment deteriorated progressively over the course of April, May and June? You have also indicated there may be a further deterioration in Q2. Given this, are you prepared to make significant cuts to fixed costs in one fell swoop? Also, while you have touched upon a number of initiatives, can you talk about which segments might be targeted for full-year fixed cost reductions? Will it be IAB or the HQ? I would be grateful for any hints you might be able to provide. (Nitto) With regard to fixed cost controls, operating conditions were tough from the outset of the current fiscal year, so, similar to what our customers were doing, we instructed the businesses to push out spending as much as possible. However, given the current conditions, we believe it is necessary to tighten cost controls further. We will be very rigorous in controlling general expenses. We will also be disciplined in terms of hiring. Inventory has the potential to be a drag as well, as noted earlier, so we will be disciplined in controlling inventory as well. These are the major areas we will target. We are stepping up our cost controls for the overall organization from Q2 onward. However, we do not want to reduce investments in areas that are key drivers of competitiveness in the medium-term, so we will maintain these investments while exerting a higher level of control over HQ expenses and staffing. This has already been communicated throughout the firm and the process has been initiated. We are close to the end of the allocated time. Are there any more questions? We will take a question from the front row. This will be our last set of questions.