2020_2q_omron_e

33/37 Questioner(2)

(Questioner 2) First, you have indicated that the operating environment for IAB is tough. Your H2 sales forecast is weak, at less than 2 times Q2 sales. The implied H2 IAB OPM is 12.4%. At the beginning of this fiscal year, you had incorporated buffers for both sales and profits in your forecasts, but indicated that your forecasts represented levels that you were firmly committed to achieving. Subsequently, the operating environment has deteriorated. What I would like to know is if you have taken a very conservative approach to your H2 forecasts. Could you please comment on both sales and profits? (Takeda) Frankly, we have been quite cautious in our forecasts. Our assumptions for the four focus domains for IAB, as well as for each of the regions is that we will not see any signs of recovery during H2. As noted by CEO Yamada, our assumptions are cautious but, at the same time, if we were to see any sort of a recovery, the guidance is structured in such a way that the GP margin and OPM would improve. (Questioner 2) Thank you. Related to this, over the last few years you have indicated that you want to have a better grip on end-demand than in the past, where you had relied more on distributors. In formulating your guidance, has this meant that you have better visibility into your customers? At the same time, has the pace of market moves in the industry picked up? If you were to try to analyze the various factors that make it difficult to formulate guidance, what would you cite as major factors, either positive or negative, if any? (Takeda) On the positive side, as you alluded to in your question, we have a much better sense of real end-demand for capex at our customers. At IAB, we have monthly rolling forecasts for customer capex, especially for the focus domains. From this perspective, the weaker investment demand is not a function of a lack of investment themes, but instead, more accurately, a reflection of fact that our customers are choosing to delay the timing of capex. So, we do have better visibility, which is a positive. On the other hand, although this is not necessarily a negative, it does appear that our customers are now quicker to react to changes in the environment. Given this, rather than taking a short-term view, it requires us to develop the capacity to understand the expected progression over a longer time horizon. But, as I said earlier, this is not a negative inasmuch as we have better visibility into customer behavior. (Questioner 2) Thank you. Given that we have CEO Yamada with us today, I would like to ask about the backlight business. You touched upon the decision to exit this business. Over the last few years this had been a challenging business, particularly more recently. On the back of the sale of the AEC business, there will be a cash inflow. You have indicated that you will be more proactive on the M&A front. Can you talk about how the backlight business would look from an ROIC perspective if you were to take a longer-term view? Also, if there were learnings in hindsight, could you share them with us? (Yamada) You are asking how we would evaluate the backlight business in hindsight? (Questioner 2) Yes. (Yamada) Well, originally, we had been accumulating technologies related to optical sensing and control. We made several forays into different themes in the optical field, such as optical communications. Of the various attempts, what ultimately survived was the backlight business. In 2013 and 2014, this business was generating an ROIC of more than 10%. Although we did position it as an opportunistic business, it did make a healthy contribution to profitability at that time. However, as you know, we subsequently saw a dramatic deterioration in the operating environment, with the market rapidly commoditizing, and the emergence of OLED technology. Since then, there have been no significant change to market conditions. The backlight business became a business that could not generate cash sustainably over time or generate returns in excess of the cost of capital. This is why we chose to exit this business. In winding down the business, we have been careful to ensure that we phase out the business gradually to minimize disruption for our customers. Production will be terminated in H2. (Questioner 2) What I was trying to understand was why it took time to exit this business. I understand that over a longer time frame it did generate returns. (Yamada) We intentionally chose to proceed slowly in winding down the business. We felt it was necessary in order to ensure that our customers were not inconvenienced. There are only a limited number of players manufacturing high-end backlights so our customers did not have immediate recourse to alternate sources of supply. As such, we gradually phased out the business, with the agreement of our customers. I understand the criticism that the process may have taken too long but we were able to wind down the business in a manner that was well received by our customers. (Questioner 2) Understood. Thank you. (Okumura) Are there more questions? Please hand the mic to the third person along the same row.