2021_1q_omron_e
34/37 - Questioner(2)

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Questioner 2: My first question is about monthly sales trends in IAB in Q1 and the outlook for Q2 and beyond. Previously at the results briefing in April, you had indicated you expected April sales to fall around 10% Y/Y but Q1 IAB sales came in down around 8% Y/Y. Does this mean that there was a sudden pick-up in June? Could you provide more color about monthly trends? With regard to Q2 and beyond, as shown on slide 15, you expect China and South Korea to deteriorate; the forecast assumes sales will revert to Q4 FY2019 levels. This does not feel right to me. Could you talk about whether you have seen a deterioration in July, in line with your plan, and provide color on near-term trends? Do you believe your forecasts to be reasonable? A. (Yamada): Mr. Oue will talk about the June quarter and I will talk about the outlook and trends for July onward. (Oue): With regard to the monthly trends for April through June, we did not see a sharp improvement into June. Instead, March levels in China were very low because of the lockdown and restrictions on economic activity, but sales recovered from April. (Yamada): With regard to how to think about trends from July, frankly speaking it is very tough. However, OMRON has chosen to take a very conservative view. In terms of what is happening on shop floors, the situation for our manufacturing customers is very fluid in terms of making decisions. There have been cases where projects have been cancelled or pushed out, but equally, there have been cases where projects have been brought forward. The situation is changing on a daily basis. So, if the question is whether China and South Korea will really drop off as much as we are assuming, honestly speaking, we need a little more time to see how things play out. However, one thing is clear. We are seeing weaker consumption, particularly in automotive. Given this, generally speaking, we would expect that customers are likely to opt to push out capex spending. This is why we have chosen to make conservative assumptions in formulating our forecasts for Q2 and beyond. Of course, we aim to fully leverage our resilience to be proactive in capturing any new opportunities that arise. Q: Thank you. I would just like to confirm that the weakness you assume is generally true for the market and that the forecasts do not assume that OMRON will lose market share. A. (Yamada): Yes, that is correct. We do not believe we are losing market share. Q: Thank you. My second question is related to the section in the presentation about OMRON’s efforts to take on the challenge of the post-COVID-19 period in FA and healthcare. In FA, are you already seeing signs of new demand, such as investments to avoid the 3C’s, or demand driven by efforts to diversify manufacturing bases (which you did not talk about today)? Are there specific examples of changes in customer behavior that you can share with us? For HCB and the new business model, what are your expectations for business scale? Any additional quantitative details you can share would be very helpful. A. (Yamada): I will respond to the questions about FA and Mr. Takeda will take the questions on HCB. With regard to FA and what is happening right now, we are still in the midst of significant disruption. The customers are still trying to decide whether to go ahead with capex projects as planned, or reduce project scale, or delay projects. OMRON is being resilient in responding to this fluid situation. At a high level, end demand is weaker. Based on the assumption of weak end demand, many of our customers are generally cautious on capex spending. Our view is that although we did see a temporary pick-up in China and South Korea, we think this temporary strength will subside. We will need a little more time to see how things play out to determine whether our view proves to be correct or not. If we look out a little further into the medium-term, I firmly believe we will see a diversification of manufacturing locations. This will be driven by a shift to more of a focus on producing locally for local consumption, or by efforts to mitigate the impact of heightened US-China tensions. Companies are already focusing on reducing risk through the regional diversification of the supply chain. However, I don’t believe there will be an immediate, broad-based shift; instead, what we are seeing is companies starting to develop plans. That said, I believe the approach of building a single, large-scale plant to produce for the global markets will give way to a strategy to put down multiple smaller-scale plants capable of serving nearby markets as well as provide mutual backup. OMRON is already moving in this direction, but I believe our customers will also shift to this approach. The integrated controller enabled for robot control which I highlighted today is well suited to a strategy of having multiple smaller-scale plants that focus on small lot production of a wide array of products. This new controller will be key in enabling OMRON to respond to manufacturers’ demand for regional diversification. (Takeda): With regard to the new HCB business model, I ask your understanding in that we prefer not to comment on numerical targets at this stage. The business model showcased by CEO Yamada today was launched in the US, having secured approval for Medicare coverage. Our first objective is to secure a minimum of 100,000 users over 5 years. The second point I will make is that this is not a model driven by outright sales of devices; as such, it is capable of generating a very high margin. Our business plans assume margins in the 20-30% range. In thinking about this business, please bear this in mind. The third point I will make is that with regard to scale, obviously geographical expansion will be key. With regard to this business model, we are now seeing many countries start to include reimbursement for remote medicine in health coverage. It is not just the US. In Europe, the UK and the Netherlands now have health coverage for remote medicine. HCB is now developing business models with a focus on capturing these new business opportunities. We expect the market to expand rapidly and OMRON Healthcare is well positioned in this space. I hope this will be helpful in thinking about the scale of the opportunity. (Yamada): I will make one additional comment. US Medicare provides healthcare coverage for people aged 65 or older. The fact that Medicare has approved monthly reimbursement payments of $64 for this service is a revolutionary development. We expect this trend to accelerate going forward. The aim is to reduce medical spending by managing the health of hypertension patients to prevent a progression to acute conditions. This is why Medicare has chosen to provide coverage for patient self-care. If this approach becomes mainstream, it will create a major opportunity for our business model. Q: If I might ask, how much of the $64 per month will be revenue for OMRON? (Yamada): I apologize but I cannot disclose that information. What I will say is that we will receive a solid share of the revenue stream under the terms of the contract. Q: Thank you.