2021_1q_omron_e

35/37 - Questioner(3)

Questioner 3: I have one question related to the GP margin, which I often ask. In Q1, the GP margin improved. Can you explain the improvement by business or provide more color about the background to the improvement? Also, you are forecasting the GP margin to improve on a full-year basis. CEO Yamada has been consistent in discussing OMRON’s focus on improving profitability on an ongoing basis. I understand the improvement is a reflection of your continued commitment to this objective. Could you please explain the specific drivers of the improvement? A. (Yamada): Mr. Oue will respond. (Oue): Enhancing the GP margin has been a key objective for OMRON over the last 10 years. Despite the impact of forex from time to time, we have been able to consistently improve the GP margin by 0.5% points to 1% point every year. One of the drivers of the improvement is cost reduction, through the adoption of standardized components or changes in design. At the same time, we have focused on developing strong products and generating value by creating solutions for our customers, rather than simply selling individual items. The combination of such efforts has been instrumental in allowing OMRON to consistently improve the GP margin over time. In Q1, on top of the above, profitability was enhanced by the impact of ongoing structural reforms and changes in mix, as IAB revenues accounted for a slightly higher share of revenues. Going forward, we will continue to focus on enhancing the GP margin and we believe that there is still room for further improvements. (Yamada): If I may make some additional comments, the contribution from the improvement in added value is significant. This is epitomized by IAB and the changes we have made in how we sell. IAB is now focused on providing solutions. Rather than selling discrete products, we now concentrate on providing value through solutions, centered on controllers. This creates a situation where the customer can assess the value we provide and we are able to distance ourselves from a discussion of price points. This change in sales approach has contributed meaningfully to the improvement in GP margin. One other point I would make is that it reflects our efforts to manage our business portfolio, perhaps best represented by our decision to wind down the Backlight Business or changes to our focus domains. As a result of these initiatives, we benefited from fixed cost reductions in FY2019 and should do so in FY2020 as well. On a full-year basis, we expect the GP margin to be unchanged Y/Y but in real terms if we exclude the negative forex impact of 0.7% points, we should be able to achieve the 0.7% - 0.8% point improvement to GP margin in FY2020 that we have consistently achieved over the last few years. We would like to continue to improve the GP margin. Q. How much did the GP margin improve in Q1 if we exclude forex impact? A. (Yamada) The forex impact was around 0.7% points, so the improvement in real terms was around 1.3% points. Q. Thank you. My second question is more of a high level question. You have talked a lot about resilience and new business models. These appear to be key words for OMRON. However, in times of great change like this, the change is often accompanied by pain and internal resistance. I think it is necessary to find ways to motivate employees and win buy-in for new businesses in these situations. Do you have a framework for addressing these issues? If you have specific recent examples of initiatives that you can talk about, it would be very helpful. I realize this may be a difficult question to answer. A. (Yamada) Yes, it is indeed a difficult question. As I noted in my closing remarks, OMRON manages its business in line with its Vision and Principles. Our fundamental purpose is to continue to contribute to society through the creation of social value. I have not felt there is internal resistance, since the value we create will need to change to extent that society is changing. However, we did make changes to the business portfolio, such as the sale of the AEC Business last year or the winding down of the Backlight Business. Obviously, an individual in the Backlight Business would be asked to transfer to another business, so it is understandable that there might be resistance or that individual could struggle to acquire new skills. However, for the organization as a whole, there is a widely held understanding that OMRON’s high GP margin reflects the fact that OMRON is contributing to society. OMRON employees firmly believe that the high GP margin is a function of OMRON’s contribution to society and recognize that if society is changing, then how OMRON provides value must also change. Because of this, I do not believe there is a lot of internal resistance. The other key is to be disciplined about execution: to execute fully in providing value to customers. My personal view is that the COVID-19 outbreak will be an existential crisis for many. This is why I believe that OMRON must be fully focused on continuing to provide value. In the absence of a sense of urgency, if OMRON cannot evolve sufficiently, there will be no future. Does this answer your question? Q: It was very helpful to hear your thoughts on this. Thank you.