Q&A

Back to Financial Results (FY3/2010)

Investor Meeting Presentation for 2Q FY 3/2010 held on November 6, 2009

Question and Answer

Mr. Kainuma has said that your information motor business has bounced back. What will be your next step over the coming year or two to achieve the profit margin target set by Mr. Kainuma?

We just started implementing an initiative for purchasing common materials and using standardized design components among business units. We have to wait and see how things will turn out. The only thing that's clear now is that our motor plants are scattered across different locations which hinders their operating efficiently. That's why we are looking to build a factory that will link the parts divisions and motor plants. Rather than jump into anything too quickly, we will focus our efforts on steadily moving ahead with the immediate tasks at hand. Over the next six months we will do everything to make sure that the information equipment motor business we are going to take over from Panasonic will be profitable.

Sales of HDD spindle motors for the second quarter fell below the projected level. Can you explain why? Can you also give us your sales volume projection for the third and fourth quarters?

Monthly sales volume for the first quarter was 2.6 million units, half of which was for 2.5-inch HDD spindle motors and another half for 3.5-inch HDD spindle motors. Monthly sales volume for the second quarter was 3 million, with 2 million accounting for 2.5-inch HDDs and 1 million for 3.5-inch HDDs. In August, we discovered a problem and suspended the shipment of some products before they caused any trouble to our customers. While the monthly sales volume was 3.5 million for July and September, it went down to 2.2 million in August, which resulted in the lower monthly sales volume on average in the second quarter. We expect the monthly sales volume to be 4 million units during the third quarter, 3 million for 2.5-inch HDDs and 1 million for 3.5-inch HDDs. The monthly sales volume for the fourth quarter is expected to be 4.5 million units, 1 million for 3.5-inch HDDs and the rest for 2.5-inch HDDs and high-end HDD products. As long as orders remain steady, the monthly sales volume will reach 4 million to 4.5 million units, bringing the business back to profitability on a monthly basis. While we have made improvements to various aspects of manufacturing, we expect that the increase in sales volume will turn the business around.

Can you tell us about the second quarter sales volumes for ball bearings and pivot assemblies as well as the forecast for the third and fourth quarters?

Sales of ball bearings for the first quarter amounted to 140 million units per month, with a monthly volume of 60 million for internal sales and 80 million for external sales. Sales increased to 160 million units per month in the second quarter, with a monthly volume of 70 million for internal sales and 90 million for external sales. We expect that the monthly sales volume will reach 180 million units in the third quarter, with a monthly volume of 75 million for internal sales and 105 million for external sales. Sales for the fourth quarter will be about the same as the third quarter although we cannot make a precise projection yet. Monthly sales volumes of pivot assemblies reached 24 million units for the first quarter and 29 million units for the second quarter. Sales for the third quarter will reach 29 million to 30 million units per month. Although we don't know what the market trends will be like in the fourth quarter, our current projection is 26 million units per month.

I understand that your inventory levels for ball bearings and pivot assemblies are low. How low are they compared with the normal level?

Our inventory has dropped to less than a one-month supply. We are facing a critical situation.

When ball bearing production returns to 200 million units per month in January 2010, will the machined component segment regain an operating margin that's anywhere near its peak performance figure?

We produce 170 million to 175 million ball bearings a month when working at full capacity. We are planning to increase monthly production to 200 million in January 2010 through various means, including a change in production shifts, an increase in personnel, and further automation. We don't know whether the sales volume will reach that peak level again, but we will definitely run into problems if we don't do anything to boost our inventory. We expect that profits will increase for the machined component segment, mainly for ball bearings. While the poor performance of aviation-related rod-end business will bring our bottom line down, profitability overall is sure to improve.

Mr. Kainuma, can you tell us about some of the areas where improvements are moving ahead of schedule and areas that are lagging behind?

Overall, things are moving according to plan. The keyboard, speaker and information motor businesses are all steadily making progress. Performance of the HDD spindle motor business depends on the number of orders that will come in. All of us at Minebea now have the ability to quickly meet challenges head-on and are working on different measures throughout the company, so I'm looking forward to next year.

I understand that your new ball bearing turning plant in Bang Pa-in, Thailand has been operating at less than full-capacity. Once the monthly ball bearing production volume returns to 190 million to 200 million units and the new plant begins running full-tilt, how will that affect your profit margin?

Our profitability will significantly change once we begin producing 200 million ball bearings per month. We've been down this road a number of times in the past where we open a new plant and suddenly the bottom drops out of the economy, leaving us with more production capacity than we need. While we did experience an increase in depreciation costs, since the new plant in Bang Pa-in is designed for turning process of ball bearings, the overall impact was minimal. Although our monthly production volume once dropped to about 70 million units, it gradually increased to 120 million units, then 130 million units, and reached 170 million units last month. The monthly production volume was 220 million units at its peak and we expect that production will soon reach close to that level again. Another thing is that we have seen a significant drop in overall fixed costs for the ball bearing business after the closure of the Skegness Plant in the U.K. This will also aid in our cost reduction efforts. While there are some challenges, like the recent appreciation of the Thai Baht, once our production returns to 200 million units per month, we should be able to overcome these hurdles and bring profitability up.

When you begin producing 200 million ball bearings a month, will that change the proportion of production volume among your production bases in Thailand, Singapore and Shanghai?

While I don't foresee any real change, the installation of some equipment from the closed Skegness Plant in the U.K. in our Shanghai Plant has boosted its production capacity, so its production volume will naturally increase. The transfer of the equipment is complete.

You mentioned back in May that you would be making several hundred thousand units of a new EMS product per month by October. How is production going?

We already have a deal in the works, but the customer is still mainly producing older models. We were told that they will switch to the new model next year, so as far as this project is concerned, we are moving slower than we have expected.

Since your operating margin reached around 7% in September, it will likely exceed 7% in the second half of this fiscal year driven by increased ball bearing production. If this happens, 100 billion yen in sales will generate 7 to 8 billion yen in operating income for the second half, bringing your operating income for this fiscal year to the projected range. Is this what you are envisioning?

We have not changed our forecast for this fiscal year's operating income since we expect that it will finish within the projected range. With the turnaround of the electronic devices and components segment this September followed up by robust performance in October, it seems to have finally regained its financial health. Although this segment negatively affected our operating income for the first half, it will have a positive effect in addition to the increased production of ball bearings.

I suppose that stagnant performance was one of the driving forces behind Panasonic's decision to transfer its information equipment motor business. How are you going to change its cost structure in order to quickly make it profitable?

As Panasonic announced, the fixed cost structure will change after the transfer. I cannot give you too many details at this point since we have only reached a basic agreement.

The information equipment motor business you are going to take over does not really have a high profile in the industry. How are you going to raise its position in the market?

Although I cannot give you any details now, the business enjoys a large share among specific customers through joint development. The primary purpose of this takeover deal is to boost the overall strength of our motor business.

Do the business operations you are going to take over include Panasonic's HDD spindle motor business?

We are going to acquire Panasonic's information equipment motor business only. Its HDD spindle motor business is not included.

Since you expect ball bearing sales in China as well as the LED backlight market to grow, what do you think your sales for the next fiscal year will be like?

Witnessing the growth of Chinese ball bearing manufacturers in the market has given us cause to find some way to enter the low-end ball bearing market. While we have traditionally targeted medium to high-end markets, we are beginning to see the potential that the growing low-end market holds for us. The scale of this market is somewhere between 10 million and 20 million units. While I believe we will be able to make a good profit, it all depends on how much of the market we can control. Sales of LED backlights will be between 20 billion and 25 billion yen this fiscal year. While we expect to see a sharp increase in sales next fiscal year, we have not made any concrete business plans for the next fiscal year yet.

While automobile production has recovered only up to 85% of its peak, do you think ball bearing production will recover to its peak level? Are you going to tap into new areas of demand to bring it back to its peak level?

We still don't have a clear outlook for the January to March 2010 period. Our projected monthly sales volume will be 180 million units for the third quarter and it is expected to remain flat in the fourth quarter. It's true that sales for the automobile industry may decline, but we have been seeing increasing demand in the office automation industry. This will probably be enough to offset the decline since sales for the automobile industry do not account for a large portion of our total sales.

What were the production volumes of HDD spindle motors in September and October?

Unfortunately, we were unable to turn the business around in September and October, but we are very close to bringing it back to profitability. While the production volume for September was relatively low, at 3.2 million units, it rose to 4 million units in October.

Your projected monthly sales volume for HDD spindle motors during the fourth quarter is 4.5 million units. Will this mainly come from 2.5-inch HDD spindle motors?

Our projection for November is 4.3 million units. This includes an increasing number of HDD spindle motors for 2.5-inch HDDs and 2.5-inch high-end HDDs. We expect that the business will return to profitability once yield is boosted, but we don't think we can do that in November.

What is the status of developing LED backlights for TVs?

We have been developing various LED backlights for TVs and PCs, which are being evaluated by customers, but specific deals won't be available until next year.

What was the outcome of your cost reduction initiatives implemented during the first half of this fiscal year? Did you make any revisions to the projected results of cost reduction efforts for the second half?

Since we just started implementing these initiatives in the first half, they haven't had much of an effect yet, but we have already been able to cut expenses by several hundred million yen. We expect that the effect will triple in the second half, resulting in a considerable expense reduction. We are not just cutting expenses but also streamlining aspects related to materials, secondary materials, as well as many other areas. I cannot give you specific figures until I can get a clear look at the big picture. The change in the sales climate makes it difficult to calculate cost reduction results in absolute figures so we have to look at it in proportion to sales. While the decline in fixed costs such as the closure of our U.K. plant is not reflected in the expense reductions I mentioned, fixed costs have decreased as initially projected.

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