Q&A

Back to Financial Results (FY3/2011)

Investor Meeting Presentation for 2Q FY 3/2011 held on November 2, 2010

Question and Answer

Can you tell us about the costs associated with restructuring your motor plants? How do you expect the restructuring to affect your performance for the second half of this fiscal year?

We expect that costs will be incurred gradually over the period from the first quarter to the third quarter and total roughly 500 million yen, excluding the costs for fixed assets. We have completed about 80% of the restructuring process and have already started to see positive effects.

You have forecasted that operating income for the rotary components business segment for the second half of this fiscal year will total 1.4 billion yen. Can you give us a breakdown of the increase from the first fiscal half?

We expect that our HDD spindle motor business, which was operating in the red during the first half of this fiscal year, will return to profitability during the second fiscal half. This will be the major factor behind the profit increase. Although we foresee some negative factors such as the appreciation of the Thai baht against the U.S. dollar, the rotary components business segment will still be able to generate higher profits during the second fiscal half. Once again, the turnaround of the HDD spindle motor business will be the leading factor. While the first quarter was bumpy, the business performed better and better with each passing month during the second quarter until it finally nearly broke even in September and we now see us returning to profitability in the third quarter.

You have made a downward revision to your operating income adjustments in business segments for the second fiscal half. Why is there such a huge difference between your initial projection?

Our revised forecast figures are based on an assumption of the yen gaining more strength than initially projected. That's why the figures for projected overseas SG&A and other expenses are lower than initially forecasted.

Can you give us a breakdown of the estimated operating income increase for next year?

We expect to gain about 3 billion yen from the improved rotary components business and about 2 billion yen from increased sales of ball bearings and LED backlights although this is a rough estimate. We are right on target for reaching next year's goals of achieving 320 billion yen in sales and 32 billion yen in operating income.

Your upward revision to the second half earnings forecast reflects a relatively small increase in operating income compared with the estimated upswing in sales if you look at it in light of marginal profit. Is this a conservative estimate made with an eye to the increasing strength of the yen?

Yes, foreign exchange rates are the major factor. While the yen to U.S. dollar currency exchange rate used for the second quarter was 86.58 yen, our assumption for the second fiscal half is 81 yen. We have also set a higher exchange rate for the Thai baht against the U.S. dollar since we expect that it will rise against the U.S. dollar just like the yen. If we were to recalculate the second quarter results simply using the yen to U.S. dollar exchange rate of 81 yen, for example, the exchange rate difference would generate a negative impact of 200 million yen per month in operating income. The revised forecast incorporates an increase in production and cost reductions that will offset this loss.

What are the reasons for entering the Chinese market for low-priced ball bearings, which are relatively large in size?

The market for miniature ball bearings is dominated by us. We are looking to enter China's huge standard-size ball bearing market where demand is high for use in vacuum cleaners, air conditioners and electric tools.

Earnings from measuring components seem to have dropped. Can you tell us about the current status and future plans?

Our measuring components business is still performing well. Although sales in the game console market have declined, sales of products for industrial equipment have been picking up. Overall sales for the second quarter turned out to be higher than we projected. Look at overall sales for the electronic devices and components business segment and you'll see that despite an increase in LED backlights sales, the operating margin for the second quarter declined compared to the first quarter. That's purely due to the fact that LED backlights are simply not as profitable as measuring components.

I see that your HDD spindle motor business is gaining ground. What areas of the business in particular will be the major engines driving it back to profitability?

While I've repeatedly emphasized that we are leveraging our vertical and horizontal strengths, we really haven't used the outstanding human resources of our machined components business segment to help boost the HDD spindle motor business until recently. We have rectified this situation by putting skilled workers who are well versed with the ultra-precision machining techniques needed for HDD spindle motor manufacturing on the shop floor to improve production. We also implemented organizational changes and made sure that each division has a clear goal that everyone in the division must focus on. As of this April we could finally see the light at the end of the tunnel, indicating that we are indeed headed in the right direction. I have also instructed that we make a greater effort to keep our Thai employees, who produce our HDD spindle motors, in the loop. Our performance indicators are now communicated to them on a monthly basis which has boosted motivation. If we continue along this path, it is sure to lead to better results.

Can you tell us about the current status and future outlook of the ball bearing, pivot assembly and HDD spindle motor businesses?

HDD spindle motor sales will remain at the current level. Instead of gearing up ball bearing production, we're going to keep the production volume at around 210 million units/month using the production equipment we already have. Sales of pivot assemblies for October were higher than expected and will be even higher in November. We can remain optimistic about the sales volume since sales in the office automation equipment market do not seem to be slowing down despite earlier projections.

What synergetic effects do you expect from the acquisition of DPM on your EMS business?

We haven't reaped any positive results yet because we just completed the acquisition in August. We are now at the point of installing new machines at DPM. It will be a while before we see the full effects of the DPM acquisition. DPM is equipped with an extensive range of technological capabilities and has been given high marks by our production people, but it won't become a profit engine until some time down the road.

Do you expect that the operating margin for LED backlights will go up, or do you expect it to remain unchanged while profits increase due to fixed costs related to ongoing capital investments? I understand that you plan to enter the market for larger-sized LED backlight products. How profitable do you think the market will be?

We should be able to maintain the profit margin at a certain level, but it will fluctuate by a few percentage points depending on the product mix. While we expect sales to increase for the third quarter, we anticipate a slight drop during the fourth quarter due to the normal seasonal cycle. Since an increase in fixed costs due to the opening of the new plant will not be posted until later, fixed costs are not increasing now. The absolute value of profits will go up as long as sales increase. Overall performance of the electronic devices and components business segment for the second fiscal half is projected to be lower than the first fiscal half due to declining sales and operating income from measuring components as well as the appreciation of the Thai baht since our main production facilities for measuring components and LED backlights are located in Thailand.

Do you plan to shift your LED backlight focus to larger-sized products to increase sales or are you going to expand sales targeting the automobile market and other niche markets?

We specialize in products that are three inches or smaller. While we are thinking about expanding into the market for larger-sized products, we will keep our focus on our core competency. A fast growing market like LED backlights offers huge potential for a wide variety of products that will fuel our drive to become number one. As always, we will strive to live up to our customers' expectations.

The HDD market has declined more than you projected at the beginning of this fiscal year. Is the slumping market affecting the demand for ball bearings?

Yes, to some extent, but we have been too busy trying to catch up with the earlier increasing demand. Now we will finally have time to make the switch from outsourced ball bearings to our own at the recently acquired brushless DC motor business. Up until about three months ago we had to turn down orders, but now we can take those orders without any problem. That's why we are moving ahead with plans to build a new ball bearing plant while still considering when to start construction on a new pivot assembly plant.

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