Q&A

Back to Financial Results (FY3/2011)

Investor Conference Call for 3Q FY 3/2011 held on February 2, 2011

Question and Answer

Can you give us a rundown of sales volumes for the fourth quarter and your forecast for each product vis-à-vis third quarter results?

Third quarter sales of ball bearings normally fall off in December due to the Christmas holidays. While we also typically see a decline in fourth quarter sales during February due to the Chinese New Year holiday, sales in January were good. We expect sales for the fourth quarter to rise slightly above over our third quarter figures. Our third quarter ball bearing sales came to 199 million units per month, divided between 123 million in external sales and 76 million in internal sales. We expect the monthly sales volume to reach 203 million units in the fourth quarter, with internal sales hitting 80 million as external sales remain at the current level of 123 million units a month. Sales of pivot assemblies for the third quarter were better than the second quarter and we expect the figures to climb even higher this fourth quarter. January sales exceeded 33 million units. Sales of aircraft-related products were upbeat despite an even bigger negative impact from the strong yen in the third quarter than previous quarters. Although our sales were affected by the postponed delivery of the Boeing 787, sales for other aircraft-related products were buoyant. Sales and profits for the fourth quarter in the machined component segment are expected to outpace our third quarter performance. Overall rotary components profits dipped during the third quarter due to an increased output of a specific vibration motor product with a low production yield. Manufacturing of these products is scheduled to cease in mid February and once that happens things will pick up again in March. Sales of products for office automation equipment remained robust, particularly brushless DC motors and stepping motors. Sales of fan motors for game consoles normally nosedive between December and February every year but we don't anticipate any more of a drop than usual. Although we didn't disclose the HDD spindle motors sales volume in our financial report, we have seen our production yield increase and waste materials decrease. The HDD spindle motor business broke even on a monthly basis in December last year. After making all these improvements to our operations, we expect to see a return to profitability in the fourth quarter despite all the expenses associated with the transfer of production lines, which will be completed by February to early March. Measuring component sales in the electronic devices and components segment fell off this third quarter and performance is expected to stay the same for the fourth quarter. Sales of LED backlights were outstanding and will continue to excel overall even with the sales dip we normally experience every January and February. We had some defects and related costs that resulted from boosting production too quickly in the third quarter, but we will pull things together in the fourth quarter and increase the operating margin. In the other business segment, keyboards profits were up as a result of downsizing production lines and personnel although sales for the third quarter remained flat. While stagnant sales of televisions that use our high power micro speakers have reined in our speaker sales performance, sales of special devices have been steady.

Do you really believe that if you stay the current course the information motor business can get back on track over the next quarter once you've finished the production run for the unprofitable vibration motor model?

Yes.

Do you anticipate sales of HDD spindle motors rising high enough in the fourth quarter to keep the business in the black over the long haul?

While we don't have that many orders at the moment, we should be able to generate a more steady profit flow than before because we are rapidly improving the production efficiency and reducing spoilage.

What are the factors behind the losses in minority interests for the third quarter?

This is related to our joint venture business. The loss was due to a large deficit we had in vibration motor sales. We were essentially unable to improve the production yield of a certain product for which we had to boost manufacturing, in turn leading to mounting losses during the third quarter. We should be able to finish manufacturing this product by mid February. Once that happens, we will be back on track to profitability. While we are also seeing stagnant sales of brush DC motors, used mainly in automobiles, our other products are generating decent earnings.

If sales of pivot assemblies are currently increasing, as you stated earlier, why did you decide to postpone the construction of a new factory?

The current monthly sales volume of 33 million units is good compared to where we were a year ago, but it's still not good enough when you look at it in comparison with our current production capacity of 40 million units per month. We will probably need a new factory once the monthly production volume hits 40 million units, but for now our current production capacity is ample enough. We want to wait until we can get a better view of the future before we move ahead with the construction plan.

What is the combined sales ratio distribution for bearings, ball bearings and rod ends by market segment for the third quarter?

Automobiles accounted for 15.9%, up 2.3% from the last quarter, aircraft 23.8%, down 3.6%, home appliances 4.9%, up 5.6%, office automation equipment 6.6%, down 3%, personal computers and peripheral equipment 6.7%, down 2.8%, motors 16.9%, down 6.6%, and other areas 25.3%, down 3.9%. Sales in the automobile and office automation equipment markets were good despite a decline in sales triggered by the strong yen. Sales in the aircraft market were somewhat flat on the basis of local currencies. While December sales were affected by the Christmas holidays, sales will increase slightly if the exchange rate remains at 81 to 82 yen against the US dollar in the fourth quarter since sales in the aircraft market are not affected by the Chinese New Year holidays. In the home appliance market sales of products for refrigerators and air conditioners are on the rise.

What was the production volume for ball bearings during the third quarter?

The monthly production volume for the third quarter totaled 214 million units, and the monthly production volume for the fourth quarter is expected to be 200 million units.

Has the ball bearing inventory been optimized?

The overall inventory is at an optimal level now, but if you look at the product sizes we have in stock, you'll see that we still have too many of some kinds and too few of others.

If production output drops in the fourth quarter, how will it impact your bottom line?

Although production costs will increase if the production volume decreases, profits may increase on a reversal of unrealized gains.

What was the sales volume for pivot assemblies?

The monthly sales volume totaled 31 million units for the third quarter, and will likely reach 32 to 33 million units for the fourth quarter.

Besides pivot assemblies, for which applications do you expect your internal ball bearing sales to increase in the fourth quarter?

We expect increasing sales of ball bearings used in HB stepping motors and fan motors. We utilized some of our ball bearings inventory on the side of pivot assembly business in the third quarter.

What kind of ball bearings do you have a shortage of?

We are short on relatively large-sized ball bearings, like those used for air conditioners, vacuum cleaners and refrigerators. While demand for ball bearings used in inverter air conditioners has not been growing that fast in China, we expect it to pick up pace.

How do you expect measuring component sales to perform in general?

Sales will gradually increase in the machine tool and automobile markets although we don't expect sales in the game console market.

What about standardization of measuring components for automobile passenger seats?

When it comes to this product, the going is always slow, but we are keeping our hopes up.

Have you been hit hard by soaring material prices?

Rising prices of steel and copper have affected our motor and ball bearing operations. While we initially projected the price hike to bring our profits down by 1.4 billion yen for this fiscal year, we now expect that the loss will amount to 1.2 billion yen. We suffered a loss of 0.4 billion yen for the third quarter.

Many HDD manufacturers expect that the HDD market will shrink a bit in the fourth quarter. What is your forecast for pivot assemblies?

At present, we expect fourth quarter sales to increase, not decrease. In fact, while the projected sales volume for January was 3.3 million units, actual sales exceeded our forecast a bit.

Can you explain the difference between the effective tax rate for the first nine months and your annual effective tax rate forecast?

An extraordinary loss of approximately 230 million yen was posted in the third quarter once the sale of the old Osaka Motor Wheel Kyoto plant was finalized. Once we decided to sell the land, the sales figure as well as the losses posted for past asset impairments due to the lower book value of the property were regarded as losses when calculating taxes. This loss resulted in a considerable drop in income for tax calculation purposes, hence the decrease in the amount of taxes to be paid. That essentially is the reason for the better-than-expected tax rate. We assume the effective tax rate for the Minebea Group to be around 35%, and that figure is expected to remain the same this year.

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