Q&A

Back to Financial Results (FY3/2011)

Investor Meeting Presentation for FY 3/2011 held on May 10, 2011

Question and Answer

What is the basis of your upper-end-to-lower-end range forecast figures for the fiscal year ending March 2012?

Our pre-3/11 earthquake forecast was for 296.0 billion yen in sales and 26.0 to 27.0 billion yen in operating income. Our current forecast is based on these figures. While our operations for the first quarter have already been impacted by the earthquake, both directly and indirectly, we don't know how they will be affected over the rest of the fiscal year. That's why we calculated our forecast figures within upper-end-to-lower-end ranges based on estimates made before the earthquake.

Do you expect sales and income for the first quarter of fiscal year ending March 2012 to be lower than the previous quarter's levels?

If our current performance falls at the lower end of the forecast spectrum, this year's first quarter performance will be much lower than the previous quarter's levels. Even if our current performance is at the upper end, the first quarter results will still be lower than the previous quarter.

You expect that the rotary components segment will see a significantly larger increase in operating income during the second half than in the first half of this fiscal year. Which products will be the major profit engines?

When we first looked at HDD spindle motors, we didn't have great expectations. Then we learned just before the Golden Week holiday that the market would recover to the pre-3/11 level in June. As far as products related to office automation equipment goes, our customers told us that they expected to recoup their first-half losses in the second half, so we need to be ready for that. All in all, our performance is likely to lag during the first half but pick up pace in the second half.

Right now we're seeing a stagnant HDD market with falling prices. When will you make a decision on whether or not to discontinue your HDD spindle motor business?

The outlook was so bright before the earthquake that we could have never anticipated March's 30% drop in sales just as we were about to cross the finish line. Honestly, I don't really know when we will reach the goal we were aiming for in March, 2011. If the quake hadn't occurred, we would have been able to see some results in March. Although some people predict that the market will recover to the pre-3/11 level in June, we're not certain this will happen. Given the significant production cutbacks, we're miles away from where we were before the quake hit. We simply have to wait and see. I can't even say now whether or not we will have a clear picture comes June.

You told us earlier that your HDD spindle motor business returned to profitability on a monthly basis in December 2010. How was the business performing in January and February 2011?

It didn't do very well in January and February due to the sales volume and falling prices.

Looking at the factors behind the ups and downs in this year's earnings figures shown on slide No. 31, you told us that you expect a gain of 2 billion yen due to increased rotary components productivity. Does this figure include the negative factors listed on the slide?

I told you at the investor meeting held in November 2010 that we were expecting a 3 billion yen increase in the coming year, but in the back of my mind I was thinking it would be bigger. After the earthquake I realized that sales of precision motors (which are used in automobiles) would drop if automobile production was halted by the impact of the earthquake despite the fact that we have already secured orders. We also had a vibration motor model used for a smartphone that was generating a loss of 100 million yen every month because of its very low yield. While the plan was to discontinue this model by January 2011, it actually took us until the end of February. There were other negative factors that we didn't expect in November, like a more than 10% wage hike in China following the Chinese New Year holiday as well as an increase in rare earth prices. Despite all these negative factors, we should be able to see an increase of at least 2 billion yen in earnings.

What are the major changes to extraordinary losses and gains for the fourth quarter of the fiscal year ended March 2011?

An impairment loss totaling 304 million yen under extraordinary loss includes a loss posted due to the impairment of assets prior to the sale of the old Osaka Motor Wheel property, an asset impairment loss necessitated by a large deficit in vibration motors, as well as a loss due to the destruction of our old plant facility in Ichinoseki due to the earthquake and tsunami. We also experienced a soil pollution problem that resulted in an allowance for environmental remediation expenses totaling 203 million yen. Additionally there was a loss due to business structuring amounting to 105 million yen triggered by the closing of one of our business operations. All these losses combined brought the extraordinary loss total up to 900 million yen. Since we decided to sell the old Osaka Motor Wheel plant in the third quarter, losses that had not yet been recognized for tax purposes were now regarded as actual losses. These losses resulted in a bigger tax deduction and hence better tax rate. While deferred tax assets posted during the fourth quarter was a positive, we had no tax-related gains or losses since the amount of foreign tax credit was amortized as a result of recent changes in the tax system. Since we posted deferred tax assets for the joint venture with Panasonic, we saw a huge minority interest gain.

Will the tax rate remain in the 30 to 40% range?

It should hover around 30% but we will try to keep it as low as possible.

What are the reasons for the quarter-on-quarter decreases of 1.0 billion yen in sales and 0.5 billion yen in operating income for rotary components in the fourth quarter of the fiscal year ended March 2011?

The biggest factor was a loss due to disposal of stock for the vibration motor model that was generating a huge deficit. This loss amounting to 0.2 billion yen was accounted for during the fourth quarter under operating income. Unfortunately the earthquake stalled sales of our profit-generating products for office automation equipment. Sales of HDD spindle motors had been good up until the fourth quarter when we were hit by a number of negative factors like falling prices and the appreciating Thai Baht. We were unable to offset those negatives in the wake of the devastating disaster of 3/11 as production and sales plummeted, resulting in the large deficit.

Will the rotary components segment performance for the first quarter of this fiscal year be significantly affected by the drop in sales expected for your customer-specific HDD spindle motor model?

Yes, for the time being. We aren't predicting that the HDD spindle motor market will recover to the pre-3/11 level by June since it is just too early to tell at this point. High-margin brushless DC motors for office automation equipment will no doubt perform worse due to what we expect to be a prolonged impact by the earthquake.

Do you expect HDD spindle motors to recover in June since you will be launching new models?

We expect that overall sales will increase for a wide range of models. The only concern is that our sales may be affected by inventory adjustment at two U.S. HDD manufacturers when they close their books in June. Pivot assembly sales for April were better than we had expected, but we don't know what they will be like after May.

What is the sales volume forecast for ball bearings and pivot assemblies?

The monthly sales volume for the third quarter of the fiscal year ended March 2011 was 123 million units for external sales and 76 million for internal sales. The monthly sales volume for the fourth quarter was good, with external sales reaching 124 billion units, and internal sales 77 million. Projected monthly sales for the first quarter of this fiscal year will likely jump to 127 million units for external sales and somewhere between 78 and 80 million for internal sales. External sales for the second quarter will reach 128 million units per month with sales probably exceeding 130 million units for some months. Internal sales volume is expected to increase to somewhere near 90 million units per month thanks to a projected sales increase for fan motors, etc. Projected monthly external sales volumes for the third and fourth quarters are likely to exceed 130 million units. Now that the overall monthly sales volume (internal and external sales combined) will be over 220 million units, we will have to raise the monthly production volume to between 226 million and 230 million units. Pivot assembly sales for the third and fourth quarters of the fiscal year ended March 2011 were 30 million units per month. While the projected monthly sales volume for the first quarter of this fiscal year is 31 million units, sales will rise to 35 million units per month in the second and third quarters. Although we already have a monthly production capacity of over 40 million units, this projected sales volume is still low when compared with our production capacity.

Do you expect any changes in the ball bearing profit margin this fiscal year?

We expect ball bearings to generate a steady profit. The only uncertainty is that we still don't know how high pivot assembly sales will go. If the monthly sales volume reaches somewhere around 35 million units during the second quarter, we will wind up closer to the upper end of our forecast. Rod end sales will also increase but we don't expect any major uptick in fastener sales this year. We still don't know how the appreciation of the yen will affect our performance yet.

Will this fiscal year's income forecast for electronic components remain at the level we see here even with the expansion of LED backlight business?

The operating income for the fourth quarter of the last fiscal year was much lower than the third quarter. One of the reasons for this drop was the decline in sales of high-margin measuring components. Another reason is that we haven't achieved high enough production efficiency for LED backlights because the business is growing so quickly. This circumstance is not likely to change until the second half of this fiscal year. There was also a concern that we wouldn't be able to get parts because of the earthquake. Now that we have been able to secure parts, we can expect a sharp increase in the production and sales volumes for this month as well as over the coming months. If all goes well, production and sales may exceed our forecast, but we still cannot assume anything just yet.

When do you think LED backlight sales will increase and start pushing up profits?

We have to wait and see how things progress over at least the next six months. While our new plant in Suzhou went on line this past April 17, we are still in the midst of expanding our operations and hiring more people, so it will be a while before we can raise production efficiency. We looked at all of these factors very closely when making our forecast.

In regard to the sales forecast for ball bearings you provided us earlier, where within the forecast range do you think it will most likely fall?

While the outlook for the future in the immediate aftermath of the earthquake was hazy at best, we are beginning to get a clearer picture now. We expect to see solid sales of ball bearings with the results falling somewhere close to the upper end of the range.

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