Q&A

Back to Financial Results (FY3/2013)

Investor Meeting Presentation for 2Q FY 3/2013 held on November 2, 2012

Question and Answer

You mentioned that structural reform of the rotary components business would be completed in this fiscal year. I believe the same was also mentioned when you assumed the president's position three years ago. It must be a great effort to start up the Cambodian plant, but these measures seem to be rather standard, such as changing product mixes and shifting manufacturing bases to locations with lower labor costs. I am not so sure whether these measures will really lead to completion of the structural reform and a return to profitability in the next fiscal year. First of all, what is your analysis of the fundamental reasons why it has been difficult to generate profits? Could you explain comprehensibly why you feel justified in saying that the structural reform will be completed in this fiscal year?

Since the days of former Chairman Takahashi and former President Ogino, one of Minebea's basic management principles has been known to be "manufacture more and better products faster and more cheaply, to contribute to society." In order to manufacture "better products faster and more cheaply," the measure taken at that time, for the purpose of securing manpower as well, was operations overseas. In those days, with no competitors operating overseas and few vendors existing, our unique production system adopting vertical integration was developed. This enabled us to manufacture products "faster and more cheaply" than anyone else, which became Minebea's formula for success. However, regarding "better products," which means whether our products are competitive compared to those of other companies', it is harder than before to differentiate our products from others through vertical integration, because Japanese companies are now everywhere in Thailand and China, including inland regions, and all kinds of vendors are there as well. In this situation, we may be able to manufacture certain products "better, faster, and more cheaply" by horizontal specialization. Thus, I have promoted internal awareness in order to change our conventions in the name of improvement of vertical integration for the last three years, since I became president. Minebea's business portfolio has three vertical axes: the machined components business segment, the rotary components business segment and the electronic devices and components business segment. What we need is "the comprehensive strength of vertical and horizontal" to construct a source of strength for the future.
With regard to "better products more cheaply," we sowed seeds by expanding our production base in Cambodia, which is located only about 500 km from our main production base, Thailand, and enables new forms of operations with low labor costs. It has been almost a year since the Cambodian plant was launched, and it is believed to be able to make a significant contribution to the assembly process. Furthermore, since a production base in the Philippines will be added due to the acquisition of Moatech, our production contributing to the theme of "more cheaply" will be even more enhanced. Regarding motors, however, our competitors include Chinese companies in addition to strong Japanese competitors. In order to compete against them, it is not good enough just to compete simply with cost by expanding production base in Cambodia and the Philippines.
That is why we have promoted the hybrid components business. To be honest, our employees may have been somewhat doubtful initially, but once started, orders have been received and gradually the business has started moving accordingly. It took time, but in terms of a car, we are in the situation where the engine has finally started running with the starter motor turning over. In fact, the number of orders is increasing for a certain product's mechanical components, and for various automobile components.
Against this background, as various seeds have been sown, the Tokyo R&D Center will be completed. Currently, since more talented personnel are on the market as big companies continue to downsize, I myself am working on recruiting them. This will enable us to have a full hand of people, goods, and capital, which I believe will be the main pillar of the structural reform. Taking the keyboards business, for example, we have withdrawn from the finished keyboards business and are in preparation of various other things. The profitable motor business is yielding a profit in the area of high added value, and so is the EMT business which has shown a single-month profit. As I feel that such seed-sowing and preparations are complete, we will work on cultivation and early harvest from now on. It is this sense that I stated that the structural reform would be completed in this fiscal year.

If a profitable motor business is realized by gradually changing its contents, is the correct view of the next fiscal year's profit & loss outlook that profit will gradually increase as an extension of the current status quo, rather than that dramatic effects of improvement will appear?

I would say that is correct. All products do not show sales increases at the same time, some do in April and others in June. Sales volume matters to us, so there is not much we can do if the production of our clients decreases due to the Japanese products boycott movement in China, etc. But there is no point in whining about economic trends. The fog may clear suddenly at a given point in time. We are planning to complete in this fiscal year the structural reform for building a foundation to ensure profits when the environment is set.

I understand that in the information motors business, fan motors, which were affected by supply chain disruption due to the Thai Floods, used to be profitable but have not regained the same level of orders. I believe the contents of this business are currently changing due to withdrawal from the PC business. Similar to the overall structural reform, should we expect it to take time for this business to become profitable as well?

Being profitable means that the entire rotary components business segment becomes profitable. I think it will take a little more time for all motor businesses to become profitable. For that sense of becoming profitable, I believe we have already taken measures in the form of the structural reform.

For LED backlights, you mentioned that while those for smartphones were doing well, those for tablet PCs were affected by production adjustment. How would you analyze the order curves for the latter half of this fiscal year or for the next fiscal year, and how would you control profit & loss at the Suzhou Plant, the production base for LED backlights for tablet PCs? In addition, in this very volatile business, I believe it is difficult to deal with clients. Is there anything you pay particular attention to in dealing with clients?

The details cannot be disclosed, but there are two things I can tell you now. One is to deal with more clients. The other is, once there are fewer companies which can accommodate large orders, all orders naturally tend to be placed only with companies with the required production capacity. We have been carefully collecting information on the risks of a shift to organic LED which will be a threat to LED backlights, and have concluded that organic LED still has a long way to go in terms of its direction and speed based on the current situation. Fortunately, our technologies have moved a half-step forward. Volatility is certainly considerable, but the issues I have just mentioned should alleviate the negative impact of volatility.

Regarding LED backlights for tablet PCs, on what curve do you expect to receive orders in the Second Half?

As explained in the presentation, technical issues occurring in various fields have already been solved. Contributing factors to the increase and decrease of future order amounts will mainly depend on the sales of clients' products. We would like to reduce volatility by dealing with more clients.

Is it correct to understand that the business segment containing businesses of which sales are recorded as hybrid components is divided into several parts? Could I ask for a breakdown by business segment?

Hybrid components are divided into various business segments. The breakdown is summarized monthly per hybrid component and per product, but unfortunately I don't have it at hand just now.

In the rotary components business, I believe there are some which are competitive as a single-product motor and expected to continue earning profits, and others which are questionably competitive and so expected to be altered as hybrid components. Could you please show us their composition ratios and the current view of their profit contributions? In the light of that, please explain the outlook after the next fiscal year.

While a categorical statement is impossible, the area of mass-production of low-priced motors is no longer Minebea's strongest point. It is true that we are utilizing plants in Cambodia and the Philippines, but this alone does not make "manufacturing better products" possible.
More importantly, the objective of having three business segments is to become a company that receives compliments from clients such as "Minebea would go to these lengths for a customer" or "This is useful" based on the design of a gear or the scope of quality assurance and so on. There is no standard for the composition ratios you requested. Nothing can be done without sales activities, and we need to find appropriate human resources in order to accommodate clients' needs as well. The objective of the Tokyo R&D Center is to accelerate our development ability by inviting various experts who can immediately contribute to the company's results. This would be the best way to understand our hybrid components business.

They seem to be used for hybrid products such as those involving gears. Does it mean Minebea is going to move into hybridization, assuming use in slightly larger motors and clients' products?

No. As a matter of fact, our strongest point now is small motors. Taking DC motors, for example, we have a patented S motor with half the volume and twice the torque. But it was not a big seller, as the price was set a little high for the size of the motor we provided. As we made it smaller, though it took time, clients showed interest in it. Such motors are currently attracting lots of attention, being used in various places. As described above, we are assuming small motors, but we have relatively large ones as well, such as the motor used to open and close the trunk of a van. You may correctly assume that the product lines cover smaller motors up to relatively large ones.

For internal and external shipment and production volume of ball bearings and those of pivot assemblies, please describe the results of the second quarter and outlook of the third and fourth quarters.

The external and internal shipment volume of ball bearings in the second quarter was 121 million units per month and 96 million units per month respectively, for a total of 217 million units per month. In the third quarter, we expect 120 million units per month of external shipment and 78 million units per month of internal shipment, for a total of 198 million units per month. Production volume is expected to be 195 million units per month. In the fourth quarter, we expect 125 million units per month of external shipment and 85 million units per month of internal shipment, for a total of 210 million units per month. Production volume is expected to be approximately 200 million units per month. The shipment volume of pivot assemblies in the second quarter was 33 million units per month. Compared to 40 million units per month in the first quarter, it was a sharp decrease. Production volume was 38 million units per month. In the third quarter, we expect both shipment and production volume to be 32 million units per month. In the fourth quarter, shipment volume is expected to be 35 million units per month and production volume 34 million units per month.

Internal shipment is expected to fall in the third quarter. Is this due to reducing inventories? Or does it mean that internal shipment will fall due to a decrease in overall motor production, not just for pivot assemblies?

Basically, we expect decreased production of pivot assemblies to be the major reason.

This question is for President Kainuma. The rotary components business segment projects a loss in the Second Half. What changed the initial forecast of the timing of a return to profitability? If the structural reform is assumed to be completed by the end of the fiscal year, the fourth quarter should be better than the third quarter in consideration of the Second Half outlook. What is your roadmap to profitability? A large part of your manufacturing should be products for office automation and automobiles, particularly hybrid products for automobiles. I imagine reduced automobiles production has had quite an impact on your company. Including the outlook for the external environment, what do you expect over the next three quarters or so?

We have adopted a strategy of discontinuing less- or non-profitable businesses. We must have our clients' understanding before we "discontinue" those businesses, so in reality, this step will not be taken right away. It takes time as various preparations are needed, such as negotiations with clients and manufacturing inventories in advance, but it should be understood that as we proceed with the structural reform, products with high added value will gradually come to replace others.
Numbers go up and down. Particularly for HDD spindle motors, two plants were damaged by the Thai Floods last October and have not reached full operation yet. Therefore, costs other than ordinary ones are excluded from manufacturing cost and recorded in extraordinary losses as a "loss on disaster." Extraordinary loss was 1.46 billion yen in the First Half. If this had been included in manufacturing costs, the operating loss of the rotary components business segment would have been even greater. The "loss on disaster" will decrease largely in the third quarter and is projected to disappear in the fourth quarter. With this loss disappearing, operating income will decrease considerably to show a small loss. But, in reality, the substantive loss is expected to improve. I hope you will understand that profit and loss will improve on a pre-tax basis.

What is the expected deficit in the fourth quarter?

The rotary components business segment recorded a deficit of 0.42 billion yen in the second quarter. We expect deficits of 0.8 billion yen in the third quarter and 0.63 billion yen in the fourth quarter.

President Kainuma, what do you consider to be the current position in terms of the profitability outlook in the next period?

Based on the current recovery status, I believe the numbers will turn to profitability in the next fiscal year. But, as you all know well, the results may be affected by changes in the external environment, given unexpected events such as the Japanese products boycott movement in China, Only two plants were damaged in the last year's Thai Floods, but the impact of the subsequent supply chain disruption was believed to be even greater. This forecast numbers, after downward revision, assumes, including businesses planned for balanced contraction, the bottom line that business will become no worse or, even if it does become worse, that the decline will be within rational limits. Although the numbers occasionally shift between positive and negative, I believe it is totally possible for the entire rotary components business segment to become profitable in the next period.

It ends about main text.

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