Q&A

Back to Financial Results (FY3/2013)

Investor Meeting Presentation for FY 3/2013 held on May 9, 2013

Question and Answer

What's the impact of exchange rate fluctuations on this fiscal year's forecast?

To put it simply, the impact is positive on sales and neutral on profits. About 20% of our products are sold in Japan in yen and the other 80% are sold in foreign currencies. If we compare the projected exchange rates for this fiscal year with the average exchange rates for the previous fiscal year, and assuming the U.S. dollar, euro, Thai baht, Singapore dollar, and Chinese renminbi all appreciated against the yen by about 10%, our net sales will be increased by about 25 billion yen.
The impact on profits varies depending on product. For instance, since machined components yield extremely high profit margins and the cost of goods sold to sales ratio is low, the weak yen basically works in our favor even though they are produced in Thailand and China where local currencies have strengthened against the yen. On the other hand, the falling yen has had a negative impact on motor products similarly made in China and Thailand because of the high cost of goods sold to sales ratio. While LED backlights, one of our electronic device products, are also produced in Thailand and China, they are not affected much by the weak yen since their main components include Japanese-made light-emitting diodes.

Will the impact remain neutral even with the current exchange rates?

Basically yes, but when the Thai baht appreciated against the yen recently, bringing the exchange rate up to 3.5 yen to the baht, we estimated a profit loss of about 1 billion yen.

Can you tell us about production and sales of ball bearings, including external and internal sales, for January, February, March and April?

External sales totaled 126 million units in January, 111 million units in February, and 129 million units in March. The average for these three months was 122 million units. The internal sales volume for the January to March period remained around 67 million units on average since we substantially cut back on production of ball bearings used in pivot assemblies. The sales volume for April totaled 209 million units, with 132 million units in external sales and 77 million units in internal sales. More importantly, we reduced the production volume to 160 million units in February but started to gradually bring it back up in March. The average production volume for the fourth quarter was 177 million units. We plan to bring the average volume for April through June up to 210 million units. We expect that the total sales volume will recover to around 210 to 215 million units.

Are current sales figures above this year's target?

The monthly sales volume is 10 million units more than the target on average.

For the sake of consistency, can you tell us about your operating income target for this fiscal year in terms of your former business segments?

While our internal projections forecast operating income in the former rotary components business segment to be in the black, we expect to post a loss of 1.6 billion yen in the published financial results. The loss is due to the sharp depreciation of the yen and the strong Thai baht. The former electronic devices and components business segment that includes LED backlights and measuring components is expected to generate 3.6 billion yen in profit.

You said that the rotary components business is unlikely to be back in the black completely by the end of this fiscal year despite drastic structural reforms. What is the underlying problem that's hindering the turnaround? I assume the best route to profitability lies in increasing Minebea's unique lines of high value-added products. If these products are hybrid components, what will they be and what are their projected profit margins for the fiscal years ending March 2014 and March 2015?

Exchange rate fluctuations are hitting our financially-weak businesses hard. Looking at exchange rates for the dollar and Asian currencies against the yen, we see that appreciating Asian currencies are having a major impact. In the rotary components business, the progress of the structural reforms and the appreciating Asian currencies are becoming like a game of cat and mouse. We were originally aiming to get the business back on track with our profitable PM motors, HB motors, brushless motors, and precision motors. The initial plan was to offset deficits for other motor products with the surplus from these top-selling motors and reach the break-even point. Sales of HDD spindle motors have been right on target so we are confident that we can turn the business around. Profits from the profitable motor businesses have fallen more than we had expected though. That's why we have projected a loss of 1.6 billion yen in our forecast for the rotary components business. It's hard to see where exchange rates fluctuations will take us.
We will focus on boosting hybrid component sales as well as sales of motor products for which we have a technological edge. One such product line is our S series motors that feature the technological advantage of generating the same torque as conventional motors even when used in a small space. We worked on developing a new application for these motors over the last year and have finally started to see demand rise. It goes without saying that these kinds of initiatives take a long time to bear fruit. Profit margins for hybrid components vary from one product to another. We also have to wait and see how well they'll sell, so I cannot tell you now exactly what their profit margins will be.

Can you tell us how your customer base for LED backlights will change this fiscal year versus the previous fiscal year in terms of expansion and dispersion? What is the ratio of non-major customers to the overall customer base?

The number of customers has grown significantly, but since the bulk of orders come from one major customer, we are still pretty much relying on that particular client. I would just like you to keep in mind that we are doing everything possible to prepare for changes in market demand.

You expect that operating losses for the rotary components business will shrink this fiscal year by 2.8 billion yen year on year to 1.6 billion yen. Of the 2.8 billion, let's say the structural reforms do result in a gain of 2.2 billion yen. What specific factors would lead to that gain?

Withdrawing from the coreless vibration motor business, which posted a huge deficit last year, will significantly boost our performance. We posted an impairment loss on non-performing assets for HDD spindle motors. This will cut depreciation costs by more than 1 billion yen per year. On top of that, the disposal of non-performing assets in our parts division, etc. is expected to cut fixed costs by about 0.5 billion yen.

How is the LED backlight business doing recently?

Although production was running full steam in April, we are currently stocking our inventory and shipments still remain slow. When shipments pick up in May and June, sales are likely to exceed 5 billion yen. That's the same amount we saw when monthly sales peaked in 2012. The operating margin reached high single digit during that peak period, and we are looking to see it at the same level again this year.

You expect to see a 1.5 billion yen gain in adjustments which include head office expenses, etc. this fiscal year. Exactly what reductions will be made?

While expenses of 750 million yen were incurred for moving our head office to Mita area last fiscal year, we won't have those kinds of expenses to post this fiscal year. Amortization of goodwill is also expected to decrease by 400 million yen annually. That all adds up to a reduction of 1.1 billion yen in total. We will also be making other cost cuts as well.

Judging from the ratio of estimated ordinary income to net income for this fiscal year, the effective tax rate will be 37%, but won't the actual rate be much lower?

Our forecasts were calculated on the basis of an effective tax rate of about 35%. The tax rate will vary depending on the country where we earn an income. Corporate income tax will be lowered to 20% in Thailand this fiscal year due to a government incentive program there. If we earn more of our income in countries like this, the effective tax rate will be lower.

The rotary components business posted a deficit of 2 billion yen in the fourth quarter of the last fiscal year. You said during the presentation that your structural reform initiative will generate a gain of 2.2 billion yen this fiscal year. That's 550 million yen per quarter, which, when roughly calculated, will give you a deficit of 1.5 billion yen each quarter. The effect of structural reforms does not seem to include improvements in variable costs. How did you envision structural reforms yielding a profit?

The rotary components business saw an extraordinary loss of 1.7 billion yen due to the interruption of our HDD spindle motor operations last fiscal year in addition to a 4.4 billion operating deficit. This brought the actual deficit total up to 6.1 billion yen. This deficit will be dramatically pared down to 1.6 billion yen this fiscal year. A 2.2 billion yen gain as a result of the structural reforms I explained earlier includes (1) an annual gain of about 1.0 billion yen resulting from reduced fixed costs for HDD spindle motors, (2) losses totaling 0.7 billion yen that were posted last fiscal year from the vibration motor business which has already terminated, and (3) reduction of fixed costs in other parts divisions. On top of all that, last fiscal year we saw increases in costs totaling about 0.5 billion yen at two production facilities that were used during the transfer of micro actuator production from an Xiamen-based subcontractor to our Cambodian plant. These costs will not be incurred this fiscal year. Although sharp fluctuations in the production volumes of HDD spindle motors during the last fiscal year put a dent in our bottom line, production has been steady this year for our high value-added HDD spindle motors used in enterprise, nearline as well as 7-mm height 2.5-inch HDDs. Since our upgraded manufacturing equipment implemented after the flooding has significantly boosted production efficiency, profitability is also expected to improve. There are some other factors, but these are basically the major ones.

Are you taking any measures for the fan motor business which seem to be facing a major deficit?

We cut fixed costs for this business, so that's also included in the gain.

Is your motor business projection for this fiscal year based on the assumption that cost reductions will shrink the deficit while actual sales remain flat or do you expect sales growth will reduce the deficit?

The situation is different for different motors. For instance, the market for micro actuators declined after sales of digital still cameras suddenly fell. Although we transferred production to our Cambodian plant with an eye to cutting costs, that wasn't enough and we had to shift strategies. The situation was the same for mass-produced DC brush motors. The market has been shrinking due to drastic cutbacks in optical disk drive production. The fan motor business was affected primarily by exchange rate fluctuations. Sales of fan motors used in machine tools were hit hard by the market's sharp decline during the months of January through March. Parts makers like us have a hard time when our customers' end products are not selling. When we piece together all these factors for each business operation, we get the earnings forecast I shared with you earlier.

You said earlier that the structural reform of the rotary component business has been completed. Since you don't expect that the business will turn around due to recent exchange rate fluctuations, do you plan to implement additional structural reforms this fiscal year?

The initial stage of structural reform has been completed. That is also why I assigned the vice president to oversee the new Electronic Device & Component Manufacturing Headquarters, so I could instead focus on Acquisition & Alliance strategies for the machined components business. Since I last talked about our strategies back in November, Asian currencies have appreciated much more than we could have ever imagined and we just didn't factor that in.

You project that SG&A to sales ratio will decline to 15% this fiscal year. Is this because expenses are mostly incurred on a yen basis while sales are fueled by the weak yen, or because of management's decision to cut costs?

The major factors behind this decrease are the fact that this fiscal year we won't have the expenses we incurred last fiscal year for moving our head office, as well as a reduction in goodwill amortization. We don't expect to see any other special factors besides these.

You mentioned that the external sales volume of ball bearings hit an all-time high in April. What are the factors behind this uptick? Did it come from increased sales to new customers or existing customers? Finally, in which markets have sales climbed?

Sales increased for both types of customers. For one thing, demand for fan motor ball bearings shot up last month, especially in China. This year, we have been focusing on increasing sales of ball bearings, including a new area of low-priced mass-produced products, and these efforts have also been paying off. Sales are significantly increasing primarily in the fan motor and automobile markets.

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