Q&A

Back to Financial Results (FY3/2014)

Investor Meeting Presentation for 3Q FY 3/2014 held on February 4, 2014

Question and Answer

Can you tell us what the monthly external shipment volume for ball bearings was for October through December as well as the estimated shipment volume for January through March? Do you see any signs of further economic recovery?

Ball bearing shipment volume for October totaled 223 million units, with 137 million units in external shipment and 86 million units in internal shipment. Shipment volume for November came to 223 million units in total, with 138 million units shipped externally and 85 million units shipped internally. Shipment volume for December totaled 215 million units, including 133 million units in external shipment and 82 million units in internal shipment. The December shipment volume dropped in the U.S. and Europe due to the Christmas holidays but the decline was offset by shipment in Asia. The shipment volume for January through March is moving ahead of our projection. We initially projected that the external shipment volume for January would total 138 million units and the internal shipment volume 86 million units. Although we still don't have a full count for Hong Kong yet due to the Chinese New Year holiday, the shipment volume for January is currently estimated to total 228 million units, with 140 million units in external shipment and 88 million units in internal shipment. Shipment volume for February is projected to reach 219 million units, with 133 million units to be shipped externally and 86 million units to be shipped internally. Shipment volume for March should total 229 million units, with a record high external shipment volume of 143 million units and 86 million units to be shipped internally.
We use bearings as our primary economic indicator. It looks like demand will be up for the January through March period since the total order for January once again exceeded 140 million units in contrast to our projection. While there are probably many factors fueling demand, one is the fact that our customers are boosting production to fill last-minute orders before the consumption tax rate goes up in Japan. In Europe, on the other hand, orders hit a record high thanks to its robust automobile market. At the very least, our data shows without a doubt that the global economy is now on the path to recovery.

Profitability for LED backlights was significantly affected by seasonal factors. If the decline continues into the January through March period, do you think you'll have to wait until the July through September period before you can make up for it? Looking ahead, how do you expect the business to rebound during the January through March and April through June periods?

Orders for LED backlight are stronger than we initially anticipated. Sales will naturally drop in the January through March period due to seasonal factors but should remain higher than our initial forecast. We'll begin delivering LED backlights for new models in the April through June period, so shipments should be up this year. Since sales for January are projected to be pretty high, we will definitely be able to achieve our 30 billion yen operating income target for this fiscal year. When you look at the overall picture, the global economy seems healthy now.

Are LED backlight sales increasing because you have a larger share of the market or due to strong demand?

Both factors are driving sales up. Our market share is increasing and there is also very strong demand in the market for high-end thin smartphones. We are currently making a capital investment in our Cambodian plant's second factory building and were initially going to dedicate about two thirds of the building to LED backlight production. Now we see that won't be enough and are going to use the entire factory building for LED backlight production. Otherwise we won't be able to meet the rising demand.

The electronic devices and components business segment saw quarter-on-quarter jumps of 1.5 billion yen in sales and 0.8 billion yen in operating income in the third quarter. You said earlier that your motor business was back on track and making a profit. I'd like to know how your other major sub-segments are performing. According to your revised forecast for the electronic devices and components business segment, you expect to see a much larger drop in profits than sales during the fourth quarter. Is that just a very conservative estimate? If profits are to fall, where will you see the decline?

The segment's third quarter profits increased 0.8 billion yen over the second quarter. That increase was about equally divided between the motor business and the non-motor businesses, including lighting devices, etc. The estimated decline for the fourth quarter is due mainly to a significant drop in revenues expected for LED backlight-related business operations. On the bright side, the decline in sales for electronic devices will be limited to around 20%, unlike last year. Motor sales will also fall. Plus, we expect to incur approximately 0.3 billion yen in cost of sales due to disposal of remainder materials.

Can you tell us about third quarter ball bearing sales by application, demand forecast for the next fiscal year, as well as initiatives you have planned?

Here are the percentage ratios of ball bearing sales by application for the October through December period. Automobile bearings accounted for 17%, aerospace bearings 27%, bearings for home electronics 4%, bearings for office automation equipment 7%, bearings for PC and related products 4%, motor bearings 15%, and other bearings 25%. (Revision of the percentages are made as follows: automobile bearings from 13% to 17%, aerospace bearings from 22% to 27%, bearings for home electronics from 3% to 4%, bearings for office automation equipment from 5% to 7%, bearings for PC and related products from 28% to 4%, motor bearings from 11% to 15%, and other bearings from 18% to 25%).
Bearing sales have been very strong and are expected to remain steady unless the market takes a drastic turn for the worse next fiscal year. We opened a new bearing plant in Thailand in 2011. The plant still has unused space where we can install manufacturing equipment capable of producing about 20 million units a month, so this should at least enable us to respond to increasing demand next fiscal year.
Back when Thailand was hit by severe flooding, we had to boost pivot assembly production to meet the surge in demand. That demand didn't last as long as we had expected and we had to stop assembling the machines we made in-house. The demand is so high now that we've begun assembling them again and have started to install them. We are also seeing rising demand for bearings used in high-end products on top of a booming economy. In Europe it's automobiles that are mainly fueling demand. Higher sales of luxury cars mean higher sales of bearings. In China, too, increasing sales of higher-class cars will drive the demand for more precision parts up, including our bearings. I believe demand for bearings increases as more people realize a higher standard of living and we're seeing proof of that now.

You said that 400 billion yen in sales is now within your reach for next fiscal year. That's 30 billion yen more than the revised sales forecast for this fiscal year. What is your forecast for the operating margin?

We will have a sales projection for the next fiscal year when we finalize our business plan in March. As long as external factors like foreign exchange rates, economic trends, etc. don't change drastically, our target of 400 billion will remain within our reach. When I became president, I set the operating margin target at 10% and we have already reached that target on a quarterly basis. Of course we will keep our sights on 10% as long as shipment volumes continue to climb and the economy doesn't fluctuate like a roller coaster. I know it won't be easy, but we'll keep that goal in mind when we develop our business plan in March and plan to announce it in May.

The number of Minebea Group employees as of the end of the third quarter was about one thousand people less than what it was in the previous quarter. Half of those one thousand were employed in Cambodia. What are the reasons for this decline in the number of employees? Can you also tell us about your personnel strategy for increasing sales in the future?

We normally see sales decline in January through March due to seasonal factors, so we have a surplus of labor during that period. While labor market liquidity tends to be high in areas where the wage standard is low, we don't usually replenish the natural decline in the workforce when dealing with seasonal factors.

You said that LED backlight sales did not fall as much as you had expected in December and were upbeat in January. Is that because sales to your major customers did not drop as much as you had expected or because your customer base has expanded?

LED backlight sales didn't decline that much in December both because business was booming for our major customers and because our customer base has widened. Sales for January fell as might be expected, and sales are expected to dip again in February. The drop is due to production and inventory adjustments as manufacturers switch to new models. While sales usually fall nearly 50%, it looks like the drop will be around 20% this year. Sales should then begin to bounce back around March. Since we usually have to wait until May for sales to fully recover, it would be great to see them bounce back a month earlier than usual.

How is it that you expect fourth quarter sales for the machined components business segment to surpass the previous quarter's level but expect profits to remain flat?

The operating income forecast for machined components is based on the sales volume projection which we made well before the latest estimate which I gave you earlier today. If sales exceed our estimate, profits will naturally be higher.

How is your ball bearing business usually affected by seasonal factors? When you look back on your past performance, what are sales for the January through March period usually like compared with the October through December period? Are sales unseasonably strong this year or is it that sales are always stronger in January through March than they are in October through December?

While sales normally increase in March because it's the end of a fiscal year, they fall off slightly in January and February. Sales are usually the best in the second and third quarters and then dip a little in the fourth quarter. The previous fiscal year was an exception. Since sales in the second and third quarters were so low, they stayed up in the fourth quarter and have been edging upward ever since.

Do you see any regional characteristics in sales for the January through March period, like strong sales in Europe?

Demand in Europe is very strong especially in the automobile market. Demand bounced back in January after it dropped during the Christmas holidays in December. If we just look at January, demand was upbeat both in the U.S. and Europe. It is unlikely to decline all that much in February and is expected be even higher in March, so the economy seems to be generally strong.
We cannot paint the whole picture by just looking at a single factor. While there are various seasonal factors, our marketing efforts aimed at increasing our market share seem to have paid off especially in Europe. We have to look at things from multiple angles.

When the new product models are launched in April through June, do you expect to see any changes in LED backlight compared with LED backlights used in the current models? Will your expanded customer base, other than your two major customers, have a significant effect on your business performance?

As I have been saying for a long time, our customer base is much larger than it was before. It's safe to say that our products are used in almost all high-end thin smartphones made by Chinese manufacturers. The ability to mass produce thin precision light guide plates gives us a competitive edge. We have been leading the pack and boosting sales in this market. While there are many factors that affect sales in April through June, they are mainly seasonal since many of our customers launch new models during these months.

Among your new customers, are you seeing more activity from the Chinese manufacturers? Are their products different from the products of your two major customers? Are they slightly thicker or something?

Although I cannot provide you with detailed information about our customers, I can tell you that their thin high-end smartphones require our thin light guide plates. You should be able to find out more by looking at their activities.

You said that third quarter profits for motors were higher than you had expected. What specifically drove profitability up? Mr. Kainuma, looking at the coming fiscal year, what areas do you think have growth potential and feel confident about, and what areas do you still need to work on?

The motor sub-segments where we saw the most significant rise in third quarter profits over the second quarter were fan motors; information motors, including stepping motors; and motors for automobile applications, which are made by our Global Motor Division in Europe. These sub-segments really started generating profits in the latter half of the second quarter and were the main growth drivers. I don't see any specific areas that need improvement next year. As long as the market stays on track, we're sure to see growth next fiscal year although it may be up and down.

You said that LED backlight sales would total at least 80 to 100 billion yen next fiscal year. Will the augmented production capacity of the Cambodian plant be enough to achieve your 100 billion yen sales target?

Our official LED backlight sales target for the next fiscal year is 80 billion yen and we will stick to that. Once this fiscal year ends at the end of March, we will announce our business plan for the next fiscal year at the investors meeting to be held in May. All I can say now is that we should be able to achieve 80 billion yen now that we have made substantial investments. Naturally we expect to make a decent profit in light of the competitive edge we now have.
I never actually said that we would raise our production capacity to the 100 billion yen level. I may have happened to mention that sales could reach 100 billion yen next year, but I never said that the amount we were investing at the time would be enough. I just wanted to drive the point home that we had a sufficient competitive edge in the LED backlight market.

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