Q&A

Back to Financial Results (FY3/2015)

Investor Meeting Presentation for 2Q FY 3/2015 held on November 5, 2014

Question and Answer

What is your current share of the LED backlight market and what is your plan for increasing production capacity over the coming year as well as your ultimate vision of what the industry should be like? Your strategy seems to mirror what you did with ball bearings and pivot assemblies. You are building the kind of mass production capability that will give you a leg up over the competition and in the end beat them with a cost advantage after the technology matures. Ultimately what kind of market share are you aiming for that will make you tops in the industry?

I believe we currently have a 70 to 75% share of the market for thin LED backlights. I don't know if we will be able to maintain a 75% share of this growing market though. As a supplier, we can at least ease the current situation where customers have to scramble to get their hands on a limited supply.
Our major customer shares its product development plan with us and we learned a year ago that the sizes of this year's models would change although I cannot give you any details due to our confidentiality agreement with the customer. Given this backdrop, stylish thin LED backlights will remain in demand for at least a while.
We are also looking to expand applications of our light guide plate technology. One application is for automobiles, and we have been successful in this area. Our LED backlights are now used in a number of luxury cars. Street lights are another example but it is difficult to project what kind of technological innovations will be made in the future or whether there will be any at all. We just have to try and think outside the box in order to expand the scope of the business. That's why we don't have any exact market share target figure for LED backlights. We want to remain the first brand that pops into customers' minds when they think thin LED backlights.

In reference to slide 23, how much of that market share is made up of thin smartphones, including those priced 400 dollars and up and those under 400 dollars, and what will it be in the future?

Among smartphones priced 400 dollars or more and those under 400 dollars, Chinese manufacturers' models priced under 400 dollars are growing at a faster rate. When we say high-end products, we don't mean higher-priced models but thinner models. There is no doubt that we have a 70% share of that market. Unfortunately you can't see that in the data shown on this slide.
Our share of the overall smartphone market is a little less than 30%. (Note: Although we said it was "around 12%" during the investor meeting, to be more precise it is a little less than 30%.)

Looking at technological advancements, do you expect the technology to become more mature beginning next year and onward?

The smartphone industry will hit its limit if it only pursues making smartphones thinner. Manufacturers must look at ways to bring technological innovations to life if they want to survive in this competitive market. We are preparing ourselves to be ready to meet their needs no matter what they may be.

Can you give us some details about the additional 16.3 billion yen capital investment in your LED backlight business? Is it aimed at enhancing efficiency? I suppose you will continue to depreciate the value of equipment over a two-year period, but will there be a change in profitability between this and next fiscal year? Also, if you achieve 20% sales growth and 150 billion yen in sales next fiscal year, will profitability rise?

Of course we must work to improve profitability, but since everything hasn't been finalized yet and because we have a confidentiality agreement, I can't go into specifics about the investment in next year's models at this time.

How much do you think the LED backlight market will change? You've been cautiously making further investments in light of market trends with an eye to avoiding any harm to your operations, why did you decide to change course and drastically increase investments?

We want to be able to increase our market share, boost production volume, and be ready for the increasingly sophisticated product functions to come.

Let me play devil's advocate and ask if you aren't playing into the hands of your customers who are getting you to boost production capacity now so you'll lower prices later?

As a primary supplier, we do consult with our customers to see if a machine will meet their needs before hammering out our LED backlight investment strategy, but you don't have to worry about anyone getting the upper hand over us. Besides no other manufacturer makes them as well as we do.

I heard that your competitor is likely to strike a deal with a major customer next year. Will you still maintain the same competitive edge in technology and market share? Do you foresee any risk?

Given the growth rate and the size of the thin LED backlight market, there's no need to worry about that now.

You said profitability in your motor business has risen. Can you tell us more about that? Will this upward trend continue from the second fiscal half to next year?

Profitability is up for all motor products. Moatech is the only business running in the red now. Vibration motors, DC brush motors, and HDD spindle motors were the primary source of deficits. We have already withdrawn from the vibration motor business. Aiming to boost DC brush motor sales, we focused on marketing our signature small, high torque S-type motors and ended up reaping added value. Now HDD spindle motors, for mainly high-end products, are also helping to drive profits up. We've seen a complete transformation of the business landscape across these three areas.

LED backlight sales are growing, and the overall gross profit margin has not declined. Do you expect your current gross profit margin, standing at around 25%, to rise or fall as LED backlight sales increase?

It is basically expected to rise since shipments will increase. When it comes to LED backlights, we make new models before we are asked to cut prices. Production normally drops after it peaks to meet the surge in demand ahead of Christmas. Lately, however, we've seen strong demand from Chinese manufactures, which will keep sales up during the January-March period when demand is driven by the Chinese New Year holiday.

You expect a huge jump in depreciation and amortization costs from 12.1 billion yen in the first half to 16.1 billion yen in the second half. Will you really be able to maintain the gross profit margin? What's behind this hike in depreciation and amortization costs?

LED backlights will be the big factor behind the increase, but at the same time we expect their sales to rise as well. If sales for the whole year reach 125 billion yen, they will go a long way toward absorbing fixed costs. Although depreciation and amortization costs will rise, fixed costs will account for a smaller ratio in comparison.

Why did SG&A expenses increase in the second quarter? Adjustments, totaling 2.7 billion yen, were well over what they were in the first quarter. What does the second half hold?

Among SG&A expenses, packing and transportation expenses rose the most. The percentage ratio to net sales steadily dropped and is now hovering around 12%. It is expected to remain the same throughout the fiscal year.

The 1.8 billion yen increase in ball bearing-related investments is less than the amount to be invested in LED backlights. Does this mean the greater emphasis you had placed on ball bearings over LED backlights in May has waned? Can you tell us about the current strategic position for ball bearings and how the amount you've invested measures up to that?

Ball bearings are our mainstay business. Naturally we never downgrade its position in our operations. Compared with the large investment we will make in LED backlights, the 1.8 billion yen investment may seem small, but you have to keep it in perspective. We did everything possible to maximize efficiency with a minimum investment, and the result was 1.8 billion yen. We will steadily increase production capacity for ball bearings while adjusting work shifts and working days.

How is your ball bearing business competing in the market?

I think we are ahead of the game since we are shipping more ball bearings. It seems that the competitive spirit within the company creates synergy. The machined components business doesn't want to be outdone by LED backlights and that serves to drive performance up. While we were aiming to hit the targets of our Five Arrows strategy within three years, we are likely to achieve our ball bearing business targets next year. That's mainly because we are so far ahead of the pack.

You decided to make investments that would strengthen operations and your performance is up. It looks like the wind is at your back. As a corporate manager, what do you see as the biggest risk right now?

As I always say, the biggest risk of all would be a drastic change in the global economy. The foundational strength of our manufacturing division is just extraordinary as demonstrated by the launch of our mass production system for LED backlights. None of our competitors have done anything like that. Still what I fear most is a sudden change that could impact the entire world, like the Ebola virus outbreak. I believe we are moving in the right direction but things could change and we might find ourselves fighting against the wind. Our strategy to bolster our business foundation is not based on boosting production capacity but rather on strictly enhancing per-capita productivity so we are prepared to make workforce reductions. Barring no major economic changes, our business will grow stronger and we'll keep our focus on shoring up any weaknesses we have.

Could you tell us what the monthly ball bearing sales volumes for external customers and internal use were for September as well as the estimated sales volumes for October, November, and December? Would you also talk about your view on the macroeconomic environment since some people see ball bearings as a leading indicator of the global economy?

The ball bearing sales volume for September totaled 242 million units, including 151 million units in external sales and 91 million units in internal sales. Sales are projected to total 242 million units in October, with 148 million units to be sold externally and 94 million units to be sold internally. We expect external sales to remain flat in November and reach 138 million units in December. Internal sales will total 90 million units in November and 89 million units in December.
There are some negative factors to weigh, like the decline of the U.S. stock market a few months ago and the still-lagging European economy. However, we don't expect any major downshift in the production of automobiles, smartphones, or aircraft, which currently constitute our "holy trinity." If a downturn were to occur sometime in the future, it might impact the office automation equipment and industrial machinery industries. Currently, orders are steadily flowing in from machine tool manufacturers, and there is no indication that it will suddenly fall off. Many machine tool manufacturers are confident about their performance for the coming year. Those specializing in our "holy trinity" areas, like smartphone manufacturers, are especially confident. Although demand may dip slightly, the markets have been growing by leaps and bounds and are likely to remain up until March.

Since your performance is up, you are expected to generate a substantial free cash flow. Can you tell us as much as you can about how far you plan to reduce interest-bearing debt?

We don't have a target for interest-bearing debt. That's because we are always on the lookout for good M&A opportunities. Net interest-bearing debt is currently 105.3 billion yen and the debt-to-equity ratio is at a healthy level. Once the net interest-bearing debt drops below 100 billion yen, liabilities will no longer be a burden.

The Cambodian plant will be fully occupied after you have boosted the production capacity and the logistics center in Banwha will be converted to a production plant. That means the new ball bearing factory in Bang Pa-in will be the only facility with extra space. Isn't it about time you started looking for the next plant site or is that already in the works?

We are looking into various options. It won't be Thailand because after employing more than 35,000 people there we find it difficult to find more local hires. The Cambodian plant has a 100,000-square-meter open lot right next door. We are currently looking into the possibility of building a facility on that site which will be larger than the plant we have now. As you pointed out, looking into the next site will be one of our priority tasks. That's all I can tell you about it today.

Can you breakdown your full-year sales targets for machined components as well as electronic devices and components?

Our sales targets for this year are 83.0 billion yen for ball bearings, 29.1 billion yen for rod-end fasteners, and 35.8 billion yen for pivot assemblies. Sales targets for electronic devices and components are 144.6 billion yen for motors, 148.8 billion yen for electronic devices, 11.4 billion yen for measuring components, and 5.2 billion yen for other products.

What is the composition of ball bearing sales by application?

Out of total ball bearing sales for the first fiscal half, automobiles accounted for 17%, aircraft 29%, home appliances 4%, office automation equipment 6%, personal computers and peripheral equipment 3%, motors 17%, and other applications 25%.

You said that hybrid component sales are improving. How about profits?

Although it's not a financial accounting figure, combined sales of hybrid components are expected to exceed 50 billion yen. Since they are spread across our various business segments, calculating the profit total isn't that straightforward.

Profitability for rod-ends seems to be rising. Will the average operating margin for the machined components segment go up as well? If so, how and when will you make that happen?

The fifth arrow of our Five Arrows strategy is aircraft components, and we will pull together to create the necessary synergy. We reorganized the rod-end business by integrating our organizations around the world into one. Since rod-ends are the kind of product that has a long lead time, it will be some time until we can realize any significant synergy. At the same time we are working with our Thai, U.S., and U.K. plants to cut costs further and improve profitability.

What were second quarter sales for the LED backlight business alone and what will they be in the third quarter?

LED backlight sales for the second quarter totaled 32.7 billion yen and are projected to reach 43 billion yen in the third quarter. Since our October sales figure of 15.4 billion yen was higher than what it was in September, third quarter sales may exceed our projection.

You once told us that your annual production capacity for LED backlights is 100 billion yen. What will it be at the end of this fiscal year and the end of the next fiscal year?
Given that October sales reached 15.4 billion yen, annual sales will exceed your 100 billion yen production capacity. How will you manage that?

LED backlight sales for this fiscal year are expected to reach 125 billion yen. That's almost double last year's sales total. The latest monthly sales figure is similar. Sales will increase by 20% next year. That's all I can say about that now except that you'll have to wait until May for more details. We've recently seen a big bump in our production capacity due to the implementation of automated equipment as well as improved yields and although it wasn't easy getting mass production off the ground, our employees' overall skill level has also improved a lot.

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