Q&A

Back to Financial Results (FY3/2015)

Investor Meeting Presentation for FY 3/2015 held on May 8, 2015

Question and Answer

Your outlook for Electronic Devices revenue this fiscal year is a very large planned increase from 170 billion to 273.8 billion yen. That includes the "smartphone-related assembly business", but what is the breakdown between those revenues and the increase in existing LED backlight sales? Also, on the subject of the margins of the new assembled part, if this is a case of buying in the parts and adding a little bit to the price, would it be correct to assume that the margins are not very high?

These are approximate figures, but of the roughly 100 billion yen increase in Electronic Devices, the new assembled part is about 50 billion yen and the contribution from the growth in the existing LED backlight business is about 50 billion yen. There isn't much added value in the assembled part.

My understanding is that the capital expenditures for the assembled part are being made to secure orders for other Minebea products. Is this what allows you to differentiate yourselves so overwhelmingly from Asian competitors? Also, will this type of new business spread to customers other than this one large customer, or is it specific to this one account? Please give us some more color on what kind of differentiator this assembled part could become in future.

We're confident that Minebea's assembled part uses more efficient automation equipment for assembly than anybody else. Whether this will spread to other smartphone manufacturers is not clear at this point. Unfortunately we have a confidentiality agreement, so all we can say is that this manufacturing and assembly is a request from a specific customer.

On the subject of this fiscal year's guidance for profits in the Electronic Devices and Components business segment, operating income is scheduled to roughly double in the second half compared to the first half, a much bigger rate of increase than in sales. I can see that there may also be seasonal effects in the existing LED backlight operations but, aside from LED backlights, can you give us some insight into what is contributing to this big second-half increase in profits compared to the first half?

The revenues from the smartphone-related assembly business kick in from June onwards. The peak will be in the third quarter, at which point the Electronic Device and Components revenues will surge, but it's the low value-added sales that will increase, so we're not expecting operating income in the second half to grow as rapidly as it did last fiscal year. Sales for the existing LED backlight operations have been quiet in the April to June quarter, but we're manufacturing more than last year. We're assuming that sales will describe the same sort of growth curve this year as they did last year, so we expect this to be a major contributor to the increase in operating income in the second half just as it was last year. Also, we expect the synergies from Sartorius Mechatronics T&H GmbH and others to start coming through little by little in the latter half of the year, which is why we forecast operating income to be higher in the second half than in the first.

On the subject of a new ball bearing factory, you can handle external shipments of up 180 million units per month on average with existing facilities. Am I right to understand that, given the risk to the business of using the existing factories at full capacity, you will make an early decision on the construction?

It's true that we set a target of average external shipments of 180 million units per month. However, while we should soon see external shipments of 160 million units on a single-month basis, we assume that the sales volumes of HDD pivot assemblies, which are the main driver of internal shipments, will decline gradually. That is to say, whether or not that means we will immediately be at full capacity when we hit an average of 180 million in external monthly shipments is something we will consider over the next three years while in the meantime we get on with the construction plan of the new ball bearing factory without delay. Our thinking is that we need to get a grasp on this trend by the end of this year.

If pivot assemblies don't decline, would you have no choice but to make an early decision?

That's what we believe.

Should we take it that Cambodia No.3 factory will not be a ball bearing facility?

That is correct.

In terms of candidate locations for the next factory, will you expand the Thailand facilities further or will you look outside Thailand?

There's no doubt that it will be outside Thailand. It's 99% certain that we will not be increasing ball bearing capacity in Thailand.

If the next factory is outside Thailand, that would be an entirely new facility, so should we take it to mean that it will be a large-scale investment?

The land for our most recent ball bearing factory had already been purchased, but in the end we will have spent about 35 billion yen on that facility with full capacity. If the next factory we build is similar in scale, we think it will require a similar investment.

This plan for 70 billion yen in aircraft component sales is a pretty aggressive figure when you compare it to the rate of growth in the market as a whole. Is your strategy to cut manufacturing costs and to take market share, or are you considering M&As as you did in the measuring equipment business?

This is quite a challenge, but we would like to reduce our costs and actively take market share. Our view is that many of our competitors are US companies with cost structures that are definitely higher than ours, in addition to which we have the geographical advantage. Looking at the other machined component businesses, this is about the only area where the competitors are US companies and where we are, perhaps not actually losing, but fighting on no better than equal terms. We want to fundamentally rethink our approach and then aggressively take share.

Are the revenues from the smartphone-related assembly business not included in the April to June quarter sales plan of 131.7 billion yen?

We expect a meaningful contribution from July onwards. The April to June quarter will continue to include production for the previous models, but there will be almost nothing for the new models.

Looking at slide 41 and the four factors pushing up profits in FY March 2016, are LED backlights included in the "5% growth in existing operations" factor?

No they are not. They are in the fourth item, "Significant increase in LED backlights".

So in other words, sales in divisions other than LED backlights will grow by 5%, Sartorius Mechatronics T&H GmbH will be an additional 12 billion - 13 billion yen, traditional type LED backlights will rise by 50 billion yen and assembly will increase by 50 billion yen, on top of which you have the impact of foreign exchange rates. Is that the right way to look at it?

Yes, something like that.

When making the assembled part, I think that at some stage it will probably be necessary to do some kind of lamination. My hypothesis is that tape lamination technology is not an area of special expertise for Minebea. What will happen in future if your technology for the assembled part is found to be inadequate?

At this stage there is no such issue whatsoever. The production line is operated by ourselves in consultation with the customer, and there has been no problem of the kind you describe. As for what might happen going forward, I think that is a discussion for the future.

For the assembled part, I assume that you will be buying in more parts from outside the company. How should we interpret the risk of these bought-in parts causing lower yields?

I cannot give details, but the customer and ourselves will decide on the price setting method.

Is there not an element of conservatism in your earnings forecasts to reflect the risk that yields will worsen?

No, there is not.

Does the contract specify some kind of guarantee?

Unless there is some kind of exceptional event we should be all right.

Given that the assembled part is hardly included at all in the 131.7 billion yen sales forecast for the first quarter of this fiscal year, isn't the operating income forecast for the first quarter too low? Specifically, while sales are expected to fall by 7 billion yen from the 138.7 billion yen in revenues posted in the fourth quarter of the previous fiscal year, will operating income really fall by 5 billion yen, from the 16.3 billion yen of the fourth quarter of the previous term to 12 billion yen?

Of course, until we try we won't know, but I think that the guidance of 12 billion yen for the first quarter of this fiscal year is somewhat conservative.

It ends about main text.

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