Q&A

Back to Financial Results (FY3/2016)

Investor Conference Call for 1Q FY 3/2016 held on July 31, 2015

Question and Answer

You said that the upwardly revised forecast reflects higher-than-plan first quarter profits added to the first half projections. Where are the higher Electronic Devices and Components profits coming from?

Electronic Devices and Components profits were higher than original projection, but only slightly and one of the reasons for that was a lower sales and profits for HDD spindle motors compared to the original projection. Since this drop was offset by the smaller than expected decline in profits for LED backlights, the Electronic Devices and Components business wound up generating a decent profit. Still we would have seen better results under more normal circumstances.

You have enjoyed robust ball bearing sales but if we look at the macroeconomic environment, we see that automobile and air conditioner makers are cutting back production. What is your outlook for ball bearing sales? How will this production cutback affect your ball bearing sales for July-September and onward?

While we have been made aware of this trend in the automobile and air conditioner markets, sales of ball bearings for air conditioner applications have already peaked out due to seasonality. When it comes to the automobile market, we are seeing steady orders for our ball bearings in Europe, China, and the U.S. Right now we don't see any factors that will cause ball bearing sales to drop drastically. We expect sales to remain steady for July-September although second quarter sales are likely to be affected by summer vacation in Europe and the U.S.

Should we worry about how pivot assemblies will affect ball bearing production?

There will be some impact. Since pivot assembly sales and production are declining, internal ball bearing sales are falling. This has caused the production volume to fall off slightly. The lower production volume unfortunately means higher production costs per unit, but this increase should be offset by foreign exchange gains since the weak Thai baht has been keeping sales on a dollar basis up.

According to your revised forecast, the Machined Components business will net out with a substantial increase in profits for the second quarter. Now that first quarter operating income has reached 10 billion yen, is 11.3 billion yen in operating income for the second quarter within reach?

I have a feeling that it will dip slightly compared to the plan, but Electronic Devices and Components should offset the shortfall.

Can you talk about April-June LED backlight sales as well as the projection for the July-September period? Could you also tell us what kind of a profit you are making and update us on production yields?

Basically things are going well. The only drawback is the fact that Chinese smartphone manufacturers are cutting back on production. Major smartphone manufacture, however, is doing very well and their operations should start picking up some steam. Now that our production lines for their new models are fully ready, sales should increase substantially every month from July to September.

Are you beginning to see the new model launch reflected in your bottom line?

Yes, it's coming into focus. Although we had a hard time boosting yields, in late June we started to see LED backlight yields for major customers improve on a daily basis.

The operating income forecast for Electronic Devices and Components has been upped by about 500 million yen. Will operating income for the second quarter and onward remain as initially projected?

It should be much higher than initially projected. The loss from the waning HDD spindle motor business in the first quarter was completely offset by the measuring components business, where performance was upbeat due to the acquisition of Sartorius Mechatronics T&H, as well as steady LED backlight sales.

In the Electronic Devices and Components business, you projected LED backlight sales for the April-June period to total 35 billion yen. Did sales reach 35 billion yen with the launch of new products by your major customer?

First quarter sales totaling about 31 billion yen were lower than we had projected. This was due to the delayed production for our major smartphone manufacturers' new models but we expect second quarter sales to skyrocket beginning in July. Our sales figures should really jump, maybe even close to triple.

While you initially projected sales of new assembled part of LED backlight to total 50 billion yen, how has that projection changed? I understand that Minebea will be the sole supplier while your Taiwanese competitor struggles to get production off the ground and was wondering if your market share projections have changed in light of that development.

We don't have a clear market share picture. I can tell you demand is increasing and we are doing everything we can to keep pace. This uptick will be directly reflected in our July-September sales figures. While we project a 50 billion yen increase in sales of new assembled part, it's likely to be higher. We expect to see the parts we make for new assembled part to start paying off. Now that things have changed, we can include both our conventional LED backlight products and new LED backlight assemblies in our profit calculations.

Let's say that second quarter LED backlight sales do reach 90 billion yen, if not triple. How much of that amount will come from new assembled part and how many more will you be selling in comparison to the previous quarter?

Sales won't reach anywhere near 90 billion yen. We just don't know how much these assemblies, which we call housing frames, will add to our top line.

How high will the sales volume go in the July-September period?

The sales volume is projected to increase by 70% in July, 100% in August, and 200% in September over what it was in June.

Are you getting closer to realizing your vision of generating enough earnings?

While the people at our factories are really going the extra mile, this is a very difficult product to make, and we are getting closer but haven't yet achieved our yield target. On the plus side, the harder it is to make the greater our competitive edge will be.

What is your projection for external ball bearing sales volumes for July-September and October-December?

External ball bearing sales totaled 150 million units in April, 151 million units in May, and a record high 160 million units in June. We expect sales to reach somewhere between 153 million and 154 million units in July, 145 million units in August, and somewhere between 155 million and 160 million units in September. The estimates for months up to September are more accurate since the forecasts for October and later are based on projections made at the beginning of the fiscal year.

The growing use of electronics in the automobile industry has buoyed actuator sales. Is this as well as the increasing adoption of small-sized ball bearings what's still fueling demand rather than usual market factors?

While ball bearings used in fan motors for office automation equipment and others used to be the top sellers, sales in the automobile industry over the last two months have leaped to take the top spot in terms of value. Sales in the automobile industry are extremely robust in Europe, the U.S., China, and other Asian markets.

Automobile production generally seems to be stalling. Hasn't this slowdown affected Minebea?

Sales of ball bearings for automobile applications are healthy at least in Europe and the U.S.

How are current LED backlight sales to your customers in China? What are they going to be like for the rest of the fiscal year?

Sales to Chinese smartphone manufacturers are declining. Sales for the April-June period were lower than they were in the January-March period and the trend is expected to continue into the July-September period. According to our sales department's latest forecast, sales should bounce back in October and increase even further in November and December.

I believe Minebea is working on increasing its market share. Are your efforts paying off?

Yes. You may think I'm just trying to put a good face on a bad situation when I say the declining sales to Chinese customers is actually great for us, but I'm being sincere. Right now we're bending over backwards to keep up with demand from our major customers, including getting production lines up and running and hiring people, and we just wouldn't be able to keep pace if sales to Chinese manufacturers were to increase. While it would be great to see sales to other customers pick up, the current balance is just right.

I understand that you were going to boost sales this year by selling more to Chinese customers and selling new assembled products to North American customer. If sales to Chinese customers were to decline and sales to North American customer to increase due to your bigger market share, won't that make sales for this fiscal year end up being flat? Or will the sales increase to North American customer be larger than the decrease in China?

There are seasonal swings in the U.S. as well as China. If the peak seasons of both customers coincided, we wouldn't be able to produce enough products to go around, but the peak seasons usually come a few months apart. In the Western markets demand peaks around Christmas, while in China demand peaks around the Chinese New Year holiday. This slight difference in peak seasons is good for us. If everything goes the same way once again this year, we should be able to make a tidy profit.

How sure are you that sales to Chinese smartphone manufacturers will start climbing in October?

We are not sure. We can't really predict what demand for our customers' final products will be like merely on the basis of our discussions with them.

What is the composition of first quarter ball bearing sales and growth rate by application?

Automobile bearings accounted for 18%, bearings for aerospace applications 33%, bearings for home appliances 4%, bearings for office automation equipment 7%, bearings for personal computers 4%, motor bearings 17%, and other bearings 18%. Sales grew year on year by 22% for automobile applications, 18% for aerospace applications, 20% for home appliance applications, 36% for office automation equipment applications, 35% for personal computer applications, 16% for motor applications, and 14% for other applications. On a quarter-on-quarter basis, sales for automobile applications were down 2%, sales for aerospace applications down 6%, sales for home appliance applications up 16%, sales for office automation equipment applications up 19%, sales for personal computer applications up 25%, sales for motor applications down 7%, and sales for other applications up 13%.

What's driving the surge in personal computer applications?

Since personal computer applications account for only 4% and the sales volume is always small, we can't tell exactly what triggered sales growth there.

What were monthly sales of LED backlights for the first quarter?

Sales totaled 10 billion yen in April, 9.9 billion yen in May, and 11 billion yen in June.

Do you expect sales to start increasing in July?

Yes.

I heard that you received substantial orders from two major Chinese smartphone manufacturers for their fall models. Can we assume that this is one of the factors behind the surge in sales you expect to see this October?

We don't know for sure if they are their fall models but they are likely to be so. We hope production peaks do not overlap between American and Chinese customers.

You said that housing frames will generate a profit because some of their parts are made in house. I remember you saying earlier that these parts wouldn't be profitable even if their sales increased.

We don't believe these parts alone will turn a profit. Since we are not just making those parts, once their production volume increases significantly, fixed costs per unit will decline and profitability for other parts will increase.

Are you talking about parts used in housing frames?

Yes. They are basically injection molded parts.

Do you have sufficient production capacity?

Production capacity is sufficient as of the end of July.

You said at the beginning of the fiscal year that depreciation and amortization costs would start dropping next fiscal year after peaking this fiscal year. Do you still expect depreciation and amortization costs to peak this year?

Our business units expect production will expand further next year, so we may need to make additional capital investments this fiscal year. Since we built a large factory in Ban Wa, Thailand this fiscal year, we made major capital investments there. That's why depreciation and amortization costs will be quite substantial this fiscal year.

Are you going to wait and see how much you'll need to boost ball bearing production capacity given the decline in internal sales of ball bearings?

While external sales of ball bearings are steady, the overall sales volume has not increased due to falling internal sales of ball bearings for pivot assemblies. Working against this backdrop, we will have to find ways to boost efficiency further.

You said that pivot assembly sales would remain downbeat. What were their monthly sales like? Can you give us the monthly sales volumes along with internal ball bearing sales figures?

Pivot assembly sales volumes for the first quarter amounted to 27 million units in April, 27 million units again in May, and 23 million units in June. Production cutbacks in June affected sales significantly, leading to a monthly average sales total of 25 million units for the first quarter. In the second quarter sales should reach 26 million units in July, 28 million units in August, and 27 million units in September, with the monthly average topping the first quarter by 1 million units for a total of 27 million units. As far as pivot assemblies go, profitability should improve in the second quarter. Internal ball bearing sales volumes for the first quarter totaled 81 million units in April, 78 million units in May, and 67 million units in June with the monthly average being 75 million units. Monthly internal sales volumes for the second quarter are projected to reach 70 million units in July, August, and September. Although we are cutting back on pivot assembly production to bring the production volume down below the sales volume, second quarter sales volumes will likely be higher than expected. Once we are done with the production cutbacks, we should be able to increase internal sales volumes starting in October.

Why did you make the revision to your net income forecast higher than the operating income forecast?

The effective income tax rate improved in the first quarter, giving us more net income than we had expected. Since net income increased about 1.8 billion yen, we raised the full-year forecast from 48 billion yen to 50 billion yen after factoring in this increase.

April-June LED backlight sales were lower than initially projected. June sales, in particular, fell below the projected sales figure of 15 billion yen. Did your performance fall short because of the delay in launching production lines for major customer or because of declining sales to Chinese customers?

Both. Although we are primarily responsible for the delay for our major customers, other parts suppliers also share some of the blame.

You said LED backlight parts would turn a profit and initially projected that sales in the existing LED backlight business would grow by 50 billion yen while the new LED backlight assembly business would generate a 50 billion yen increase without any profit margin. Are you now beginning to see the new assembled part business turn a profit?

Since we are making parts in house, the operating rate should rise dramatically. Once the operating rate goes up, per-unit fixed costs will go down along with production costs for other parts. That's why we expect higher profits than originally projected. The 50 billion yen jump in sales from the new assembly business can make that happen.

Do you expect the effective income tax rate to remain as low as it was in the first quarter for the rest of the fiscal year?

Ordinary income was higher than operating income in the first quarter, which improved income before income taxes. While we had originally projected that the effective income tax rate would be around 25%, it turned out to be slightly better at 22.3%. We expect it to remain around 25% for the rest of the fiscal year. If the effective income tax rate continues to improve, it will have a favorable effect on our net income.

How much of an impact do you believe foreign exchange fluctuations will have on your performance for the first and second quarters?

We haven't come up with exact figures for foreign exchange gains or losses for the second quarter yet. In light of the current foreign exchange market, it is expected to have a positive impact. It definitely won't have any negative impact.

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