Q&A
Latest Update : Mar.2, 2017
Back to Financial Results (FY3/2017)
Investor Conference Call for 3Q FY 3/2017 held on February 13, 2017
* Some parts have been added and modified to make them easier to understand.
Question
- Can you tell us which areas you focused on when writing down inventory and accounting for impairment losses at MITSUMI ELECTRIC? Can MITSUMI maintain its 2-billion-yen operating income target beyond this March quarter? Should we just assume that ongoing production of new game consoles will keep operating income up in the first quarter of next fiscal year and onward?
- LED backlight sales will probably drop in the March quarter as they usually do. Although I don't expect sales to decrease as much as they did last year, how much do you think they will fall? Secondly, why did you make a downward revision to the operating income forecast for the electronic devices and components segment while making an upward revision to the annual sales forecast?
- Didn't you revise the full-year operating income forecast for the electronic devices and components segment downward from the previous forecast, which was released after you announced the financial results for the September quarter?
- Does that mean you expect to have difficulty making LED backlights for this year's models or you don't expect profits to rise despite growing sales? Or are you simply being cautious? Why did you make a downward revision even though operating income for the December quarter exceeded your projection?
- Let me ask you about the number of shares. While you announced a buyback of 12 million shares today, can I assume the number of issued and outstanding shares to be 426 million, not including the treasury shares noted in the announcement?
- We were informed that in accounting for MITSUMI's March quarter results, only the balance sheet would be consolidated, not the profit and loss statement, but the revised forecast includes figures for MITSUMI. Why did you change your mind?
- Can you tell us about your outlook for ball bearing sales in the March quarter and onward, including internal sales? How long will your increased production capacity continue to meet your needs? Could it be one or two years, or will production reach full capacity sooner than that?
- Did you make upward revisions because you expect to see a positive effect from better ball bearing capacity utilization as a result of keeping production up in order to increase inventory?
- Can I assume that, while quarterly production and sales of ball bearings will gradually edge up until half way through the next fiscal year when you'll start to see the positive effects of the increased production capacity, they won't really take off for at least six months or so because of the limited production capacity?
- Can you tell us how production of new game consoles will affect your bottom line? You said earlier that you can expect to make a steady profit, but there should be a big seasonal factor, differing from the seasonal factor affecting the LED backlight business. Should I assume that production will remain stable throughout the year or not?
- According to your March quarter forecast, the MITSUMI business will generate 36 billion yen in sales and 2 billion yen in operating income and these figures are all post January 27. What would the figures be if MITSUMI's results were consolidated for all three months?
- MITSUMI's operating income for the December quarter was 3 billion yen, excluding inventory write-downs. This is a significant improvement from the 1.5-billion-yen operating loss posted in the September quarter. Which product was the primary profit driver? Also, what kind of business assistance helped turn MITSUMI operations around?
- When looking at your performance for the next fiscal year, I assume that it will be largely affected by better productivity for MITSUMI camera actuators and a change in Minebea LED backlight sales. What's your take on this?
- MITSUMI turned its operations around in the December quarter and will generate 2 billion yen in operating income in the latter two months of the March quarter. Can I assume that the improved camera actuator business is one of the factors behind this turnaround?
- MITSUMI operations saw a significant jump in profits from the September quarter to the December quarter. Would you give us the breakdown of costs that had a positive impact?
- You said that you would lower materials costs through joint purchasing and other measures. Have you started seeing the effects of these measures? Also have you been seeing any positive effects on costs due to integrated logistics?
- Are you seeing the same level of improvement in production yield as you've seen in logistics and materials costs?
- Can I assume that inventory write-downs have no positive impact in the December quarter?
- Once you start implementing the selection and concentration strategy in the March quarter, will it change MITSUMI's sales mix in the March quarter forecast?
- Based on the average ball bearing sales volume for the December quarter, it seems that December monthly sales were quite high. Are there any particular factors fueling the demand?
- Have there been any changes to aspects you told us about in previous investor meetings, such as the increasing use of your ball bearing products in automobiles and high-end consumer electronics?
- The operating margin for the machined components segment declined in the September quarter and edged up in the December quarter. Do you expect it to return to somewhere over 26%? Can you also tell us how you are going to improve profitability for ball bearings, whose sales volumes are quite robust, including your strategy for selectively taking orders?
- You estimate that MITSUMI operations will generate about 5 billion yen in operating income next fiscal year. While game consoles have not really been a focus of your business, did they generate more of a profit than you had expected or just as you projected? Or was it asset impairments that made the difference?
- You said that the 5 billion yen plus in operating income from MITSUMI in the next fiscal year is a conservative estimate because you expect the improvement to be better than expected before, even without factoring in new game consoles?
- MITSUMI's inventory increased from 43.6 billion yen at the end of September to 45 billion yen at the end of December despite inventory write-downs. Why is that? Is it due to an increase in products for new game consoles?
- Are they work in process or raw materials? In other words, did the increased inventory affect the profit gained from better capacity utilization?
- Does that mean that it will not have a big impact on your bottom line since the increased inventory is accounted for in your balance sheet but has no added value?
- Was there a particular accounting reason for the impairment losses and inventory write-downs?
- You said that there won't be much change in the LED backlight sales volume forecast for the next fiscal year. Would you tell us more about your outlook for the future, such as whether you see your customer mix changing?
- Your LED backlight market share looks like growing this fiscal year. Is that right?
- With regard to your future strategies for MITSUMI, you said previously that its manufacturing sites had excess capacity. What are your plans for that?
- Could you tell us what the monthly internal and external sales volumes as well as production volumes for ball bearings were for October through December along with pivot assembly sales volumes?
Question and Answer
- Can you tell us which areas you focused on when writing down inventory and accounting for impairment losses at MITSUMI ELECTRIC? Can MITSUMI maintain its 2-billion-yen operating income target beyond this March quarter? Should we just assume that ongoing production of new game consoles will keep operating income up in the first quarter of next fiscal year and onward?
- The MITSUMI inventory write-downs happened in light of a strict re-evaluation of its overall inventory. Optical devices such as OIS and VCM for smartphone camera actuators accounted for a large part of those write-downs. We worked on the impairment of assets across the board and the bulk of impairment losses came also from the optical device-related business.
Since announcing the business integration with MITSUMI, I have set our sights on generating 5 billion yen per year in operating income, or 400 million yen in several different months during the first year. Will we be able to continually hit this target? I can tell you now that we are able to reach that target over the course of a year. I'll give you more details about that at the investor meeting to be held in May. I expect operating income for MITSUMI operations to reach at least 5 billion yen, and that's a conservative estimate.
- LED backlight sales will probably drop in the March quarter as they usually do. Although I don't expect sales to decrease as much as they did last year, how much do you think they will fall? Secondly, why did you make a downward revision to the operating income forecast for the electronic devices and components segment while making an upward revision to the annual sales forecast?
- While year-on-year appreciation of the yen is factored into the LED backlight sales forecast for the March quarter, we expect a slight year-on-year increase in sales.
- Didn't you revise the full-year operating income forecast for the electronic devices and components segment downward from the previous forecast, which was released after you announced the financial results for the September quarter?
- We took a hard look at profit projections mainly for electronic devices such as sensing devices and LED backlights.
- Does that mean you expect to have difficulty making LED backlights for this year's models or you don't expect profits to rise despite growing sales? Or are you simply being cautious? Why did you make a downward revision even though operating income for the December quarter exceeded your projection?
- We are being cautious and kept our estimate on the conservative side in light of the difference between the production volume and inventory due to inventory adjustments in the March quarter.
- Let me ask you about the number of shares. While you announced a buyback of 12 million shares today, can I assume the number of issued and outstanding shares to be 426 million, not including the treasury shares noted in the announcement?
- None of the calculations for per-share figures we have announced factored in treasury shares. Although we haven't decided on any specific measures, such as whether or not to cancel the shares we will buy back, we will continue to exclude treasury shares from profit per share or other per-share figure announcements.
- We were informed that in accounting for MITSUMI's March quarter results, only the balance sheet would be consolidated, not the profit and loss statement, but the revised forecast includes figures for MITSUMI. Why did you change your mind?
- We did that simply for technical reasons. The main thing to note is that MITSUMI's performance was better than expected and will help bring profits for the March quarter up on a consolidated basis.
- Can you tell us about your outlook for ball bearing sales in the March quarter and onward, including internal sales? How long will your increased production capacity continue to meet your needs? Could it be one or two years, or will production reach full capacity sooner than that?
- Since we haven't installed equipment yet, we can't boost production beginning next month. We should be able to gradually increase production from the end of the September quarter of the next fiscal year. We are a seeing strong demand from external customers in the March quarter and are actually facing the problem of not being able to meet that demand, so the sales volume is expected to drop slightly below what it was for the December quarter. We will probably have to cut the internal sales volume back a little from what it was in the December quarter.
- Did you make upward revisions because you expect to see a positive effect from better ball bearing capacity utilization as a result of keeping production up in order to increase inventory?
- Production doesn't usually increase much between late January and February because of the Chinese New Year holidays as well as the fewer number of days in February. So we're going to put a limit on orders.
- Can I assume that, while quarterly production and sales of ball bearings will gradually edge up until half way through the next fiscal year when you'll start to see the positive effects of the increased production capacity, they won't really take off for at least six months or so because of the limited production capacity?
- Yes.
- Can you tell us how production of new game consoles will affect your bottom line? You said earlier that you can expect to make a steady profit, but there should be a big seasonal factor, differing from the seasonal factor affecting the LED backlight business. Should I assume that production will remain stable throughout the year or not?
- There's nothing we can do about seasonal demand for game consoles. Demand is sure to rise when the launch date draws near. Honestly, I can't really say that sales will remain stable throughout the year. There will probably be ups and downs. Now that we are expanding our operations, we are in a generally favorable situation where our various business operations offset each other's ups and downs.
- According to your March quarter forecast, the MITSUMI business will generate 36 billion yen in sales and 2 billion yen in operating income and these figures are all post January 27. What would the figures be if MITSUMI's results were consolidated for all three months?
- Although January results will not be consolidated, we have the actual figures for January since the announcement of financial results was postponed. I'll give you an internal managerial figure that does not exclude unrealized gains and others for your own reference. Operating income for the two companies combined reached almost 7 billion yen. I hope this gives you some idea.
- MITSUMI's operating income for the December quarter was 3 billion yen, excluding inventory write-downs. This is a significant improvement from the 1.5-billion-yen operating loss posted in the September quarter. Which product was the primary profit driver? Also, what kind of business assistance helped turn MITSUMI operations around?
- We implemented various measures to boost performance and provided extensive support, including help to enhance productivity. Besides that, I see that overall employee enthusiasm about boosting profits has dramatically changed, which should explain why MITSUMI's performance is improving. As we carefully sow the seeds of new ideas and practices at MITSUMI, I can see the Minebea way of doing business gradually taking root.
- When looking at your performance for the next fiscal year, I assume that it will be largely affected by better productivity for MITSUMI camera actuators and a change in Minebea LED backlight sales. What's your take on this?
- Since July I have made monthly visits to the Cebu plant in the Philippines where the optical devices for camera actuators are made and, as I mentioned earlier, have seen positive changes in the shop floor. I've been told that demand will continue to grow, and we are gearing up to meet that demand, so I'm not that concerned. They should yield a profit next fiscal year.
According to the latest estimates, demand for LED backlights won't drop so much next fiscal year, but, to be honest, production yield was not very good this fiscal year. Things didn't go as we had planned due to the strict product tolerance requirements, and we will take it as a lesson for next fiscal year as we work to generate profits even if production volumes decline. As of today we don't expect any substantial drop in quantity next fiscal year. For now I expect that next fiscal year we should be able to generate the same kind of profit as usual or on par with this fiscal year. I'll talk more about it in May if anything comes up.
- MITSUMI turned its operations around in the December quarter and will generate 2 billion yen in operating income in the latter two months of the March quarter. Can I assume that the improved camera actuator business is one of the factors behind this turnaround?
- There are many factors, including new game consoles. Since we looked at asset impairment with a focus on optical devices, performance should eventually improve in this area as well. One thing for certain is that sales of optical devices will bottom out in February and March as usual, so while we expect they will generate a profit, it won't be that big.
- MITSUMI operations saw a significant jump in profits from the September quarter to the December quarter. Would you give us the breakdown of costs that had a positive impact?
- Materials costs fell as did logistics costs while productivity increased. In announcing our financial results today, we included financial results for MITSUMI prior to the business integration under the category "MITSUMI business" in order to make everything crystal clear. However, we decided not to provide details of the cost analysis in order to protect our common shareholders' interests. So I can't say any more.
- You said that you would lower materials costs through joint purchasing and other measures. Have you started seeing the effects of these measures? Also have you been seeing any positive effects on costs due to integrated logistics?
- After taking a close look at all our business and customer locations, we consolidated specific logistics operations at either Minebea or MITSUMI wherever the costs were lower. We also consolidated purchasing of the same products through joint purchasing at whichever site they cost less. Since the business integration has made us a company generating more than 700 billion yen in sales, our suppliers have greater expectations and have given us better deals.
- Are you seeing the same level of improvement in production yield as you've seen in logistics and materials costs?
- It varies depending on the product. I'll give you more details in May.
- Can I assume that inventory write-downs have no positive impact in the December quarter?
- Yes, you can. Since our inventory valuation has been greatly affected by currency fluctuations, the inventory write-downs should have some positive effect from now on. They are not the direct cause of the recent improved performance, though.
- Once you start implementing the selection and concentration strategy in the March quarter, will it change MITSUMI's sales mix in the March quarter forecast?
- I'll give you more details in May, but I'd say that MITSUMI has an excellent product portfolio. It's like a fine meal that tastes better with every bite. While we will eventually downsize product lines with low profit margins, right now we are putting that on hold as we reap the positive effects of the various improvement measures, which I mentioned earlier.
- Based on the average ball bearing sales volume for the December quarter, it seems that December monthly sales were quite high. Are there any particular factors fueling the demand?
- Ball bearing sales have been very healthy. External sales for the month of December were outstanding at nearly 180 million units. The upward trend looks like it will continue and I'm afraid that we may run out of stock. That's why I decided to give the go-ahead for capital investments.
- Have there been any changes to aspects you told us about in previous investor meetings, such as the increasing use of your ball bearing products in automobiles and high-end consumer electronics?
- Things are the same. It's not that there are new applications, but rather that sales in the automobile market are steadily increasing while demand for our high-end ball bearings is rising, and we must meet the demand.
- The operating margin for the machined components segment declined in the September quarter and edged up in the December quarter. Do you expect it to return to somewhere over 26%? Can you also tell us how you are going to improve profitability for ball bearings, whose sales volumes are quite robust, including your strategy for selectively taking orders?
- Since we must work to improve profitability, we started to be selective about taking orders. We are asking our customers to cut back on orders for low-priced products. Since the inauguration of President Trump, the yen is getting even weaker, steadily bringing ball bearing prices up. While the sales volume dropped in January due to the Chinese New Year holidays, we have to wait and see how things go since prices are rising. Although it will take time, I'm sure we will be able to improve productivity. We can't stop our customers' production lines.
- You estimate that MITSUMI operations will generate about 5 billion yen in operating income next fiscal year. While game consoles have not really been a focus of your business, did they generate more of a profit than you had expected or just as you projected? Or was it asset impairments that made the difference?
- I myself had never really considered taking a close look at game consoles and you too, I'm sure, must have had some reservations about their profitability. When I took a closer look, however, I found that game consoles employ a wide range of technologies, and MITSUMI possesses those technologies. It was an interesting discovery that opened the door to different business opportunities and game consoles pointed the way. I now have a totally different idea about game consoles. That goes for semiconductors as well and I'll talk about it in more detail this May.
- You said that the 5 billion yen plus in operating income from MITSUMI in the next fiscal year is a conservative estimate because you expect the improvement to be better than expected before, even without factoring in new game consoles?
- Basically yes. I think it's too soon to give you details today because I don't want to mislead you, but you know me. I'm actually aiming higher.
- MITSUMI's inventory increased from 43.6 billion yen at the end of September to 45 billion yen at the end of December despite inventory write-downs. Why is that? Is it due to an increase in products for new game consoles?
- They increased their inventory of products for new game consoles in December quarter. Shipments of these products will begin in March quarter.
- Are they work in process or raw materials? In other words, did the increased inventory affect the profit gained from better capacity utilization?
- MITSUMI stocked up supplied parts by charge in preparation for the shipments that will begin in March quarter.
- Does that mean that it will not have a big impact on your bottom line since the increased inventory is accounted for in your balance sheet but has no added value?
- That's true for the current portion of the increase.
- Was there a particular accounting reason for the impairment losses and inventory write-downs?
- There hasn't been any change in accounting criteria. They are simply a result of their thorough re-evaluation of inventory and assets ahead of the business integration. They looked at everything from all angles, including potential orders, and that's the result they got.
- You said that there won't be much change in the LED backlight sales volume forecast for the next fiscal year. Would you tell us more about your outlook for the future, such as whether you see your customer mix changing?
- That's our outlook as of today. It's too early to talk about next fiscal year now but I'll give you more details in May. We are getting a number of inquiries from Chinese customers and expect orders to increase although there will be some changes in the mix.
- Your LED backlight market share looks like growing this fiscal year. Is that right?
- Yes, it's just as you see it.
- With regard to your future strategies for MITSUMI, you said previously that its manufacturing sites had excess capacity. What are your plans for that?
- We just finished implementing urgent assistance measures to improve its performance. What we are doing now is focusing on identifying products to develop in the future, how we should develop them, how we should enter their markets, and how we should improve them. MITSUMI's management team and I recently got together for a two-day conference to discuss these areas. Once we have identified them, we can move on to determine what to do with MITSUMI's manufacturing sites. That will be the third step. We should have some extra capacity and space as usual. We must carefully assess the situation since the inauguration of the new U.S. president has given rise to the possibility of trade friction. We should take the slow and steady path to solving manufacturing site issues and you can take that as a sign that we now have the breathing room that allows us to do that.
- Could you tell us what the monthly internal and external sales volumes as well as production volumes for ball bearings were for October through December along with pivot assembly sales volumes?
- External sales, internal sales, and production volumes for October were 177 million units, 79 million units, and 245 million units respectively. External sales, internal sales, and production volumes for November were 180 million units, 85 million units, and 256 million units respectively. External sales, internal sales, and production volumes for December were 180 million units, 80 million units, and 250 million units respectively. Pivot assembly sales volumes totaled 31 million units for October, 32 million units for November, and 30 million units for December.