Q&A

Back to Financial Results (FY3/2017)

Investor Meeting Presentation for FY 3/2017 held on May 9, 2017

Question and Answer

In reference to page 34, you mentioned that, even though LED backlight sales would decline, you will work to keep profits up. Profits for the electronic devices and components business don't seem to have grown that much despite increasing motor sales. Based on the first half of the presentation, I assume that you expect HDD spindle motor earnings to drop or that the additional 9-billion-yen in revenue from Mitsumi motor sales you'll get beginning this fiscal year won't add that much to your profits column. Can you give us a detailed breakdown of profits? Even though sales of motors for automotive applications will actually increase, it doesn't look like motors will contribute that much to the projected 22-billion-yen in operating income for the entire electronic devices and components business.

The motor business does help keep profits up. Although I cannot give you exact profit figures for the business segment, including LED backlights and sensing devices, it's true that the 9 billion yen from Mitsumi motor sales doesn't do much to boost profits, but they eventually will. We were unable to improve the Mitsumi motor and power supply businesses before the business integration due to anti-trust issues, and that's why we've gotten off to a slow start.

Do you expect profits for HDD spindle motors to significantly drop as well?

No.

Do you project profits for LED backlights to fall rather than remain flat?

It appears as if they will dip somewhat. So they won't remain exactly flat.

Can I assume that profits for motors from Minebea business will actually increase as sales grow?

Yes, you can, although the increase won't be that much.

You divided Mitsumi operations into core, sub-core, and non-core businesses as shown on page 42. If it's a "sub-core" business, does that mean you won't be putting too much of a focus on it or investing in it so much? Following the business integration, you were initially placing the greatest emphasis on smartphone camera actuators such as OIS and VCM. The slide says you will gain a greater competitive edge but since you assume the technology might change in the future, is it safe to say you'll be investing less in these products than in LED backlights?

No, we're treating them exactly the same as LED backlights. I've never said that LED backlights is a core business. We went into the business knowing full well that LED backlights might eventually disappear or experience a technological evolution, which is why it's not positioned as a core business. That doesn't mean we haven't invested in them or made light of them. As long as they've had a fighting chance, we've put one hundred percent into them. We need to work on and develop other businesses while we are continuing to reap profits from our sub-core businesses. We have worked to turn the motor business around as LED backlights generated a profit. That's what I mean by cultivating core businesses while our sub-core businesses generate a steady profit stream. We must make both work, and that's my responsibility as a management.

Wouldn't changes in technology bring added value? Even though conventional products like power supplies and analog semiconductors, which have been identified as core businesses, are sure to be permanent and competitive in niche markets, will they really generate the kind of profits indicated by the big dark blue circle on page 42, and should you really position products that are rarely subject to technological changes as core businesses?

If we had stopped making motors back when everyone was urging us to get out of the motor business, we wouldn't be where we are today. We will work on improving operations that should be positioned as core businesses under the MinebeaMitsumi seven spears initiative. When it comes to businesses that experience high and low tides, we will ride the wave when it is growing, just like we're doing with LED backlights. I never said we would shy away from businesses that experience ups and downs or that we wouldn't focus on them. We're not afraid to wade in and give it everything we've got, and that's what we do with LED backlights. At the same time we have to diversify risks. That will entail accelerated depreciation for sub-core businesses while keeping the seven spears on the target.

How much of overall sales do non-core businesses account for?

I initially expected that a significantly large portion of Mitsumi operations would fall under the non-core business category. We used to make products that might have made you wonder why we bothered, such as TV remotes, but we don't have all that many non-core businesses any more. That's because we've turned all our operations around. Today there is only one Mitsumi operation, a single department, that is in the red. While we won't invest too much, whether it be human resources or effort, in an operation that is running in the red, we won't necessarily shut it down right away either.

Assuming that Mitsumi's fourth quarter results were consolidated for all three months, projected net sales of 93.3 billion yen and an operating income of 4.4 billion yen for the first half of this fiscal year seem quite conservative against net sales of 52.9 billion yen and an operating income of 3.7 billion yen. What are your estimates for changes in camera actuator sales and your market share for them as well as any increase in game-related sales?

The tide is high for games right now, but we didn't really factor them into our forecasts for this fiscal year. You may be right about our projections being conservative. I'll just leave it up to your imagination. We also made a very conservative estimate for OIS initially, but sales should pick up soon.

I believe you've made quite a bit of progress in improving productivity for camera actuators. Can I assume that your market share will likely increase?

We're really not trying to aggressively increase our market share. I said these products are positioned as a sub-core businesses, but when it comes to sub-core businesses, I don't think we need to focus on lowering prices to increase our market share until we gain a dominant share. I say this because of everything we experienced with LED backlights. While we will do our best, we have a lot more on our plate that we have to focus on, and that's what we will do.

Last fiscal year Minebea incurred about 2 billion yen in losses due to business integration costs. What were the total costs incurred by Mitsumi and how does last fiscal year's total differ from this fiscal year's total? After substantially cutting down costs, such as purchasing costs, do you expect to reduce costs again this fiscal year and how much of a total reduction do you expect as a result of the business integration?

I didn't explain these points because they have already been factored into Mitsumi's performance forecast. We've been working on cutting costs for Mitsumi operations since September of last year. Actually we have already saved more than 1 billion yen a year on shipping materials. I didn't tell you this because, if I had emphasized the special costs that were incurred, your expectations might have been inflated. While business integration costs incurred by Mitsumi last fiscal year totaled about 0.7 billion yen, it really doesn't make much of a difference since Mitsumi's results were consolidated beginning with the fourth quarter. I thought it would be easier to understand if I excluded special factors such as business integration and inventory disposal costs after deducting the 2.3 billion yen coming from Mitsumi's results from overall operating income of 49 billion yen as I explained earlier. That's why I talked about pre-integration Minebea.

Your forecasts are based on an exchange rate of 105 yen against the dollar. If we were to assume that the exchange rate will remain the same as last fiscal year, how would that change the operating income projection for this fiscal year that is based on the most recent exchange rate estimate?

While dollar-denominated sales account for about 70% of our overall sales, we don't calculate forecast figures based on changes in the yen's exchange rate against the US dollar in order to avoid any misunderstanding because they also affect costs. When we convert dollar-denominated figures to yen-denominated figures, however, the yen has a bigger effect on operating income when it is weak than when it is strong because overseas profit figures are higher. I explained that the change in the yen's exchange rate against the dollar from 120 yen two years ago to 108 yen last fiscal year resulted in a 4-billion-yen decrease in operating income. I suggest you use that as a basis for any estimate.

How did consolidating Sartorius' results on a six-month basis affect net sales and profits?

As shown in the brief report on financial results, the changes in net sales and operating income as a result of consolidating the financial performance of Sartorius and Moatech in Korea for the additional three months are 4.8 billion yen and 130 million yen respectively.

The quarterly adjustments figure for this fiscal year is projected at about 4 billion yen while the quarterly figure for last fiscal year was 3.7 billion yen. Is the increase of about 1 billion yen over the previous level of about 3 billion yen because some of the costs, such as R&D expenses, that are not allocated to any particular business segment are included in the adjustments as a result of consolidating Mitsumi results? Or are there some other special factors?

The biggest factor contributing to the increase in uncategorized expenses for the previous fiscal year was business integration costs. This fiscal year we expect to incur additional expenses for implementing ERP, etc. along with expenses for filing Form 20-F with the SEC in relation to the business integration. These head office expenses totaling about 1 billion yen are also included in the adjustments as a result of the business integration with Mitsumi.

In looking at BLDC motors for automobiles on page 38, it would seem that you haven't shared that much information with the public. What kind of applications are you looking into? The market for these motors is huge and has tremendous growth potential. Can you tell us, as much as you can, about the applications you are shooting for as you get the business off the ground?

As you pointed out, these kinds of motors are geared toward the automobile market and that will be a main target but I can't tell you much about specific applications.

Were they developed in Germany for customers in Europe? Do you expect the business to pick up next fiscal year?

Yes.

Can you tell us as much as possible about the actual depreciation costs for LED backlights in the fiscal year that ended in March 2017 as well as projections for the fiscal years ending March 2018 and 2019?

While I don't have the figure for the year that just ended, we are expecting a year-on-year decrease of about 3 billion yen in the fiscal year ending March 2018 for LED backlights alone.

What will the total depreciation costs be in the end? It doesn't look like depreciable assets will hit zero.

Of course we will incur capital expenditures and expenses related to dies for new models, etc. again this fiscal year. The die costs are part of capital expenditures and won't reach zero as a result of depreciation. I don't have the exact capital investment figure for this fiscal year yet, so all I can tell you now is this. As I explained earlier, the salvage value will be more than a billion yen if depreciation costs amount to 2.7 billion yen.

What should we make of Mitsumi's medium-term plan? How are its top products, such as game consoles, OISs, and VCMs, factored into it?

While I can't give you specifics about any of these products due to confidentiality agreements, in terms of projected sales under the medium-term plan, we expect camera actuator sales to remain flat. There will be ups and downs ranging from 1 to 2 billion yen depending on the year. We also made the estimates for game consoles very conservative. Actual results for this fiscal year should be much higher.

While LED backlight profits won't dip in fiscal 2017, how are they positioned under your medium-term plan for electronic devices and components whose sales are expected to decline in fiscal 2018 and onward? Also you project that LED backlight sales will increase in the final year. Why do you think so?

For now we plan to offset any possible decline in sales volumes and prices by lowering depreciation costs as much as possible. The reason why we expect sales to increase two years from now is, first of all, growing sales in the automobile market. New LED backlights such as those for thin and narrow frame displays, which we are currently working on, will start gaining popularity sometime around the year after next. Since we are dealing with more than one customer, we should be able to beat out OLED with better prices, durability, and other features.

Could you tell us what the monthly internal and external sales volumes as well as production volumes for ball bearings were for January through March along with pivot assembly sales and production volumes?

External sales, internal sales, and production volumes for January were 165 million units, 79 million units, and 235 million units respectively. External sales, internal sales, and production volumes for February were 164 million units, 79 million units, and 240 million units respectively. External sales, internal sales, and production volumes for March were 180 million units, 84 million units, and 264 million units respectively. Pivot assembly sales totaled 27 million units in January, 27 million units in February, and 30 million units in March. The production volume for each month from January to March was 30 million units.

You said that you are now seeing light at the end of the tunnel when it comes to making significant improvements in productivity for ball bearings and rod-end bearings. You've been working hard on this and, as you told us in this meeting, have now suddenly reached the point where major improvements in productivity are in sight. Can you tell us what happened? I'm concerned that you may be pushing the envelope too much. Is this a move towards sustainable improvement?

There is lots of room for improvement on the shop floor, whether it be motors or Mitsumi. I ask people who work on the shop floor why they do things the way they do. Oddly enough, people who work on the line every day seem to take the way they do things for granted. If a person like me, who doesn't usually work on the shop floor, goes there and directly asks the people working there why they do things the way they do or suggests alternative ways of doing things, that will serve as an impetus for making improvements in shop floor operations. When I first visited Mitsumi's Cebu plant in the Philippines, I pointed out about 100 areas that could be improved on day one. I didn't know if I was right about everything I pointed out, but I just asked workers why they were doing what they were doing and in the end the final tally was that much. Consequently I was giving them hints about making improvements. Although I'm not a manufacturing pro, when I walk the shop floor, I spy a lot of waste. By the same token, those working on the shop floor have probably been itching to try new ways of doing things. That's the interesting thing about manufacturing. I no longer need to visit the shop floor every day. I just have to go there once a month and check on progress. Those working on the shop floor take care of the rest. I regret not getting there sooner since I didn't have time to see the money-making departments and point out areas there requiring improvement. I spent my time focusing on turning around the operations that were losing money.

In reference to Mitsumi's sub-core businesses on page 49, it says that you will consider producing both optical devices and mechanical components at your Cambodian plant. I'm wondering how you can transfer production to Cambodia so quickly and be sure to satisfy the needs of your customers. Can you tell us exactly how you are going to use the Cambodian plant?

We will transfer production of some of optical devices for Chinese customers to the Cambodian plant, freeing up room in the Philippines plant. That should happen by the end of this fiscal year.

It ends about main text.

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