Q&A

Back to Financial Results (FY3/2018)

Investor Conference Call for 1Q FY 3/2018 held on August 4, 2017

Question and Answer

You made an upward revision to your first-half forecast for the electronic devices and components business by 43 billion yen. I imagine the increase will come mostly from LED backlights. Can you give us some more details? Is it that sales of existing models for your major customers were good in June quarter or that you got orders for LED backlights for new models earlier than you had expected? Or is it that sales to other customers are increasing? If it's not due to actual demand, were there any developments that you hadn't factored into your initial forecast, such as pricing?

The primary reason is that we are receiving a steady flow of orders for LED backlights from major customers, and that's actually all it is. There have been no particular changes in prices or other factors.

Does the upward revision to the LED backlight sales forecast, raising it from the initial 184.3 billion yen to 220.7 billion yen, mean that you will see that much of a sales volume uptick? This is a big change and I'm wondering if it indicates that customer demand is higher than you had expected at the beginning of the fiscal year.

Although I don't know what the order volumes are like at our competitors, we are seeing strong interest from customers for all our products and steadily gearing up production to meet their needs.

Did the better-than-expected sales in June quarter come from products for new models rather than for existing models?

It's partially from products for new models, and we expect that they will account for much more in September quarter and onward.

I don't believe your major customers' forecasts for smartphone sales volumes have changed much since the beginning of this fiscal year. The only explanation for the big change in your sales forecast I can figure out is that your market share increased more than you had expected or that your initial forecast was extremely conservative. What's the real story?

Like I said earlier, we don't know how much our competitors are selling. If the overall sales volume hasn't changed, our market share may have increased.

You made a 15.4-billion-yen upward revision to the Mitsumi business' first-half sales forecast. Can you give us the breakdown by product, such as game consoles, camera actuators, etc.? Also you expect a 4.6-billion-yen increase in operating income, which is proportionately much larger than the sales increase. Can you tell us which product will boost profits the most?

We expect overall sales to be higher than initially projected. The primary factor for the increase will be game consoles. I'm afraid that I cannot give you any details on operating income.

When it comes to camera actuators, can I assume that you will see profits grow but sales won't vary much from the initial forecast?

We have factored in the negative impact of the slight slowdown in sales we expect to see in the Chinese market.

You project that sales for the Mitsumi business will increase from 48.1 billion yen in June quarter to 60.7 billion yen in September quarter. If the bulk of this increase comes from game consoles, sales for September quarter should be higher. Do you have any capacity-related constraints?

No, we have no capacity-related constraints. Basically we should be able to meet customer requirements. We expect that demand for game consoles and camera actuators will grow significantly in September quarter and are steadily preparing for that.

According to your forecast, you will see a quarter-on-quarter increase of about 50 billion yen in overall sales for the company in September quarter, but operating income will increase by only about 3.2 billion yen. Is there any special reason for the quarter-on-quarter drop in the operating margin? Or is your September-quarter forecast just conservative? In particular, can you tell us why the operating margin for the electronic devices and components business will decline in September quarter?

Most of our production activities take place in Thailand and we factored in a slight appreciation of the Thai baht against US dollar we expect to see in September quarter but made no change to the estimated exchange rates for the rest of the fiscal year. Other than that, there are no particular reasons for the decline.

Would you give us an update on your efforts to improve productivity for camera actuators? Can we expect productivity to improve further for new models rather than existing models?

As we explained during the investors meeting held back in May of this year, many people including our management team have been working on improving the profitability of the Mitsumi business since we signed a business support agreement with MITSUMI ELECTRIC in August 2016. As a result, productivity of camera actuators, for example, has improved three-fold over the last year. We should be able to enhance productivity for new models by leveraging the know-how we have gained so far.

Six months after the business integration, what has been completed and what still needs to be done?

Looking at the areas where improvements can be made in a relatively short time, we have made good progress in cutting costs via joint materials purchasing and integrated logistics, for instance. As a result of the business integration with Mitsumi, our product portfolio was significantly enhanced. Our next goal is to develop and commercialize Electro Mechanics Solutions by combining the two companies' technologies. It might take some time until we see results in this area, but we are doing our best.

The effective tax rate for June quarter was low, at 18.4%. Is that because the tax rate for the Mitsumi business is low, which also makes the effective tax rate low on a consolidated basis? Can you tell us about the estimated effective tax rates for September quarter and onward, or this fiscal year and next?

Beginning this fiscal year, we implemented tax consolidation in Japan for the entire MinebeaMitsumi Group, including Mitsumi Group subsidiaries. Given the tax effect of the cumulative loss from the Mitsumi business, we expect the effective tax rate to be lower than what it has been.

Can you give us an idea of the specific effective tax rate we are likely to see?

It will be a little over 20% this fiscal year.

You said that you factored in the effect of a strong Thai baht in your September-quarter forecast. Since you didn't make any revisions to your initial second-half forecast, can I assume that the baht will have a negative impact on your performance if it remains at the current level?

Yes.

Has there been any major change in your foreign currency sensitivity?

As we explained earlier, among the factors that affected our operating income for June quarter was a quarter-on-quarter loss of 1.4 billion yen due to foreign exchange fluctuations. While dollar-denominated sales account for over 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 costs are affected by fluctuations of various currencies. I hope this will give you some idea.

Can you tell us about the factors behind the quarter-on-quarter increases and decreases in June-quarter operating income for the Mitsumi business by product category? I'm assuming that the sales volume of camera actuators decreased quarter on quarter while the sales volume of game consoles was up, but I'm not sure about the ups and downs for other products. Could you fill us in?

We don't announce specific profit and loss figures for individual product categories of the Mitsumi business. Overall profit for the Mitsumi business increased in June quarter. We saw significant improvements especially in the products that make up the Seven Spears, rather than optical devices and mechanical components. That's all the information I can give you at the moment.

How long do you think the effect of the loss carryforward will have on your effective tax rate? I imagine the amount of savings is quite large and that you may not be able to use the whole amount within the specified number of years. How long do you think the tax rate will remain low?

Losses can be carried forward for tax purposes for up to nine years while deferred tax assets may be recognized over a period of up to five years.

Are you basically saying you will use up the full amount of the loss carryforward?

I'm sorry but I cannot give you a firm answer to that at this time.

You said that the LED backlight business is doing well right now, but a major shift to OLED is expected in the second half of this fiscal year. While sales will grow during the first half, could it possibly drive your second half sales down? You may have already factored that into your initial forecast, but can you tell us if it will have a negative effect on your second-half forecast?

Right now I don't expect the robust performance in the first half to drastically drop off in the second half although I don't have sufficient information on the outlook for the second half to tell you for sure.

In regard to LED backlights, slide 16 says "Expecting shipment for smartphones next year as well," but your medium-term business plan announced this past May stated that major customers would for the most part be switching to OLED next year. Has there been any change in that outlook to prompt this statement? Some expect that LCD models may still be around next year. Is that factoring into your equation now?

I'm very sorry but I can't comment on that at the moment.

Do you see any changes in customer response to your camera actuators as a result of improved productivity and quality? Is there any possibility that it will boost your market share?

As Mr. Kainuma explained during the investors meeting held this past May, we don't lower prices for the sake of gaining market share. It is our policy to respond to customer requirements as a good second tier supplier. We are sticking to that policy, and if customers find we are ahead of the pack in lead time and quality, our market share may go up, but that's not our main concern right now.

Do you currently have any problems affecting mass production of camera actuators for new models?

Now that productivity has significantly improved, morale is up across the shop floor, and we are making steady progress on launching production for major customers' models. I don't see any problems.

The electronic devices and components business saw operating income jump about 1.2 billion yen in June quarter despite a quarter-on-quarter drop in revenue totaling about 10 billion yen. Can you talk about the changes for each product category?

The motor business is steady. This is an indication that profitability of LED backlight has been substantially improved due to better productivity after gaining a broad spectrum of manufacturing know-how.

After production for the new models kicked off, inventory might have been increased and absorbed fixed costs. Is this one of the factors behind the enhanced profitability of LED backlights in June quarter?

LED backlight inventory has been maintained within a normal balance range, and we are not stocking extra inventory. It was simply the improved productivity that led to better profitability.

Can you give us a rundown of June-quarter ball bearing sales by application as well as year-on-year growth rates?

Automobile bearings accounted for 20%, bearings for aerospace applications 32%, bearings for home appliances 4%, bearings for office automation equipment 6%, bearings for personal computers and peripheral applications 3%, motor bearings 17%, and other bearings 17%. Despite a 17% drop for personal computer and peripheral applications along with a 5% decline for aerospace applications, year-on-year sales were up 11% for automobile applications, 21% for home appliance applications, 12% for office automation equipment applications, 11% for motor applications, and 6% for other applications to bring overall sales up 5%.

Since external ball bearing shipment volumes are up by a wide margin, I would imagine you've incurred higher-than-usual shipping costs for courier services and so on. Can I expect profitability to increase further as you boost production capacity to keep pace with the growing shipment volume?

June-quarter operating income for the machined components business was 10.4 billion yen, and profitability of ball bearings improved significantly. When it comes to rod-end fasteners, on the other hand, both revenue and profit as well as the profit margin decreased due mainly to declining production of large aircraft and diminishing demand from the defense industry. While the inventory level of ball bearings is still low, the production volume is increasing, and profitability has improved quite a bit.

You project a 12.6-billion-yen quarter-on-quarter increase in sales for the Mitsumi business, taking you from 48.1 billion yen in June quarter to 60.7 billion yen in September quarter. Can you give us a breakdown by product?

Demand for OIS and other optical devices is expected to increase in September quarter due to the used seasonal uptick. On top of that, we are planning to increase production of game consoles. These are the primary factors that will drive sales up.

Which of these factors will have the greater impact?

We expect game consoles to have a greater impact.

Can I assume that sales of OISs for major customers are as projected in the initial forecast?

Overall optical device sales will be up, but we expect to see a slowdown in sales to some Chinese smartphone makers.

You said that you don't have any problem with production capacity for game consoles, but demand must have increased substantially since you made your initial forecast. What specific initiatives have you implemented to secure sufficient capacity?

We have built up our manufacturing know-how over the years and are implementing various measures in order to manufacture large quantities of products that are distinctly different from what we used to make. I cannot give you specifics, but please understand that we don't have any particular problem with overall production although we need to augment specific equipment in order to produce our new products.

Could you tell us what the production volumes as well as internal sales volumes for ball bearings were in June quarter along with pivot assembly production and sales volumes?

Production and internal sales volumes for ball bearing were respectively 250 million units and 85 million units for April, 267 million units and 88 million units for May, and 267 million units and 87 million units for June. Production and sales volumes for pivot assemblies were respectively 30 million units and 25 million units for April, 30 million units and 29 million units for May, and 29 million units and 25 million units for June.

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