Q&A

Back to Financial Results (FY3/2018)

Investor Meeting Presentation for 2Q FY 3/2018 held on November 8, 2017

Question and Answer

During the presentation you mentioned that it was difficult to make forecast revisions since there are different factors that could significantly throw off your estimate in the second half year. How much of an impact does each of these factors have? Could you tell us which, if any, of those factors are positive starting with the one that could have the greatest impact?

We have to wait until we can get a clearer picture of trends in the smartphone market. Two years ago we failed to achieve our targets and were punished by the stock market. You must understand that it is very difficult to come up with accurate numerical targets in early November with the information we have in hand. We are not in a position to know how well our customers' products are selling or what kind of feedback they are getting from the market. After much discussion over what to do with the forecast figures, we decided to keep them on the conservative side for now and revise them later when we get more accurate numbers.

Can I assume that smartphone components are the biggest factor affecting your forecast?

It's true that smartphone components are the most volatile factor, but overall, all of our business segments are in good shape. I'm not concerned about machined components at all. We don't have to worry about game consoles that much either because demand is going to peak.

You made an upward revision of about 5 billion yen to the full-year operating income forecast for the Mitsumi business. What is the breakdown for game consoles, camera actuators, and other products?

Compared with the previous forecast figures, all product categories will yield a profit. Game consoles will be the biggest increase with camera actuators following behind and then all the other products. As I said before, products other than game consoles and camera actuators have very large contribution margins.

Has there been any change to your Mitsumi business strategies for next fiscal year and onward? For example, what decisions did you make about customer requests to increase production of game consoles as well as the associated risks? How big of a share of the camera actuator market are you aiming for as you try to keep profitability up? Do you have any strategy shifts in store for the coming fiscal year, including how you position core and sub-core businesses?

There have been basically no changes. As I explained earlier, next fiscal year we should be able to generate at least 9 billion yen more in operating income than this fiscal year even if our market share remains the same regardless of external factors. For one thing it means we won't have to go to the trouble of slashing prices to increase our market share. Another thing is that our greatest strength lies in the diversity of our product lines. Instead of relying on one or two product lines, we have multiple product lines. This strategy enables us to minimize risk and enhance our corporate value. Not only that, we have recently been approached by customers from various industries with different R&D projects. I believe this is a testament to our proven track record in working on a wide array of projects. I think we should bolster this strength even further.

While the financial performance of the Mitsumi business segment has clearly improved in terms of numbers, what really changed and in what way?

Having implemented various measures over the last year, I now regret that I didn't take any videos of the Mitsumi factories before they were improved. If I was able to show them to you, you would without a doubt be flabbergasted by the before and after shots. Since I can't do that, I'm afraid that I can only explain how they've improved in terms of higher productivity and employee morale. Productivity is up threefold at many of these factories. Everything has changed, including the brightness of the lighting in the factories. There's no way I can explain it all. It's true that Minebea extended a helping hand, but it's also true that Mitsumi has some great employees. Mitsumi saved about 4 billion yen in costs through the business integration due to an approximate 3-billion-yen decrease in depreciation and amortization costs related to last fiscal year's asset impairment as well as a transfer of R&D expenses, totaling about 1 billion yen, to head office adjustments. All improvements other than that were achieved solely by Mitsumi.

Are there any unsolved problems related to improving Mitsumi operations?

We must boost sales of the Seven Spears products, such as sensors, connectors/switches, power supplies, wireless products, and analog semiconductors. Our power supply factories are already operating at full capacity, and we will focus on making more of these products. I think it's wonderful that Mitsumi is working on these initiatives with Minebea's production engineering team. Although Mitsumi has a number of engineers, some of its factory managers used to be people with a sales or software engineering background. Things have changed dramatically, and today manufacturing is done by people who specialize in the field. Some of them are Minebea employees as well. These initiatives have brought a sea change to Mitsumi. The challenges that lie ahead include boosting the performance of core businesses and distinguishing ourselves from the competition in order to increase our market share. Mitsumi possesses the advanced technological capability that will set us apart. The haptic devices we will soon launch into the market feature a Mitsumi design that is wholly unique. There are areas that require support from Minebea's manufacturing division in order to successfully launch these products. That's also one of the challenges ahead.

In regard to the business integration with Mitsumi, I believe you have almost completed the phase for boosting Mitsumi's productivity and cutting costs through joint purchasing. You are now moving on to the next phase where you leverage Mitsumi technologies to make new products. Specifically, what kind of new products will you have to offer in the coming fiscal years and how will they affect your performance?

The most typical example of such products would be our new strain gauge called the MINEGE consisting of a gauge and an analog semiconductor. The gauge was designed by Minebea while the analog semiconductor was designed by Mitsumi. This is just one of the fruits borne from our joint efforts. We recently decided to invest about 3 billion yen in the cleanroom at Mitsumi's Atsugi plant that had been used to make semiconductors. This example clearly illustrates how Minebea gauges are combined with the Mitsumi semiconductors at Mitsumi's factory and made into finished products. We were also able to reduce the size of a data logger case for medical bed sensors by half thanks to Mitsumi technology. We have a motion tracking SALIOT lighting system on display at our newly opened showroom. This motion tracking feature was also made possible by Mitsumi technology. I could give you more examples but there are just too many to mention now. These kinds of developments are happening across a wide spectrum of areas.

Looking at the outlook for Mitsumi on page 30, you said that sales for fiscal year ending March 2020 will decline 13 billion yen and operating income will remain flat at 25 billion yen. Is this because you expect demand for game consoles to peak in the fiscal year ending March 2019?

We kept our forecast for the game console business on the conservative side based on the projection that demand will peak in the fiscal year ending March 2019. Since I can't give you any further details due to our customer confidentiality agreements, I'm afraid you'll just have to research the market outlook for yourself.

You said earlier during the presentation that smartphone-related sales will remain strong in the fiscal year ending March 2019. Will sales of LED backlights and camera actuators increase as well? Can you also tell us how much they will grow?

Although the outlook for LED backlights is still cloudy, we expect sales to remain steady and camera actuator sales to increase.

Do you plan to keep LED backlight sales at the current level by increasing customers or by increasing applications?

The answer is both.

What are your plans for the new bearing factory? Are you going to expand it while increasing productivity at your existing factories or do you have something different in mind?

Lately the ball bearing sales volume has been increasing at an extraordinary pace. It has grown by 20 million units in only a few months. In order to meet this growing demand we have to plan far in advance otherwise we'll fall behind. Internal sales of ball bearings for motors are increasing as well. That's why we must build a new building to secure the space we need. The preprocessing stage of bearing production cannot be done at just any vacant factory because of the load capacity issue. If we don't use the new building for bearings, we could still use it for other operations.

Are you constructing the new building because you are afraid that if you don't, you will lose your share of the market or are you just fulfilling your responsibility as a top bearing manufacturer since the whole industry is maxed out?

The fact that we are getting so many orders is probably because of the growing needs of customers who use products that meet high quality standards. A typical example of such products is automobiles. Rather than compete for market share, we have built the ability to supply high quality products to customers. If you have that ability, you eventually earn customer trust.

You talked about using your Cambodian factory for postprocessing, but you must have concerns about infrastructure such as the lack of expressways. What do you think the future holds in that regard?

We have no problem with infrastructure. We have about 400 trucks traveling between Thailand and Cambodia every month, and the trip takes less than 24 hours. The distance is 500 km, about same as the distance between Tokyo and Osaka. Although we do have a small problem with road conditions, we don't have to wait that long for customs clearance. We don't see any major problem with transporting bearing parts because of their high transport efficiency.

You made a downward revision to your full-year sales forecast for electronic components and devices. Sales for the first fiscal half didn't actually reach your target. I'd like to know the reason for the shortfall. On the other hand, you made an upward revision to your full-year operating income forecast. Can you give us a breakdown of the factors behind the lower sales forecast and higher operating income forecast?

In the first fiscal half sales were slightly below target. Unlike last fiscal year, the launch of LED backlight production went rather smoothly. That's why operating income was up this first half. We made a downward revision to the sales forecast for the second half in line with our conservative estimate that demand would peak later than it did last fiscal year.

Then can I assume that the increase in operating income for the first fiscal half, resulting from improved LED backlight productivity, was the main impetus for the upward revision to your operating income forecast for electronic devices and components?

The operating rate remained very low from April to June last year, but this year production went smoothly and production yield didn't drop that much.

Did you keep your forecast for this year on the conservative side in light of the possibility that a decrease in second half sales might bring operating income down? If sales were to rise, the increase in operating income would be quite large. Isn't that right?

Yes.

The sales forecast for the Mitsumi business is approximately 120 billion yen for the second half of this fiscal year and 328 billion yen for the next fiscal year. That's about 80 billion yen higher than the second half forecast figure doubled. You talked about haptic devices and other new products earlier, but what are the factors behind this uptick?

We plan to start recognizing sales of game console parts that are supplied from customers beginning next fiscal year. While we have always accounted for sales of supplied parts for OEMs, Mitsumi never did. We will start accounting for Mitsumi's parts just like we have done for Minebea parts. I've heard that other companies that assemble similar products use this accounting practice as well.

The medium-term outlook for electronic components and devices shown on page 30 projects that sales will drop about 25 billion yen, taking it from this fiscal year's total of 418 billion yen to 393 billion yen next fiscal year. You said during the presentation that LED backlight sales will remain steady next fiscal year, but sales of automotive motors and other products are expected to increase next fiscal year. Can you give us a detailed breakdown of changes in sales by product? For example, is it that LED backlight itself will remain flat but declining sales of LED backlight-related parts will bring overall sales down?

I can't give you any details about individual products.

According to the automotive product sales forecast on page 27, the compound annual growth rate is a whopping 26%. I see the projected growth rate of electronic components and devices is especially high. I knew motor sales would grow but never expected them to increase by 20-30%. Has something changed or are new products going to be launched? Can you tell us what's really happening?

Since motors used for automotive applications are the big growth drivers, you generally know what to expect. Sales forecast figures for the fiscal year ending March 2020 take into account our new strain gauge product. Used in automobile brakes, for example, it would significantly enhance sensitivity and improve braking performance. These are just a few of the various factors that could drive sales up.

When talking about investments in the ball bearing business, you said that you are going to build a new preprocessing facility in Bang Pa-in and use your Cambodian plant for postprocessing. Building a bearing factory boils down to a huge investment. How much do you plan to put into it and how much additional capacity will you gain? Can you also give us a timeline?

We will be investing 3 billion yen this time around. Since there is still room for installing additional machines in our current factory's preprocessing facility, we will fill that space first before considering whether or not to use the new facility for bearing production. In the end the new facility will have enough space to produce an additional 20 million units per month. We must start laying the groundwork for it now. We built a new factory following the 2011 Thai floods, and now, just six years later, it's about to reach full capacity. This additional capacity should be sufficient for a while. Honestly we want to build a full-scale factory somewhere outside Thailand, such as in India, but we haven't made up our minds yet.

While camera actuators used to be underperformers at Mitsumi, their productivity seems to have improved since the company was integrated with Minebea. Can you tell us your outlook for the second fiscal half, including how production is going as well as what the yield is like?

Both production and yield are perfect. But that's all I can really tell you.

Has there been any change to your initial market share forecast for smartphone and game console-related products? Can you also tell us how it was factored into your full-year forecast?

I don't think there has been any change in our market share. As I said before, we are not taking any measures to increase our market share.

Does that mean the profitability of these products has significantly improved since your initial projection?

Yes, and sales volumes have also increased.

I see that various target markets for your new strain gauge are noted on the slide. Which one do you think will grow and how long will it be before it takes off? You also mentioned that sales may reach hundreds of billions of yen. Can you tell us how that would be possible?

Since this gauge is extremely small and sensitive, it can be used for many different purposes. As noted in the presentation material, the automobile, mobile/wearable, and robotics markets are our primary targets. If it gets adopted for a product that is to be mass produced, it's possible that it could really take off. I really believe this new product has outstanding potential. We already started shipping samples to customers for evaluation testing.

Will it bring your medium-term forecast figures shown on page 29 up?

We expect it to generate about 2 billion yen in profit in the fiscal year ending March 2020.

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