Q&A

Back to Financial Results (FY3/2018)

Investor Meeting Presentation for FY 3/2018 held on May 8, 2018

Question and Answer

How will the change from the conventional JGAAP to IFRS affect profits for the fiscal year ending March 31, 2019?

The biggest change is that we will no longer account for amortization of goodwill, which will result in an increase of over a billion yen in operating income. There will also be some items that were accounted for as non-operating income under JGAAP, which will be accounted for as operating income under IFRS.

You expect sales for electronic devices and components for the fiscal year ending March 31, 2019 to substantially decline due to a drop in parts supplied for a fee. How about on a sales volume basis?
Could you also tell us why you expect operating income to significantly decrease to 25.0 billion yen? A decrease in parts supplied for a fee should boost the operating margin, but you expect it to fall substantially. Is that because you kept estimated yield on the super cautious side?

Although I can't go into detail about sales quantities, we expect to see a slight year-on-year increase. When it comes to yield, since we are planning to quickly launch products we have never tried to make before, I can't tell what the situation will be like until we actually start making them. It's going to take some more time until we can see the big picture. That's why we had to keep our estimates very conservative.

If the best-case scenario of sales volumes staying where they are or rising slightly happens, is there any chance of you gaining the same added value as you had last fiscal year? Or is it that yield will pose you the biggest challenge ever and limit the amount of added value you can get?

All we can do is work hard to launch our products as quickly as possible with a decent yield. If a product doesn't generate that much profit, I don't see any reason why we should put too much effort into it, so if things go well, we should be pretty well rewarded. That's all I can tell you.

You expect a hefty 26-billion-yen profit bump for the Mitsumi business this fiscal year even though actual sales don't look like they are going to climb very high. What's behind the increase? Is it OIS or game related, or something else? Could you also tell us if you are going to increase production capacity for OISs and do everything you can to bring in orders again?

Game and smartphone related products are definitely giving the biggest shot in the arm to the Mitsumi business.
I can't give you a sales volume figure for game consoles, but since our customer said it would be about 20% more, naturally our sales would be 20% higher.
We boosted our production capacity for OISs in response to a customer's request and built a flexible system that will enable us to increase production should the final products sell well. We are not expecting whopping profits, but if we make more, profits will also go up.

Are you going to stick to the No. 2 supplier strategy for OISs rather than trying to gain a bigger share of the market?

We are fine with being number two. We don't think it's a good idea to quickly increase our dependence on smartphones any more than we have already.

During the second quarter investor meeting held in November, you said you could add 9 billion yen to the estimated operating income figure for the fiscal year ending March 31, 2019 no matter how the previous year's operating income ended up higher than what you had targeted. Have there been any changes in the operating environment since then and can I assume that there is still room to gain additional profit?

First of all, exchange rates have changed significantly. The Thai baht has sharply appreciated against the US dollar since November although that's changing now. The yen exchange rate against the US dollar has also changed dramatically.
Secondly, we expected that we would keep game components go strong because the industry seemed to be booming then, but there have been some unexpected slowdown.
Thirdly, the smartphone picture has changed. While back then we expected that smartphone sales would remain up in 2018, the current consensus is that they won't be that upbeat this year. That's why we decided to revise our profit target in line with that trend as announced today. This is a conservative estimate, though.

In regard to smartphones, which is the estimate more conservative for LED backlights or OISs?

I'd say LED backlights. The key factors are that we don't know what the yield will be and that the prices have not been finalized.

The Mitsumi business experienced a big quarter-on-quarter drop in operating income in the fourth quarter, going from 9.8 billion yen to 1.4 billion yen. If you were to divide the business into three categories, that is game components, OIS, and other core products, what would you say were the biggest factors affecting each category?

In the fourth quarter profits fell significantly due to poor sales of both OLED and LCD smartphone models while the operating income for game components was slightly below our initial target as I noted earlier. Other than that, there were no major changes in other businesses, and our profit figures were just as we had expected.

You said that the Mitsumi business's performance plummeted in the fourth quarter. What is it like now? Also, you expect sales to drop but profit to increase in the second half of the fiscal year ending March 31, 2019 compared with the first half. Could you give us a breakdown?

We expect that smartphone-related products will be affected by inventory adjustments especially in the first quarter. Game components will also be somewhat affected, and the overall Mitsumi business will get off to a slow start in the first quarter but will grow by leaps and bounds the rest of the year due to the launch of new smartphone models as well as other factors. As we move into the third quarter, we expect to see a change in the mix of products with different profitability, which will result in lower sales but higher profits in the second fiscal half compared with the first.

If you were to set aside changes in terms and conditions of sale, would you expect to see a year-on-year increase in Mitsumi sales this fiscal year?

The effect of changes in terms and conditions on net sales was 24.2 billion yen last fiscal year and will be about 100 billion yen this fiscal year. If you were to exclude this effect, last fiscal year's net sales would have been 226.4 billion yen and this fiscal year's net sales would be about 250 billion yen.

When using IFRS to factor foreign exchange losses into your operating income forecast due to the yen's expected appreciation, how much would the total loss amount to? Can I assume that the goodwill factor will bring an additional 1 billion yen in profit while the negative factors will affect non-operating income?

Yes, but I'm sorry I can't give you any information on foreign exchange translations.

How is your ball bearing pricing strategy factored into your latest plan? The fourth quarter operating margin for ball bearings seems to be up slightly over the third quarter, but it doesn't seem to be as high as it was in the past.

We are currently working on price revisions. I'm making sure that our employees are providing all customers with our reasonable explanation for the price increases instead of just notifying them about it. Now that demand for bearings is so strong, we made investments of 8 billion yen and 6.5 billion yen. That's a total investment of 14.5 billion yen for customers who need more bearings so we want these customers to share some of the cost, and that's one of the backgrounds why we decided to revise our prices. We will spell everything out for them, explaining about the growing demand, and will be happy to make special arrangements if they want us to supply products for which demand will increase over the long term. I've instructed our employees to tell the customers about the costs we are incurring as many times as needed until they are convinced. Just please bear in mind that it may take a while.

Would you tell us about the Mitsumi operations other than OISs and game components, particularly the core businesses listed on page 44? Are there strong ones and weak ones or some that are making progress and others that are not? Since demand for game components will peak in the third year of the medium-term business plan, things will get tough for the Mitsumi business if these products are not fully launched by then.

We just completed the tough task of paving the way to better productivity and are now focusing on expanding sales. We will enhance our lineup of products other than the profit-driving game and smartphone components, particularly power supplies, automobile parts, connectors, etc., as we work hard to bring in orders and cut costs via economies of scale. Semiconductors are a rather high value-added product for which we have a somewhat fixed production capacity for, but we also outsource production to a foundry and are making steady progress on improving our profit structure in many ways. When it comes to power supplies, automobile parts, connectors, and other precision parts, it's going to take some more time.

In the fourth quarter the electronic devices and components business saw sales drop and profit increase quarter on quarter. You said during the last investor conference call that a reversal of allowance totaling over a billion yen was accounted for in the LED backlight business. How did that affect actual results?
Would you also tell us how much you expect C&A and Mach Aero to contribute to the bearing and rod-ends/fastener businesses in the fiscal year ending March 31, 2019?

Temporary expenses for LED backlights were recognized in earnings as initially projected. Just as I explained at the third quarter investor conference call, earnings that were supposed to have been recognized since the first quarter of the last fiscal year were reflected more in the fourth quarter results.
About 10 billion yen in sales and over 1 billion yen in operating income from C&A are included in the forecasts for ball bearings. Mach Aero's sales, totaling about 3 billion yen, are included in rod-ends and fasteners.

Your projected capital expenditure figure is quite large at 60 billion yen. How are you going to allocate this amount to each business? Would you also tell us about your return on investment approach?
As cash flow substantially increases, net cash will keep increasing as well. I think it may be time for you to consider a major M&A deal for your machined components business. What do you think?

Among the 60-billion-yen capital expenditure total, the largest single investment amount in the machined components business will be 6.5 billion yen for increasing the monthly production capacity for bearings by 15 million units. Another large investment is for LED backlights, and that amount is much higher than we initially anticipated.
We will also put money into Mitsumi products that were neglected as the company kept its belt tightened until the integration was complete. Not all investments will be profitable. For example, if the Akita Business Division, which focuses on automobile parts, wants to attract top talent from Akita University and other academic institutions, it will have to do something about its old, run-down buildings and labs to make itself a more appealing place to work. In the Philippines we are improving housing conditions for the Cebu plant employees including business travelers. We are constructing a nice building equipped with dining facilities for guests. We always build a club house whenever we open a new location because we want to provide an excellent living environment that will satisfy our customers and enable our employees realize their full potential. This year we will actively work on improving the work environment as well. Rather than making investment decisions solely in light of return, I believe enhancing our work environment equally for all employees, whether they be Mitsumi employees assigned to Minebea jobs or vice versa, is a cost necessary to unify us all and will eventually lead us to long-term prosperity.
As you can see, the 60-billion-yen investment total isn't all aimed at generating bigger profits.
Looking at cash flow, we see that we have a net debt of almost zero compared to the more than 300 billion yen it once was. That's why we are a lot more generous in giving back to our shareholders than we once were and we want to keep it that way.
Following on the heels of the recent acquisition of Mach Aero and C&A that generated 1.5 billion yen in profit, we hope to find other M&A opportunities that will add to the bottom line of our machined components business.

You said you are facing challenges in making your new LED backlight product. What specifically are they? Once you overcome those challenges and make the product, what can I expect from it that's so different from conventional LED backlights?

We've never made this type of LED backlight before and it's very challenging, but I just can't give you any details about it yet. "Passion to create value through difference" is our motto. You can see it under our logo and you can see it at work behind this product that's completely different from any other on the market and creates value. I'm quite sure that this new product is something nobody but us can make. This new product should generate a decent profit once we overcome all the challenges, otherwise we won't be able to sell it. Since we're breaking new ground here, we are keeping our estimate conservative as I have said a number of times.

Would you tell us how the roles played by the Cambodian and Cebu plants may change this fiscal year?

The Cambodian plant's Building No. 1 and Building No. 2 are now operating at full capacity and have no more room to grow. Any expansion in the future will be implemented at Building No. 3. Ball bearings are now generating a profit, and various other businesses are poised to start moving into high gear.
The Cebu plant has no more room to expand either, so we started transferring operations elsewhere. We are planning to gradually shift various products, such as camera actuators for Chinese customers, to Cambodia in order to keep at least one building open at the Cebu plant because it's likely that customers will require us to make some products in the Philippines in the future. Since we have no room to move in the Philippines, we will move some jobs there to the Cambodian plant as we initially planned. We have no plans to shutter any of our plants.

How do your latest exchange rate projections affect sales and profit for the fiscal year ending March 31, 2019?

I'm sorry but, as I mentioned earlier, you're going to have to make your own estimates based on the data for how foreign currency affected our results in the past.

You said that the amount of capital expenditures for LED backlights this fiscal year are higher than you initially expected. Can you tell us as much as you can about how high it will be? Will the amount be higher because of the increasing shipment volumes or the higher investment amount per product? Can you also tell us if there will be any change in the depreciation method for LED backlights after adopting IFRS?

We initially projected spending about 3 billion yen in capital investments, but the actual amount will be higher than that. That's partially because of the shipment volumes, but it's mostly because we need new equipment for all these difficult production processes. That's all I can tell you though. The depreciation method for LED backlights will not change due to the new accounting standards.

You expect LED backlight sales to increase in the fiscal year ending March 31, 2020. What changes do you expect to see in the customer mix and applications?

Automobile applications are steadily growing with a double-digit percentage increase over last fiscal year. LED backlight sales for Chinese smartphone models will inch up this fiscal year due to the changing ratio of LCD models. Trends in other applications are as I explained earlier, but we should be able to keep sales up in April next year and onward by tapping into potential replacement demand. That said, we will continue to keep our estimates conservative next fiscal year.

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