Q&A

Back to Financial Results (FY3/2020)

Investor Meeting Presentation for 2Q FY 3/2020 held on November 7, 2019

Question and Answer

What was the ball bearing production volume in the second quarter, and what is the outlook for the third quarter and beyond?

In the second quarter, the production volume was 244 million units. We expect a volume of 256 million in the third quarter and 259 million in the fourth quarter. By month, external shipments came in at 183 million, 179 million, and 194 million in July, August, and September, respectively. Internal shipments came in at 64 million, 66 million, and 63 million, and the production volumes were 253 million, 235 million, and 245 million.

I understand that cooling fan ball bearings for data centers and ball bearings for automobiles have been recovering. Can you provide more detail, including recent changes?

Very strong demand persists for automobiles, and we reached an all-time high during the second quarter. We believe that trend will continue.
Demand for other uses, including home appliances, has bounced back from a temporary dip. Basically, there are no shortfalls in a year-on-year comparison. The only weakness was in fan motors. Demand bottomed out in June and remained very low in July and August, but recently it has begun to recover, and that has brought the overall volume up.

The operating margin for machined components was 27.3% in the second half, which is near the highest level ever, but sales haven't grown that much. Can you provide the background for the operating margin alone increasing so significantly?

We believe that ball bearing sales will go up a little more. Tentative orders are stronger than the forecast going into the fourth quarter. We will also begin commissioning the machinery and equipment that we invested in for mass production as appropriate and keep costs down to improve the operating margin.

Will the ball bearing product mix improve going into the second half, or will leverage improve with an increase in production volume?

Both. For automobiles, the number of units shipped has decelerated in China and around the world, but record-breaking ball bearing sales volumes were achieved in July and October. As for the product mix, the operating margin is higher for automobiles than for fan motors, and we believe this trend will continue.

The Mitsumi business is the only one for which the forecast for operating income has been increased. Can you give some specifics? Is this from games, Chinese smartphones, North American smartphones, or something else?

It's driven by games and OIS. As reported in today's newspaper, Chinese brands are very strong when it comes to OIS. There has been talk for a while that Chinese brands would take off this year, and that trend is very prominent. This is a very big plus for us as well. We've also received very firm tentative orders for games, so we believe that the Mitsumi business will be a driver of growth.

As of next year, what level of sales can be expected for the five pillars of the U-Shin business? Also, if there are any additional actions that you will take with respect to measures to improve profitability due to changes in the business environment, can you tell us about those?

Out of these five, we have already received orders for CSD and flush door handles, and some will start next year. Currently, we're working to prepare a solid production system through integrated synergy, including production know-how. We hope to launch home locks next fiscal year. We'll announce more specific figures next May.

What level of operating margin do you hope to achieve with the U-Shin business next year?

Our target for operating income is 10 billion yen. Currently, the automobile industry is extremely varied in performance depending on the manufacturer. The ones doing well are doing very well, while European, American, and local Chinese manufacturers are struggling. Our plants are distributed evenly across the globe, so we will have to pay closer attention to the macro environment of the automobile industry.
CSD, flush door handles, E-Access and other products that will grow among the five pillars target luxury vehicles, but right now, quite a few are for lower priced vehicles, such as mechanical steering wheel locks. As such, the product mix will have to be changed to increase the margin, but the procedures for automobiles are very complicated, and new models come out once every four years, so it's not something that has to be done right away. However, once in, it continues for a long time. In this sense as well, the easiest of these to set to work on is the fifth, home locks.

Is there a difference in the degree of recovery and vigor for automobiles when looking at bearings and the U-Shin business?

Yes. The automobile manufacturer customers for the U-Shin business are limited, but bearings are universal for the most part. As explained, bearings very closely reflect the economy, so even as results improve moving forward, I think it's safe to say that it will be patchy to a certain extent. In fact, performance is gloomy for machine tools, but semiconductors are bouncing back. Accordingly, the way things bounce back varies depending on the industry, and even if things do bounce back, the strength of the manufacturer will still come into play. You could say that's the lot of a parts supplier.

How much have ball bearings recovered in October and November?

In October, external shipments reached 195 million units, and internal shipments reached 65 million, for a total of 260 million. Production was boosted to 254 million units. I think production will be increased a little more.

What is your forecast for how sales for smartphones and games will change from the second quarter to the third and fourth quarters?

In the second quarter, electronic device sales were 46.4 billion yen. The forecasts for third and fourth quarters are 52.1 billion yen and 46.8 billion yen, respectively. As for the Mitsumi business, second quarter sales were 100.9 billion yen, and the forecasts for the third and fourth quarters are 82.8 billion yen and 56.6 billion yen, respectively. For games, the peak was in the second quarter, and we anticipate a slight drop in the third quarter. However, I've heard that customer sales are very favorable, so I'm optimistic. In regard to optical devices, we expect OIS to grow significantly in the third quarter and fall slightly in the fourth quarter.

Is the reason that electronic devices will peak in the third quarter because LED backlights will further increase going into the third quarter?

Yes. We believe that LED backlight sales will remain favorable.

A little more than a half a year has passed since the merger with U-Shin, and you've been engaged in various improvement activities. In particular, can you tell us what European operations are like now and what changes can be expected going into the next fiscal year?

Making improvements in Europe is the most important thing for a U-Shin turnaround. Our managements visit Europe once every two months, and I have personally visited Europe three times over the past six months. We are making various improvements centered on new products while sending a lot of support.
We're also promoting vertical integration, and in addition to providing backup for manufacturing internal parts, we're working on joint purchasing with the MinebeaMitsumi Group and unification of logistics.
As such, next year various new products will be launched in addition to improvements like these, so by putting our capabilities to use in a smooth launch, I believe U-Shin's results in Europe will change for the better. The employees are earnest, and morale is very high, so we'll solve each problem by engaging in team development.
However, as previously mentioned, the situation of European automobile manufacturers is patchy, and some are struggling with sales, so I think we'll have to watch a little more closely.

I believe electronic device sales usually drop significantly in the fourth quarter. Can you tell us why you think there will only be a slight dip this year?

New products are being introduced on a different cycle than usual, so there will be considerable sales in the fourth quarter as well.

This year there were products transferred from the Mitsumi business segment to electronic devices. What do you think the full-year sales will be at this point in time?

The relevant sales of the transferred products will be 10 billion yen. Including the ones that will be launched this year, electronic devices will gain around 15 billion yen.

What is the breakdown of the 3 billion yen increase in the full-year forecast for the head office adjustment since the beginning of the year? Also, I believe the run rate for the head office adjustment for next year and beyond was around 3.5 billion yen per quarter previously. Do you think it will come back to around that level?

We extended the mandatory retirement age for our employees to 65 this year, so the provision for retirement benefits has increased. Additionally, we are actively engaged in various M&A, so there are also expenses associated with that. One way of looking at it is that without M&A expenses it would be around 15 billion yen.

You said the policy for OIS will be a little more forward-looking. What about investment? Does this mean you'll expand or increase the scale of the Cebu Plant, or are you going to put the Cambodia Plant to effective use? Also, will there be capital expenditures involved?

Basically, we're not considering expansion of the Cebu Plant. We anticipate that the increase will be absorbed by the Cambodia Plant. It's not that we're not making capital expenditures, but we aren't in a phase of very large expenditures. As business opportunities increase, we will address them by diverting or modifying existing capacity. We do not believe we will have to make major investments.
Specifically, we will increase our overall capacity by handling OIS for Chinese customers at the Cambodia Plant and using the Cebu Plant for our biggest customers.

So the subcore positioning remains unchanged?

Yes.

In regard to U-Shin, I believe the situation is quite different between the past business of U-Shin and the business acquired primarily in Europe. Which was impacted by the deceleration?

Both. Generally speaking, there is the original U-Shin Group that was profitable and a group operating primarily in other areas of Europe, but the slowdown in the automotive market impacted the profits of both heavily. I can't provide details, but if you look at the situations of our customers, I think you'll see.

The automotive market is unlikely to bounce back significantly in the next period. Are there any other moves you can make besides new products?

Our policy is to create and sell various new products, and we believe the biggest defense is to just go for it. With automobiles, it's clear what we can and cannot do ourselves, so we can't just put our hopes in the part that we can't do. The business that best meshes with us among the five pillars is home locks, so we hope to put our focus there to achieve growth.

You said that LED backlight sales will not drop much from the third to the fourth quarter. Do you see the seasonality that was there in the past becoming less pronounced? Also, what are your thoughts on the trend in demand for LED backlights themselves in the next period?

Generally speaking, there will be a difference in the fourth quarter in the smartphone business. Also, about next year, as I've stated previously, we haven't heard anything from our customers about dropping LED backlights. That's all I can say.

In regard to Mitsumi mechanical components, particularly games, production was quite favorable in the first half, I think. Do you see any risks of deceleration in the second half?

I'm sorry, but I'm not at liberty to discuss that.

Concerning the medium-term direction of Mitsumi, is it correct to say that you'll be beefing up the current business? How do you feel about development of the next drivers for actuators and games, and what progress has been made?

Looking at the current segmentation, games and OIS come to mind when talking about Mitsumi, but for the next driver, first we have semiconductors. When we merged with Mitsumi, we thought we would sell the semiconductor business first, but they have shown very good movement, and now they are at the core of profits.
Also, I think there could be a misunderstanding with past segmentation, but U-Shin's home locks will be backed up not by Minebea but by Mitsumi. Right now, we view integration as the most important thing, and we hope to make what comes about available for sale as soon as possible and prove ourselves. In the next period I hope to be able to introduce tangible results.

Regarding the bounce back in sales for fan motors, will it approach the peak level of the past? Also, regarding automotive bearings, is there some specific factor for why the volume is increasing despite the deceleration in automobile production?

For fan motors, there are drivers like 5G and IoT, so once inventory adjustments in supply chain have come full circle, they will definitely bounce back, but how much depends on how things go in the world. What we can say is that demand bottomed out and has begun rapidly recovering. Based on the past, when we look back a year or two years from now, I think it will be apparent.
As for automobiles, it's unquestionable that electrification is advancing quickly. There are not many companies out there that can guarantee operation of their bearings in temperatures from -30°C to 120°C. Even if competition comes from China, they wouldn't be used in top-ranking cars right away, so we have an advantage. This trend will accelerate all the more in electric vehicles. Despite the environment in the automotive industry being as poor as it is, our bearing volume is increasing, and I think that is an impressive achievement.
As more and more cars are made into electric or hybrid vehicles, bearings will be used in everything from air resistance control to brakes. Steadily capturing this demand will also lead to an improved margin, so we will engage in thorough efforts.

Are you optimistic or quite reserved about the LED backlight figures for the third and fourth quarters? Also, you said LED backlights will not be going away next period. Are your expectations higher than before or the same?

Based on various information, I think things will go well to a certain extent.
As for the next period and beyond, it's just as I said earlier. If there are business opportunities, we'll pursue them.

You said you will continue looking at M&As. Are there any particular fields, products, or technologies?

I can't say anything about fields, but we aim to take advantage of integration and for people to look back later and say, "Now it makes sense!"
I think if you look at a showroom with U-Shin products, you'll feel that way about them as MinebeaMitsumi products.
We'll grow our Eight Spear products and steadily bring integrated products to market. This is a strategy that has remained unchanged over the past several years. That's the gist of it.

It ends about main text.

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