Q&A

Back to Financial Results (FY3/2013)

Investor Conference Call for 3Q FY 3/2013 held on February 1, 2013

Question and Answer

What are the prospects for your Rotary Components business? How much will it cost to exit the core-less vibration motor market? When do you think the business will break even in light of the current financial performance of the vibration motor business?

We are planning to withdraw from core-less vibration motors by the end of this fiscal year. We expect to incur about 1.2 billion yen in restructuring costs, including losses on the disposal of fixed as well as inventory assets. The withdrawal will effectively eliminate a yearly deficit of about 600 to 700 million yen beginning the next fiscal year.

Will the dissolution of the joint venture motor business with Panasonic have any immediate effect on your financial performance?

The immediate effect will total a positive 200 million yen annually. While there is no specific date yet, we are planning to absorb Minebea Motor Manufacturing Corporation into Minebea in April or May to cut overlapping indirect costs. This is expected to bring its bottom line up several hundred million yen.

You said previously that you will turn the Rotary Components business around by the second quarter of the next fiscal year. Are you sticking to that statement?

It may be difficult to realize this forecast if the economy doesn't pick up from where it was between October and December 2012. However, we are breathing a small sigh of relief since motor sales in the office automation equipment market started to show signs of recovery in January.

Would I be right in thinking that you may implement an additional structural reform between January and March, or during the next fiscal year, using the proceeds from the insurance claim related to the floods in Thailand and sale of the Omori Plant property?

Yes. You could say that.

Regarding the Machined Components business, what were the sales volumes for ball bearings and pivot assemblies during the third quarter and how will they change in the fourth quarter?

The third quarter sales volume for ball bearings was 192 million units per month on average. This included 118 million units in external shipments and 74 million units in internal shipments. The monthly production volume dropped 188 million units on average. Sales for the fourth quarter are expected to be slow due to the Chinese New Year holiday in February. The external sales volume is projected to be 118 million units on average. January shipments were higher than we had expected, with the external sales volume increasing to 126 million units. The monthly internal sales volume is expected to be 65 million units on average since we've cut back on production of ball bearings used in pivot assemblies. If external shipments remain at the current level, the monthly average sales volume for the fourth quarter may exceed 120 million units, and the total sales volume, combined with internal shipments, may reach 180 to 185 million units. Since we have to cut back production, the monthly production volume will be around 175 million units.
The monthly average sales volume of pivot assemblies for the third quarter was 31 million units. The sales volume dropped to 28 million units in December due to major inventory adjustments. Although the monthly average sales volume for the fourth quarter is projected to remain flat at 31 million units, shipments bounced back in January to total 34 million units. Sales volume, however, are expected to fall to somewhere between 27 and 28 million units in February due to the Chinese New Year holiday.

What is your outlook for the Machined Components business in the fourth quarter compared to the third quarter performance?

We expect to see profit figures for ball bearings and rod-end fasteners in the fourth quarter increase over what they were in the third quarter while earnings for pivot assemblies will remain flat.

You said the performance for the ball bearing business in the fourth quarter will be better than it was in the third quarter. How can profits rise when both sales and production volumes are expected to fall from their third quarter levels?

It all has to do with the ratio between external and internal sales volume. External shipments will rise while internal shipments will fall in the fourth quarter. Sales unit prices are higher for external than internal shipments and so is the profit margin. This is expected to affect profits.

In order to achieve this fiscal year's operating income forecast of 15.5 billion yen, we need to see operating income rise 2.0 billion yen quarter on quarter in the fourth quarter. You said that quarter on quarter, profits for ball bearings and rod-end fasteners are expected to rise on the increasing external sales volume and the falling yen, respectively, LED backlights earnings are projected to drop as sales volumes decline, and the motor business is expected to improve. Can you give us a rough estimate of numbers for the increases and decreases?

Although we expect fourth quarter operating income for the Machined Components to increase over the previous quarter due to better ball bearing and rod-end fastener sales, the increase won't go beyond 1.0 billion yen, resulting in a total increase of somewhere in the neighborhood of several hundred million yen. Pivot assembly earnings will remain flat. Although we don't know how the problem with the Boeing 787 will affect our rod-end fastener business, production for January through March will go pretty much as planned. If we need to adjust production due to this problem, it won't occur until the next fiscal year or later. Although the Rotary Components business has seen a major inventory adjustment in the HDD market, orders for our HDD spindle motors used for high end products like 7 mm height 2.5 inch and enterprise HDDs are increasing. Still we don't have a very big share of the HDD spindle motor market. Since the profit margin for high end products is high and the production yield is increasing due to the new equipment installed after the floods in Thailand, we predict profits will be up.

While I recognize that HDD spindle motors were virtually in the red in the third quarter due to the loss from the interruption in operations, do you expect a loss due to interrupted operations to be posted in the fourth quarter?

We don't expect to post any such loss in the fourth quarter.

Then will the HDD spindle motors be back in the black this fourth quarter?

We believe it will be.

Will operating losses for information motors be worse in the fourth quarter than they were in the third?

Given the signs that the office automation product market has bottomed out and is beginning to pick up, we see the possibility for a slight improvement in the fourth quarter.

What is the fourth quarter outlook for electronic devices?

The LED backlight business is expected to see a sharp drop in both sales and profits in the fourth quarter due to plummeting sales in the tablet PC market.

Is there any possibility that electronic devices will dip into the red this fourth quarter?

We don't see things going that far. Although nothing is written in stone, we are looking forward to ramping up production ahead of schedule beginning in March. If that happens, it should bring our bottom line up. At this point it's unlikely that the Machined Components and Rotary Components businesses alone can drive profits up far enough in the fourth quarter to reach this year's operating income forecast.

Would you give us the figures for the impact from foreign exchange fluctuations?

Quarter on quarter, foreign exchange fluctuations brought a 1.3 billion yen increase in net sales and a 0.4 billion yen drop in operating income. The Thai baht and Chinese renminbi remained strong against the dollar and euro. The Thai baht has been gaining on the dollar and now stands at 29.8 - 29.9 baht to the dollar, a rise over the second quarter when it was 31.5 baht to the dollar.

While the yen is weakening, is there a possibility that currency fluctuations will negatively impact your fourth quarter operating income?

It's possible that it could have just a slightly negative impact.

In light of the cumulative third quarter results, your fourth quarter operating income forecast seems out of reach. Why didn't you revise your full-year forecast?

Mainly because, at the moment, we don't have a clear picture of our total earnings outlook. Gains on sales of the Omori plant property and insurance claims related to the flooding damage in Thailand have not been finalized yet. Everything should be finalized by March and we expect the figures to be very large. I explained earlier that we will have to make structural reforms to some of our operations besides our core-less vibration motors. Since we don't have figures for the extraordinary profit and loss forecast, the net income figures may vary significantly. That's why we did not change the full-year forecast at this time.

Given that you only supply tablet PC LED backlights to a specific panel manufacturer and don't supply any for use in mini tablet PCs, what kind of progress are you making as you move into the next fiscal year and how do you plan to gain new customers?

We are now shipping LED backlights for tablet PCs to several customers and our main goal for next year is to increase our customer base. Doing that will bolster our foundation so we can maintain stability amid the shifting market sands.

You mentioned you were shipping LED backlights to multiple customers. Are you just talking about the panel manufacturers you supply them to or do you mean tablet PC makers?

I was talking about the end customers.

During the next fiscal year, major smartphone and tablet PC manufacturers are planning to launch their products simultaneously. If you want to get orders from multiple customers, you're going to need significant LED backlight production capacity. Don't you think you will face major changes in production volume if you expand your customer base and they all launch their products at the same time? What are your feelings about that?

Major changes in production volumes will present challenges. We are working to outsource more so we can meet the challenge head on, but there aren't many subcontractors who can guarantee the production capacity and quality we need for these kind of large orders. Finding capable subcontractors will be a huge task. When it comes to major changes in production volume, capital investment can be a risk but the biggest problem is personnel. More employees means higher labor costs while greater turnover takes a toll on the skill level of the workforce. We are putting our heads together to find ways to shift to simple, automated operations so that we can build a hands-off production system that will enable us to alter production lines more quickly than ever. Once we make progress on that, we should be able to better deal with major changes in production volume.

On top of the loss incurred from interrupted operations, third quarter operating losses for the Rotary Components business were actually greater than what they were the previous quarter. Is that drop a result of declining HDD spindle motors profits?

Yes, HDD spindle motors experienced the biggest decline. Although production and sales volumes rose steadily in the first and second quarters, production volume declined in the third quarter.

Does that mean profits for HDD spindle motors suddenly fell off in December?

Yes.

Do you expect HDD spindle motor production to be back on track from January to March?

Yes, we believe so. Production and sales volumes were just as we expected, at least for January.

What are the estimated forex rates? The estimated exchange rates for the fourth quarter are the same as initially estimated for this fiscal year, like the 77-yen-to-the-dollar rate. Is that right?

Yes, that's correct. There has been no change to our estimated fourth quarter foreign exchange rates.

You said earlier that the stronger Asian currencies will have a negative impact on the fourth quarter results. Is that against the backdrop of the current exchange rates or your foreign exchange rate forecasts?

We expect the current exchange rates for Asian currencies to take a toll. While the bulk of our production operations are based in Thailand and China, we often ship parts and materials from Japan so reducing the costs of those parts should cushion that impact. The weak yen may boost sales and profits in Europe. Fluctuations in currency don't have an immediate impact on materials costs since we are working from inventory and it takes time to ship them in the first place. If we were to ship parts and materials by sea, we wouldn't see the foreign exchange impact for at least a month. We don't expect to reap the full effect of the weak yen until after March or April.

Since it will take all that time for the impact of the weak yen to surface, can we expect to see the positive effect of overall currency fluctuations after March or April as well?

Yes, that's correct. Materials costs in particular have a huge impact on any operations dealing with motors. On the other hand the strong baht and renminbi have added to costs incurred in Thailand and China, such as labor and electric power. Offsetting these costs rests in the hands of the purchasing division.

Should we trust that the weak yen will push sales and profits up in the next fiscal year?

Yes, it should. We believe that the recovery of the US market will also fuel our performance.

What impact will the gain from the sale of the Omori Plant property and insurance payout for flood damage in Thailand have on fourth quarter extraordinary losses and gains?

We believe the net gain from sale of the Omori Plant property will come to a little over 4.0 billion yen. The insurance payment covering lost earnings due to flood damage in Thailand will be posted in the next fiscal year but other gains totaling about 2.0 billion yen will be posted by the end of March.

Are you planning to use just about all of the 6.0 billion yen in extraordinary gains, which includes a 4.0 billion yen gain from the property sale and 2.0 billion yen from insurance, to implement the next structural reform?

Although we don't have a specific amount in mind at this time, we are considering implementing further major structural reforms.

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