Latest Update : Nov.19, 2014

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Investor Meeting Presentation for 2Q FY 3/2015 held on November 5, 2014

* Some parts have been added and modified for a clearer understanding.


Question and Answer

I believe we currently have a 70 to 75% share of the market for thin LED backlights. I don't know if we will be able to maintain a 75% share of this growing market though. As a supplier, we can at least ease the current situation where customers have to scramble to get their hands on a limited supply.
Our major customer shares its product development plan with us and we learned a year ago that the sizes of this year's models would change although I cannot give you any details due to our confidentiality agreement with the customer. Given this backdrop, stylish thin LED backlights will remain in demand for at least a while.
We are also looking to expand applications of our light guide plate technology. One application is for automobiles, and we have been successful in this area. Our LED backlights are now used in a number of luxury cars. Street lights are another example but it is difficult to project what kind of technological innovations will be made in the future or whether there will be any at all. We just have to try and think outside the box in order to expand the scope of the business. That's why we don't have any exact market share target figure for LED backlights. We want to remain the first brand that pops into customers' minds when they think thin LED backlights.
Among smartphones priced 400 dollars or more and those under 400 dollars, Chinese manufacturers' models priced under 400 dollars are growing at a faster rate. When we say high-end products, we don't mean higher-priced models but thinner models. There is no doubt that we have a 70% share of that market. Unfortunately you can't see that in the data shown on this slide.
Our share of the overall smartphone market is a little less than 30%. (Note: Although we said it was "around 12%" during the investor meeting, to be more precise it is a little less than 30%.)
The smartphone industry will hit its limit if it only pursues making smartphones thinner. Manufacturers must look at ways to bring technological innovations to life if they want to survive in this competitive market. We are preparing ourselves to be ready to meet their needs no matter what they may be.
Of course we must work to improve profitability, but since everything hasn't been finalized yet and because we have a confidentiality agreement, I can't go into specifics about the investment in next year's models at this time.
We want to be able to increase our market share, boost production volume, and be ready for the increasingly sophisticated product functions to come.
As a primary supplier, we do consult with our customers to see if a machine will meet their needs before hammering out our LED backlight investment strategy, but you don't have to worry about anyone getting the upper hand over us. Besides no other manufacturer makes them as well as we do.
Given the growth rate and the size of the thin LED backlight market, there's no need to worry about that now.
Profitability is up for all motor products. Moatech is the only business running in the red now. Vibration motors, DC brush motors, and HDD spindle motors were the primary source of deficits. We have already withdrawn from the vibration motor business. Aiming to boost DC brush motor sales, we focused on marketing our signature small, high torque S-type motors and ended up reaping added value. Now HDD spindle motors, for mainly high-end products, are also helping to drive profits up. We've seen a complete transformation of the business landscape across these three areas.
It is basically expected to rise since shipments will increase. When it comes to LED backlights, we make new models before we are asked to cut prices. Production normally drops after it peaks to meet the surge in demand ahead of Christmas. Lately, however, we've seen strong demand from Chinese manufactures, which will keep sales up during the January-March period when demand is driven by the Chinese New Year holiday.
LED backlights will be the big factor behind the increase, but at the same time we expect their sales to rise as well. If sales for the whole year reach 125 billion yen, they will go a long way toward absorbing fixed costs. Although depreciation and amortization costs will rise, fixed costs will account for a smaller ratio in comparison.
Among SG&A expenses, packing and transportation expenses rose the most. The percentage ratio to net sales steadily dropped and is now hovering around 12%. It is expected to remain the same throughout the fiscal year.
Ball bearings are our mainstay business. Naturally we never downgrade its position in our operations. Compared with the large investment we will make in LED backlights, the 1.8 billion yen investment may seem small, but you have to keep it in perspective. We did everything possible to maximize efficiency with a minimum investment, and the result was 1.8 billion yen. We will steadily increase production capacity for ball bearings while adjusting work shifts and working days.
I think we are ahead of the game since we are shipping more ball bearings. It seems that the competitive spirit within the company creates synergy. The machined components business doesn't want to be outdone by LED backlights and that serves to drive performance up. While we were aiming to hit the targets of our Five Arrows strategy within three years, we are likely to achieve our ball bearing business targets next year. That's mainly because we are so far ahead of the pack.
As I always say, the biggest risk of all would be a drastic change in the global economy. The foundational strength of our manufacturing division is just extraordinary as demonstrated by the launch of our mass production system for LED backlights. None of our competitors have done anything like that. Still what I fear most is a sudden change that could impact the entire world, like the Ebola virus outbreak. I believe we are moving in the right direction but things could change and we might find ourselves fighting against the wind. Our strategy to bolster our business foundation is not based on boosting production capacity but rather on strictly enhancing per-capita productivity so we are prepared to make workforce reductions. Barring no major economic changes, our business will grow stronger and we'll keep our focus on shoring up any weaknesses we have.
The ball bearing sales volume for September totaled 242 million units, including 151 million units in external sales and 91 million units in internal sales. Sales are projected to total 242 million units in October, with 148 million units to be sold externally and 94 million units to be sold internally. We expect external sales to remain flat in November and reach 138 million units in December. Internal sales will total 90 million units in November and 89 million units in December.
There are some negative factors to weigh, like the decline of the U.S. stock market a few months ago and the still-lagging European economy. However, we don't expect any major downshift in the production of automobiles, smartphones, or aircraft, which currently constitute our "holy trinity." If a downturn were to occur sometime in the future, it might impact the office automation equipment and industrial machinery industries. Currently, orders are steadily flowing in from machine tool manufacturers, and there is no indication that it will suddenly fall off. Many machine tool manufacturers are confident about their performance for the coming year. Those specializing in our "holy trinity" areas, like smartphone manufacturers, are especially confident. Although demand may dip slightly, the markets have been growing by leaps and bounds and are likely to remain up until March.
We don't have a target for interest-bearing debt. That's because we are always on the lookout for good M&A opportunities. Net interest-bearing debt is currently 105.3 billion yen and the debt-to-equity ratio is at a healthy level. Once the net interest-bearing debt drops below 100 billion yen, liabilities will no longer be a burden.
We are looking into various options. It won't be Thailand because after employing more than 35,000 people there we find it difficult to find more local hires. The Cambodian plant has a 100,000-square-meter open lot right next door. We are currently looking into the possibility of building a facility on that site which will be larger than the plant we have now. As you pointed out, looking into the next site will be one of our priority tasks. That's all I can tell you about it today.
Our sales targets for this year are 83.0 billion yen for ball bearings, 29.1 billion yen for rod-end fasteners, and 35.8 billion yen for pivot assemblies. Sales targets for electronic devices and components are 144.6 billion yen for motors, 148.8 billion yen for electronic devices, 11.4 billion yen for measuring components, and 5.2 billion yen for other products.
Out of total ball bearing sales for the first fiscal half, automobiles accounted for 17%, aircraft 29%, home appliances 4%, office automation equipment 6%, personal computers and peripheral equipment 3%, motors 17%, and other applications 25%.
Although it's not a financial accounting figure, combined sales of hybrid components are expected to exceed 50 billion yen. Since they are spread across our various business segments, calculating the profit total isn't that straightforward.
The fifth arrow of our Five Arrows strategy is aircraft components, and we will pull together to create the necessary synergy. We reorganized the rod-end business by integrating our organizations around the world into one. Since rod-ends are the kind of product that has a long lead time, it will be some time until we can realize any significant synergy. At the same time we are working with our Thai, U.S., and U.K. plants to cut costs further and improve profitability.
LED backlight sales for the second quarter totaled 32.7 billion yen and are projected to reach 43 billion yen in the third quarter. Since our October sales figure of 15.4 billion yen was higher than what it was in September, third quarter sales may exceed our projection.
LED backlight sales for this fiscal year are expected to reach 125 billion yen. That's almost double last year's sales total. The latest monthly sales figure is similar. Sales will increase by 20% next year. That's all I can say about that now except that you'll have to wait until May for more details. We've recently seen a big bump in our production capacity due to the implementation of automated equipment as well as improved yields and although it wasn't easy getting mass production off the ground, our employees' overall skill level has also improved a lot.

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