Results for the three months ended September 2010 (1Q11)
Q. Micro-Mechanics' CMA Business in the USA has made major breakthroughs by securing its first strategic supplier agreement (SSA) at the end of FY2010 and achieving its first profitable month in September 2010. Was it the main reason that the CMA Division was able to turn profitable in September? Will more SSA agreements with other customers follow?
A. During the last two years (after acquiring the assets of AMP3 LLC), we have focused on improving the fundamental factors that determine competitiveness and profitability - Quality, Cost, Cycle-Time and Service. By focusing and making steady progress in each of these areas, we have seen our results improve including our first month of profitability in September 2010. However, the single most important factor in becoming profitable is the contribution and commitment of our team at our USA subsidiary who have worked tirelessly to build a foundation for profitability and growth.
Moving forward, we think it is essential to engage with our key customers on a strategic basis. World-class manufacturing requires a long-term approach and with close customer cooperation, we believe we will make much better investment and personnel decisions.
Back to topQ. The Group has USD sales exposure of around 55% and in 1Q11, incurred a foreign exchange loss of S$65k. Given the protracted weakness of the USD, what is the company doing to minimise its forex risk? Have you considered changing the Group's reporting currency to USD?
A. We manage our currency risk by hedging using foreign exchange forward contracts. We also attempt to reduce our USD exposure by requesting customers at various locations to be billed in local currency. These measures however were unable to fully buffer us from the sharp plunge of the USD during 1Q11. We are presently studying ways that can help us further minimise the future impact of currency fluctuations.
Changing the Group's reporting currency to USD may not be feasible as there are considerations under the Financial Reporting Standards (FRS) that need to be taken into account. Such a change would also not provide flexibility for us to revert back to SGD reporting currency in the future.
Q. Can you give an indication of the capital expenditure (capex) you are planning for the China operations over the next 3 years?
A. We are investing about S$1 million in FY2011 to outfit a new factory in Suzhou which is twice the size of our existing facility. This is a long-term initiative to ensure we have sufficient floor space to smoothly expand our operations there over the next several years to capitalize on the continuing growth of China's semiconductor industry.
Q. As some of your factories have capacity utilisation rates that are below 70%, will you be able to defray capex by employing a 'ship from overseas' concept for some of your products which are generally small and light-weight?
A. We already employ a 'ship from overseas' concept for our semiconductor tooling business. In addition to serving customers in their respective domestic markets, our plants in Asia also provide inter-company manufacturing support depending on the consumable tools and parts required.
Our capex expenditure is not only for increasing production capacity but also to enhance our capabilities in areas such as design, precision manufacturing and quality inspection. Our capacity utilization measures the usage of all equipment including some that are not constantly in use, as well as machinery related to our CMA business in the USA which is still recovering from the impact of the recent global recession. Because our manufacturing involves many different types of processes which are not easily modeled into a single denominator, our capacity utilization rate is a very rough guide to factory efficiency. We view gross profit margin as a better reflection of the Group's management of cost, our ability to create value and our competitiveness in the market place.
Q. Sales to the Singapore market have declined in recent years to account for only about 5% of the Group's revenue. Is there a case to downsize your manufacturing operations in Singapore and shift more production to your lower cost factories?
A. While customers in Singapore account for only 5% of the Group's revenue, our Singapore factory is a key production base to serve our customers in Singapore and other geographical markets. In FY2010, sales from our Singapore factory to external customers accounted for 21% of Group revenue. Although the migration of the semiconductor industry to lower cost locations has resulted in a shrinking domestic market, our Singapore factory has a commanding position in the development of higher value products that involve significant know-how and a high level of automation.
We are building Singapore as our Product Development Centre and see it playing a critical role in developing our knowledge and capabilities in cutting-edge 'micro' and 'nano' technologies. This will strengthen our position in the semiconductor industry and also allow us to explore opportunities in other industries that require high precision micro tools.
Q. The Group said that one of the reasons for closing the Switzerland office was the difficulty meeting the technical and cycle-time requirements of customers in Europe. Why are your Asian factories unable to achieve the level of precision demanded by European customers as this will allow Micro-Mechanics to widen the gap with your competitors?
A. The main disadvantage facing Micro-Mechanics in Europe is that customers are located a number of time zones away from our technical people and manufacturing facilities in Asia. This has made it more challenging to meet the technical and cycle-time requirements compared to our competitors in Europe.
With the ongoing shift of electronic manufacturing to Asia, little growth prospect for our core semiconductor business in Europe and a concern that our operations there was becoming a distraction, we decided in May 2010 that it would be more effective to close our subsidiary in Switzerland and support customers in Europe with product distribution directly from our factories in Asia and the USA. Besides enabling us to eliminate S$1 million in annual cost in FY2011, this decision is also allowing us to redirect the energies of our factory in Malaysia on better serving customers in the Asian time zone.
Q. Given the low interest rate environment, has the Group considered using debt as a cheaper way to finance its expansion plans?
A. Our board continually looks at the effectiveness of our capital structure and we have deliberated the use of debt to finance our expansion plans. With our track record of generating positive cash flows and relatively modest capital expenditure needs, we believe there is more value at this time to fund our growth using internal resources.
As there is higher volatility in today's business environment, we intend to continue our practice of maintaining a strong balance sheet which is key to being able to execute long-term initiatives that create value for shareholders.