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Interview with the President. Upfront about Everything

The Star Micronics Group enjoyed strong financial results in the fiscal period ended December 31, 2018 while also reporting record high sales in the Machine Tools Segment. On the other hand, uncertainty surrounding the future is expected to continue despite a market environment that has remained vibrant. Here we provide our thoughts on market conditions and the direction of the Group’s business going forward.

theme01 The Chinese economy is experiencing a slowdown as a result of such factors as growing trade friction with the U.S. What impact is this having on the Group’s operating results?

Trade friction between China and the U.S. is indeed having an adverse effect on the Chinese economy. In general, the machine tools market as a whole is also witnessing a downturn in demand.

Having said this, however, the Group’s Machine Tools Segment is exhibiting substantial growth in China. In fact, we are not seeing any discernable impact on trends in our mainstay Swiss-type automatic lathes with users being asked to remain in a holding pattern due to the current level of robust demand. The downturn in machine tools market demand in China is mainly in the smartphone and other electronics field. The Group’s users, on the other hand, come largely from the medical equipment-related sector, which cover such items as bone screws and implants. Moreover, a large portion of the Group’s activities are geared toward numerous domestic industries. This includes 5G communications-related components, which China continues to promote vigorously. We believe these factors will provide a source of considerable ongoing strength.

Regardless of the economy, the shift toward machines as a substitute for human labor is picking up steam. This reflects the shortage of labor in China as a result of its declining birthrate and aging population. At the same time, the need to introduce new equipment over and above the renewal of existing facilities is also climbing on the back of an increased focus on machine tools (automatic lathes) that address manpower- and labor-saving concerns. Turning also to the automobile industry, and the growing need for increased performance and precision, there are signs of an upswing in new component machining demand, which includes Swiss-type automatic lathes that are distinguished, among other things, for their excellent processing of compact precision parts. Taking into account each of the aforementioned factors, the machine tools manufactured by the Star Micronics Group are exhibiting different trends from other machine tools fields.

From a business cycle perspective, however, we view the upcoming and inevitable downturn in machine tools demand with considerable trepidation. With this in mind, we recognize the need for vigilance with regard to forecasts of 2019 results.

Representative Director,
President and CEO Mamoru SatoLooking back, the scale of each lull in machine tools market demand has grown in intensity. In addition to addressing the increase in short-term orders as a matter of course, we remain acutely aware of the critical need to consistently bolster our production structure and systems as the market enters each period of impending growth.

In the fiscal period under review, the Star Micronics Group worked diligently to expand its production capacity at each production site with an eye toward building a structure that is capable of manufacturing 350 units each month. Despite a bottleneck with respect to the procurement of principal parts, we have successfully minimized any adverse effects by promoting various countermeasures including the replacement of certain suppliers. We anticipate that production capacity in 2019 will exceed the fiscal period under review, with signs of an end to the current shortage of parts.

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theme02 While sales of mPOS printers are strong in Europe, results remain flat in the U.S. and Japan. What can you tell us about the direction of business amid the gradual increase in new settlement methods?

mPOS printer competition is becoming increasingly fierce with each passing year. Despite this competitive environment, the global mPOS market continues to expand. Moving forward, we are confident in our ability to take full advantage of this expanding market by introducing attractive high-value-added products. Sales of mPOS market products related to the mCollection® brand released in 2018 are expanding steadily and contributing to an increase in market share. Moreover, we are anticipating a further pickup in demand on the back of investments aimed at addressing reductions in the tax rate as well as government subsidies in the leadup to the scheduled consumption tax rate hike in 2019.

Technological advances in cashless and other settlement methods are also emerging as a major trend in recent years. This includes the growing incidence of fully automated stores and register-free settlement methods. However, these phenomena are concentrated on such specific outlets as major retail stores. Meanwhile, the target markets for mPOS-related products are completely different. Looking ahead, we anticipate that small and medium-sized as well as other retail stores that previously did not utilize mPOS-compatible registers or accept the use of credit cards will increasingly emerge as a lucrative market.

From a global perspective, mPOS demand is projected to climb in earnest. Against this backdrop, efforts will naturally be directed toward improving printer functions and performance as the mPOS market continues to expand. Looking well into the future, we recognize the need to grow our business even further and will actively focus on the development of peripheral products and services.

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theme03 What progress have you made under the Medium-Term Management Plan?

MEDIUM-TERM TARGETS

In the fiscal period under review, the second year of the Medium-Term Management Plan, which will carry the Group through to the fiscal year ending December 31, 2020, both revenue and earnings exceeded established targets. In specific terms, net sales came to ¥60 billion and operating income totaled ¥7 billion largely as a result of robust trends in the Machine Tools Segment. By business, the Group successfully commercialized fixed headstock automatic lathes and released a system that monitors machine operations in the Machine Tools Segment. The Group also unveiled two new fixed headstock product models during the fiscal period under review with plans to further expand the lineup going forward. In addition, the decision was made to construct a new solution center on the premises of the Kikugawa Factory in Japan. By setting up certain facilities including an exhibition showroom, energies will be directed toward enhancing the Group’s before-sale services to customers. At the same time, we will establish an evaluation test room where we can conduct product tests with Asia’s high-temperature and high-humidity environments very much in mind. Our goal is to comprehensively bolster our business capabilities from product development to sales. Turning to the Group’s manufacturing activities, we are shortening lead times and reducing inventories by expanding models that are compatible with modular design and production.

In the Special Products Segment, we took steps to develop high-value-added products targeting the mPOS market. This included the launch of mCollection®, a new brand of mPOS-related peripherals. In addition to expanding sales in the future, we will introduce new systems and adopt various measures in a bid to strengthen supply chain management.

As far as the Precision Products Segment is concerned, the consignment of non-wristwatch component production is exhibiting a substantial decline. This largely reflects an upswing in competition from various countries throughout Asia where products can be manufactured at a lower cost. As a part of its ongoing restructuring endeavors, the decision was also made to terminate production of precision products at the Group’s Dalian Plant in China as of the end of 2019. Moving forward, we will continue to promote a host of measures including the reorganization of production bases in an effort to improve profitability. We will also work to increase productivity by streamlining production and promoting automation utilizing IoT.

In order to create new businesses, the Star Micronics Group will leverage the research and development base located in the Tokyo Office newly established in the fiscal period under review. In addition, we will actively consider M&A as well as business alliance opportunities as a wellspring for the birth of new businesses.

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theme04 What is your outlook regarding business result forecasts for the fiscal year ending December 31, 2019?

While the global economy as a whole is projected to experience a period of ongoing modest recovery, conditions are expected to remain uncertain in the future. This uncertainty is due to the difficulty in predicting operating conditions as a result of various issues including trade friction between the U.S. and China as well as problems associated with the U.K.’s withdrawal from the European Union and the impact of these issues going forward.

Under these circumstances, and in the context of the Company’s consolidated business performance for the coming fiscal year, the mainstay Machine Tools Segment is projected to confront a mixed operating environment. NET SALES AND OPERATING INCOMEWhile there are concerns regarding the impact of a slowdown in economic conditions, demand is expected on the back of ongoing automation needs both in Japan and overseas. Turning to the Special Products Segment, trends are anticipated to remain firm, spearheaded by a pickup in demand in Japan in the lead up to the consumption tax rate hike. In the Precision Products Segment, where the Group is undertaking various measures including the reorganization of production bases, trends in both wristwatch and non-wristwatch components are projected to be sluggish.

In this business environment, we expect net sales of ¥66,200 million, operating income of ¥8,800 million and net income attributable to owners of the parent of ¥6,300 million in the next fiscal year.

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theme05 Can you comment on the Company’s approach toward corporate governance and returns to shareholders?

Individuals appointed from outside the Company make up a majority of its Board of Directors. In specific terms, three of the seven-member Board of Directors are appointed in-house while four are outside directors. In order to ensure that Star Micronics continues to evolve as a true global company, we will consider the injection of diverse human resources on an ongoing basis.

In addition, and from a shareholders’ return perspective, Star Micronics’ basic policy is to target a total consolidated payout ratio of 50% or more, including the repurchase of own shares, while taking into consideration its consolidated dividend on equity (DOE). In the fiscal period under review, the Company repurchased its own shares at an acquisition cost of approximately ¥1.8 billion. All of the shares that were repurchased were retired. Star Micronics set its annual dividend at ¥54 per share, up ¥2 per share compared with the previous fiscal year. On this basis, the Company has continued to increase its cash dividend for an eighth consecutive fiscal year, and as a result, secured a total payout ratio of 55.2% with DOE coming in at 4.1%.

CASH DIVIDENDS PER SHARE AND DOE

Turning to the payment of dividends for the next fiscal year, Star Micronics is looking to pay an interim and period-end dividend of ¥28 per share for the fiscal year ending December 31, 2019. This will bring the annual dividend to ¥56 per share, a ¥2 per share increase compared with the fiscal period under review.

Moving forward, the Company will continue to target DOE of 4.5% or more and ROE of 12.0% or more, both of which are medium-term targets under its Medium-Term Management Plan. While maintaining its focus on actively reforming its business and management, Star Micronics will work in unison to enhance its corporate value.

*1. The consolidated fiscal period for the fiscal period ended December 31, 2018 is based on and presented for a 10-month period for the Company and consolidated subsidiaries in Japan and a 12-month period for overseas consolidated subsidiaries.

*2. Figures presented as a reference for the fiscal period ended December 31, 2018 have been calculated to facilitate a comparison with forecasts for the fiscal year ending December 31, 2019 under the same conditions (a 12-month period for both domestic and overseas Group companies).

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