Q&A

Back to Financial Results (FY3/2010)

Investor Conference Call for 3Q FY 3/2010 held on February 2, 2010

Question and Answer

Can you tell us about the third quarter sales volumes for ball bearings and pivot assemblies as well as the forecast for the fourth quarter? Could you also tell us about your plan for boosting production capacity?

Sales of ball bearings for the third quarter amounted to 180 million units per month, with a monthly volume of 106 million for external sales and 74 million for internal sales. We expect that the monthly sales volume will reach 177 million units in the fourth quarter, with a monthly volume of 107 million for external sales and 70 million for internal sales. While the January sales volume actually exceeded our initial projections, and we expect that sales for February will also exceed our forecast by a wide margin, we don't know exactly how the Chinese New Year will affect our February performance in the Chinese market yet. Monthly sales volumes of pivot assemblies came up to just below 30 million units for the third quarter and sales for the fourth quarter will be about the same.
Although ball bearing production in Thailand slowed down in January due to the New Year holidays and we will have fewer operating days in February because of the Chinese New Year holidays in China and Singapore, we still expect the monthly production volume to bounce back to over 200 million units in March. Since we haven't finalized our production schedule for the next fiscal year, we cannot make any precise projections. We do expect that sales will start to pick up during the first quarter and that the monthly production volume will climb to somewhere between 200 and 220 million units.
Our current production capacity is 230 to 240 million per month. Moving previously used production equipment from our now closed factory in England to China and switching to a three-shift operation, as opposed to the one-shift operation in England, has enabled us to increase the monthly production volume by approximately 20 million units. Once we are able to employ enough factory workers, we should be able to increase our production capacity to 240 million units per month. We expect that the monthly pivot assembly production volume will reach 30 million for this fourth quarter and somewhere between 30 and 35 million in the next quarter. Production volumes will rise once we get the machines needed to boost output and they are scheduled for delivery around the end of March.

Is it safe to say that there is still room for improvement in the machined component segment's operating margin?

We saw large unrealized profit during this past third quarter, indicating that costs are decreasing, so we expect to see improvements in the operating margin for the fourth quarter.

What is the amount of unrealized profit?

Declining unit production costs have contributed to unrealized profit amounting to a 10-digit yen figure for the first quarter, just below the 10-digit yen figure for the second and third quarters.

Did the third quarter operating income performance for the electronic devices and components segment go as you had expected?

Looking at the overall picture, the electronic devices and components segment finally returned to profitability during the third quarter. If you break it down by product, you'll see that the information motor business bounced back in the third quarter and will continue to see profitability increase during the fourth quarter. However, sales for the measuring components business fell sharply, as did profits. The LED backlight business enjoyed increases in both sales and profit. Overall success for the business segment hinges on the HDD spindle motor business. We could have reduced the deficit for this business a bit more during the last quarter. The keyboard business has seen a slight recovery due to a much smaller deficit.

What is the projected amount of unrealized profit for the fourth quarter?

Although we don't know exactly how high February's machined component segment sales will be, sales for the fourth quarter may be higher than projected in light of our better-than-projected January sales. As sales rise, unrealized profit will fall, but once production is increased, unrealized profit will rise due to decreased unit production costs. We expect that unrealized profit for the fourth quarter will generally be about the same as they were for the third quarter.

The machined component segment's fourth quarter operating margin projection of 15.3% is lower than it was for the third quarter. Is that because you expect rod end profit to drag down overall profit?

While profitability for ball bearings is increasing, we anticipate lower profitability for aircraft-related products.

Did operating income for the keyboard business decline in December?

The keyboard business actually turned around in November if you exclude headquarters expenses. Once you factor in those expenses though, it's still technically in the red. Despite a drop in December sales, the business is moving gradually on the road to recovery.

What was the external sales volume for ball bearings in January?

External sales are steadily increasing with 108 million units sold in December and a total of 109 million units sold in January.

How have external ball bearing sales been performing generally?

Fan motors for PCs and household electronics have been the main engine driving ball bearing sales up, followed by automobile applications. Since October, we have also seen sales pick up in the area of office automation equipment.

Have you seen any fluctuations in market shares and prices in the ball bearing market?

Although prices are subject to foreign exchange fluctuations, they haven't changed very much on a local currency basis since we haven't lowered our prices. We have been able to maintain our market share and, although we are currently unable to significantly increase our production volume without increasing our inventory, we expect our market share to grow once we take production to 200 million units this March.

What were the third quarter sales volumes for HDD spindle motors, fan motors and stepping motors? Can you also give us your sales volume projections for the fourth quarter?

The monthly sales volume of HDD spindle motors for the third quarter was 3.8 million units. The monthly sales volume for the fourth quarter is expected to reach 4.9 million units. About 70% of sales come from 2.5-inch HDD spindle motors, both for the third and fourth quarters. While sales will increase in the fourth quarter as demand in the HDD market grows, we also anticipate a shift in the market landscape during the next fiscal year. Although our production volume was only about 4 million units this past January, we sold 4.9 million units, with the balance coming from some products we had in stock. The monthly sales volume of fan motors totaled 6 million units for the third quarter. Even though sales for game consoles usually dip in the fourth quarter, actual performance will exceed our monthly sales volume projection of 5 million units for the fourth quarter since sales already hit 5.8 million in January. The monthly sales volume of stepping motors was 6.4 million units for the third quarter and, even though the monthly sales volume for the fourth quarter had been projected at 7.2 million units, we expect it to climb to somewhere around 7.5 million. We anticipate demand in the office automation equipment industry to remain high.

Demand for rod ends still seems to be low. What is the outlook for the future?

Although commercial aircraft production at Boeing and Airbus has not declined any, they are largely consuming supply chain parts inventories and are not placing orders with components manufacturers like us. Now that the Boeing 787 had its first test flight, we expect to see things move in the latter half of this year.

When do you expect the HDD spindle motor business to turn around?

While we have said that we have been aiming to bring the business back to break even on a monthly basis by the end of the fourth quarter, we haven't been able to successfully improve production yield and increase production volume as much as we had expected. Once we are able to do that, we should be able to turn the business around, but we cannot yet say exactly in which month of this quarter we will do that.

What is your capital expenditure for the next fiscal year?

We have already placed orders for additional manufacturing machines for pivot assemblies and HDD spindle motors. We will start installing these machines early next fiscal year and spend over 20 billion yen on the capital expenditure over the course of the next fiscal year.

Can you give us an update on Panasonic's information equipment motor business you are going to acquire?

We will acquire Panasonic's information equipment motor business as of April 1. Things have been moving along smoothly without any major hitches. Demand is up and business seems to be busy. We expect to see the business make a positive impact on our bottom line immediately after the April acquisition, anticipating it will generate profits in the hundreds of millions during the next fiscal year.

Can you tell us something about the extraordinary gains and losses you expect to post for this fiscal year?

We posted a loss of about 150 million yen associated with the factory closure in the third quarter. This is due to the foreign exchange loss generated as a result of liquidating the information motor factory in Singapore we had actually closed a long time ago. We do not expect to see any major extraordinary losses in the fourth quarter.

What is the effective tax rate going to be like?

Although there are some special factors for the third quarter to account for, the effective tax rate would be about 35% if we were to exclude those factors for the present.

What is the sales ratio distribution for bearings, ball bearings and rod ends combined, by user industry for the third quarter?

The sales ratio breaks down to 15.9% for automobiles, 26.6% for aerospace, 4.4% for home electronics, 7.1% for office automation equipment, 6.4% for PC and related products, 17.1% for motors, and 22.6% for other areas.

You seem to have been working to bring rod end sales up for a long time now. Do you expect to see sales bounce back to the 10 billion yen level for a six month period two years ago?

We are sure that sales will recover to the 10 billion yen level for a six month period in the future.

What is the projected amount of depreciation and amortization expenses for the next fiscal year?

Considering that the amount for this year is about 21 billion yen, it will be 22 to 23 billion yen next year.

Am I correct in my understanding that you can increase production capacity for ball bearings without any major capital expenditure?

As I have said, we have a monthly production capacity of 240 million units. No capital expenditure for additional equipment is required to increase production volume to that level.

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