Q&A

Back to Financial Results (FY3/2012)

Investor Conference Call for 1Q FY 3/2012 held on July 29, 2011

Question and Answer

Although operating income for this first quarter was lower than your projection, you didn't change the interim and full-year forecasts. What are the prospects for recovery in the second quarter and onward?

The second quarter results for machined components, rotary components, and LED backlights will be quite different from the first quarter results. In our most profitable segment, machined components, external ball bearing sales volume for the first quarter were good while sales of products for automobiles and office automation equipment declined in the wake of the massive earthquake that hit northeastern Japan this past March. Unfortunately, our internal sales volume was smaller than we had expected. We did see large unrealized profits as production volume continued to increase on a monthly basis in the first quarter and we expect that both internal as well as external sales volume will rise in the second quarter, leading to a production volume that will exceed our forecast. This will ultimately bring production costs down and performance for the second quarter will improve thanks to increased sales on top of reduced costs. We also expect to see an improvement in pivot assembly sales since the monthly sales volume is projected to rise to 35 million units for the second quarter. That's up from 32 million for the first quarter. We don't see any negative factors affecting our products for the aviation industry now that the supply chain for the Boeing 787 will start moving as soon as deliveries of the aircraft begin. All these factors will help boost the performance of the machined components segment for the second quarter. In the rotary components segment, the HDD spindle motor business, which has been one of our major concerns, is expected to break even during the second quarter. While performance in April was dragged down by the lingering impact of the earthquake, both production and sales volumes were up every month. The business almost broke even in June and will continue to recover for the second quarter. We anticipate that the sales volume for information motors will also continue to climb along with sales. One continual blind spot is the inability to accurately assess how much of an impact the soaring prices of rare earth magnets will have on our bottom line. Back in May we had estimated that rising magnet prices would take a 1.2 billion yen bite out of this year's operating income. Now the loss is expected to be somewhere between 3 and 5 billion yen. While we're not entirely counting on the prospect of raising prices on motor products incorporating magnets, we have started negotiating with our customers for higher prices. At this point we still don't know where those negotiations will take us. All I can say is that while the rotary components segment will definitely see sales grow in the second quarter, we are not sure at this time whether it will yield any profit. The price hike for magnet-related materials in the first quarter wound up costing us only somewhere in the range of tens of millions of yen, but there is no end in sight for the steeply rising monthly losses. The dip in earnings from the electronic devices and components segment was one major reason for the lower-than-projected operating income for the first quarter. Although we saw a two-digit operating margin for measuring components, profit figures fell as sales in the automobile market plummeted. While we had to cut back production of LED backlights due to the inability to get a hold of key components in the aftermath of the earthquake, we quickly boosted production once the procurement problem was solved to meet the orders that had been steadily pouring in. In the final analysis, a large up and down in production volume caused inefficiency and drove up production costs, and we were just not able to generate as much profit as we had expected. While we posted a huge deficit in April and May, the business finally turned around in June. We expect to see a huge jump in both sales and profits in the second quarter for this business.

You mentioned that you received a large order for LED backlights from a tablet PC maker. Who is that tablet PC maker?

I'll leave that up to your imagination. We will leverage the increased production capacity of the Lop Buri Plant in Thailand and the new plant in Suzhou to meet the growing demand for products used in smartphones and tablet PCs. We project sales to soar this year and are just waiting to see how far it will expand the profit margin.

What do you think the first quarter operating income would have been if there had not been any setback from the earthquake?

It's difficult to say, but it would have probably been around 3.5 to 3.6 billion yen. There were also other negative factors like the strong yen and Thai baht against the U.S. dollar as well as rising labor costs. We still have to implement cost reduction measures to deal with these factors. The machined components segment continued to plod along throughout April and May and still wasn't back on track in June. It should be back to normal for July through September.

How were sales for your key products?

Ball bearing sales volume for April totaled 200 million units with 127 million units sold externally and 73 million units sold internally. Sales for May totaled 208 million units, with 127 million units sold externally and 81 million units sold internally. Sales for June totaled 214 million units, with 130 million units sold externally and 84 million units sold internally. Projected monthly sales for the second quarter will reach 217 million units per month on average overall, including 127 million units per month on average to be sold externally and 89 million per month on average to be sold internally despite some adverse effects due to summer vacation. While monthly sales volume of pivot assemblies were 32 million units per month for the first quarter, sales will reach 35 million units per month in the second quarter with the expected increase in HDD productions. Although the first quarter sales volume for HDD spindle motors remained almost unchanged from the previous quarter, sales will increase steadily in the second quarter in pace with the recovering HDD market.

What is your forecast for HDD spindle motor profitability for the second quarter?

Although everything will depend largely on the product mix, monthly average sales for the second quarter should exceed the break-even point. Our biggest concern is how much the appreciation of the Thai baht against the U.S. dollar will affect our performance. We should be able to exceed the break-even point if we can cut costs to offset the impact of a strong Thai baht. We are also seeing positive results after realignment of our Thai production lines last year.

You saw an increase in costs like labor and expenses related to the launch of new plants during the first quarter. How did it affect your performance in comparison with the previous quarter?

We haven't really started selling products made at our new plants in Suzhou and Cambodia, so we have a big inventory of high-cost products including work in progress valued at hundreds of millions of yen. Labor costs went up 3 to 4% in Thailand, about 15% in southern China, and about 10% in Shanghai. While these increases affected only a single month of the first quarter, they resulted in hundreds of millions of yen in losses. The increased labor costs probably caused about a 300 million yen increase in SG&A expenses over the last quarter, including salaries and an allowance for bonuses as well as labor costs associated with R&D. We also saw another 300 million yen increase in overseas travel expenses incurred for business trips related to the launch of new production facilities in addition to increased logistics costs due to sales increases.

What is this year's projection for LED backlight sales?

Although we don't know how much of an impact foreign currency fluctuations will have on sales, we expect to generate 35 to 36 billion yen if the currency rates are just as projected.

Can you tell us about profitability for LED backlights?

The business was in the black in June and will have a profit margin between five to ten percent in the second quarter if everything is O.K. Now that fixed costs have been rising in preparation for the launch of the Suzhou Plant, the break-even point will be 2.3 to 2.5 billion yen on a monthly basis depending on the product mix. Once sales start to take off, the per-unit R&D cost will drop as will the break-even point.

What is your second quarter forecast for the rotary components segment?

While I'm sure sales will go up, the increase in rare earth magnet prices is still unpredictable. Right now we are doing everything we can, including stocking up on materials, in the face of skyrocketing prices. Despite the lingering effect of the March earthquake, the sales volume will increase. As long as it is not knocked off balance by the magnet price hike, the segment will definitely make a profit. It's been only two weeks since we started talking with our customers about raising prices, so we don't know how things will turn out on that front just yet.

Why did first quarter operating income fall so short of your projections?

Operating income for ball bearings and LED backlights was lower than projected. We expected the LED backlight business to generate a profit despite a decrease in operating income. The fact that it ended up in the red was a major blow. While we had to reduce the production volume, we also had orders to fill. That meant we had to make up for delivery delays at a cost of overtime, so there was essentially a big overcommitment and resulting loss. Unrealized profits in the amount of several hundred billion yen were posted due to the increased production of ball bearings in the months of April through June. While we will see unrealized profits in the second quarter, the ball bearing business will steadily generate a profit once our inventory of lower cost products starts to move.

Would HDD spindle motors generate higher profits if you could raise their prices?

Although we expect that the increase of rare earth magnet prices will have some effect on the HDD spindle motor business, we are about to start negotiation with our customers to raise product prices, but outcomes of it is not in our forecast. We have already started negotiation to raise the prices for our other information motors. Information motors that employ rare earth magnets include brushless DC motors and vibration motors. While we expect rare earth magnet prices to continue soaring, we don't know exactly how it will affect our performance. We will try to raise the prices of our products in proportion to the actual increase in rare earth materials prices.

How did the information motors business do in the first quarter?

We had a tough time with stepping motors for office automation equipment in April, but they generated steady profits in May and June. We expect to see a sharp rise in the sales volume during the second quarter. Brush DC motors and vibration motors have still been generating losses. Reducing costs through increased production in Cambodia will make a crucial difference.

What are your plans for small motor production in Cambodia?

The new plant will be a very large facility and a production hub for brush DC motors, vibration motors and micro actuators. Seventy percent of our micro actuator production is currently outsourced. We must switch to in-house production as soon as possible. Labor costs are much lower in Cambodia than they are in China, Thailand and Malaysia. The recent earthquake made us realize that producing the same type of motors at a single production facility poses a big risk. Once this large facility in Cambodia is completed, we will be able to move lines there or build smaller mirror production lines there. The Cambodian plant will basically serve as a satellite of our Thai plants. It will be used for assembling precision parts produced in Thailand. Since we will transport parts to Cambodia, we will start off by producing small motors like those I mentioned earlier and bring in other types of motor production operations if space allows. While we won't move existing production lines already in operation at other plants lock, stock and barrel, we will spread the production of the same motors over several different facilities.

It ends about main text.

Tweet