Q&A

Back to Financial Results (FY3/2019)

Investor Conference Call for 3Q FY 3/2019 held on February 6, 2019

Question and Answer

Can you give a summary of the transient factors in the third and fourth quarters?

First, for the Mitsumi business in the third quarter, there is a 6.7 billion yen return of retirement benefits resulting from personnel system reform acting as an increasing factor. An operating loss, inventory loss, etc. related to the 2018 Hokkaido Eastern Iburi earthquake are included as decreasing factors.
In the fourth quarter, we expect a structural reform cost of 2.4 billion yen in the electronic devices and components business. This is a provision for transfer of production arising from the trade friction between the United States and China and for some inventory.

Are the special expenses expected in the electronic devices and components business in the fourth quarter primarily related to LED backlights?

The production transfer is for sensing devices. Inventory-related expenses are for LED backlights.

Can you say anything about the preparations for the merger with U-Shin? What's your impression? Also, what is the expected time frame for improvements to be seen in distribution, manufacturing, etc.?

This might be the ABCs of M&A, but ultimately, it's people. I went to Europe and spoke directly with everyone from top to middle management, and I felt good about everything, including their eyes and facial expressions. The biggest thing was that they were very receptive to my comments on what I'd like to do.
In the initial due diligence, I took a quick tour of four plants. This time I took various related individuals with me and toured six plants in Europe. We were also able to identify many points to be improved.

I think it's safe to say that current U-Shin profits will be added to profits next year. Is there a chance, though, that it may be a little sooner than that?

I think there are many improvements that can be made in the area of yield. Presently, we are saying conservatively that operating income of 10 billion yen will be achieved in three years, but I have my own very different goal, and I want to make sure that success is attained at all costs. Improvements at U-Shin will create synergy for MinebeaMitsumi as well, so the sooner the better.

When the second quarter results were announced in November, it was stated that next year net sales of 1 trillion yen and operating income of 100 billion yen would be achieved by any means necessary. Will you be taking action to strive for that goal even under the current business environment changes?

Of course. I'll explain the reason in more detail in May, but it's said that the installation base among smartphone users of our North American customer alone is 900 million units. That means there's latent replacement demand. I don't know customer trends, but I think prices will come down to be more accessible to general consumers, and quality will improve. I'm not pessimistic at all about smartphones right now.
As I said before, I really want to achieve net sales of 1 trillion yen next year, a year ahead of the initial target. Going by current profitability, I'm confident that profits will follow.

Without the extraordinary factors in the Mitsumi business in the third quarter, I estimate that operating income in the Mitsumi business this year would be just above 20 billion yen. Compared to this year's result, do you think it's possible for the income level in the Mitsumi business to be maintained or improved next year?

I'll provide more detail in May, but my general thought right now is that Mitsumi performance will not drop significantly next year.
The volume of camera actuators was quite a bit lower than expected this year, but starting next year, there will be steady progress on added value and the shift to multiple cameras. We're making quite significant inroads with Chinese smartphone manufacturers right now, so when those profits are considered, it will be a significant driver of growth.
As for the game-related business, to be honest, I'm not sure, but I've heard that there are several appealing pieces of software coming out this year.

I understand that there's been deceleration in ball bearings for some uses, but the plan calls for slightly higher sales in the fourth quarter than in the third. How is it that sales of more than 30 billion yen can be maintained despite the slowdown? Also, what are your thoughts on next year's sales and production plans?

The content has changed a little for ball bearings in the fourth quarter. The reason that sales won't drop despite the lower number of miniature/small-diameter ball bearings, our main product, is that sales in the NHBB Business Unit and others not counted in the volume will increase in the fourth quarter. Overall, income will fall slightly for machined components because of the change in the product mix.
At this time, we expect the external shipment volume next year to be roughly the same as this year. The effect of economic measures by the Chinese government and other factors have not yet been included. New equipment will be installed in the latter half of next year. We will be carefully reviewing production, including the timing of commissioning that equipment.

So fourth quarter ball bearing sales include a 1 billion yen or more increase in NHBB and others?

Yes, that's right.

In the electronic devices and components business segment, the decrease in income in the fourth quarter seems to be quite large in relation to the decrease in sales compared to the previous quarter, even if you consider the 2.4 billion yen for structural reform. Is there some extraordinary factor like LED backlight inventory or utilization rate?

The fact is that the third quarter started out at a very fast pace, but the brakes were hit suddenly. As of the end of the third quarter, company-wide inventory was thoroughly under control, but some smartphone-related inventory built up. As we optimize inventory in the fourth quarter, we expect the utilization rate to drop significantly. There's also a slight time lag in the response, including personnel adjustments.

Is it safe to say that those things will return to normal for the most part by the end of March?

Yes.

Overall, inventory has decreased as of the end of the third quarter. What about by segment or product, and how will it change from now to the fourth quarter?

Mechanical component inventory has decreased significantly in the Mitsumi business. Otherwise, there have been some slight ups and downs overall, but inventory levels have not changed that much. LED backlight inventory increased slightly.
The fourth quarter will be a complete low season for the game-related business, so we will control inventory tightly. As for smartphone-related products, we will finish addressing the sudden halt by customers and return to normal inventory levels.

Will operations be normal for everything else?

Both external and internal shipment volumes will be a little weaker in the fourth quarter for ball bearings. On the other hand, we will maintain mostly full production. With this, the focus in the fourth quarter will be on taking firm measures like reducing air fees and optimizing operation to return to the way things should be and increase strategic inventory.

It seems like inventory might have been insufficient to begin with. Will the approach be to return to normal levels?

Yes, that's what we're thinking.

With drastic fluctuations in the market, what is your stance as you prepare a plan for the fourth quarter, particularly for the game and smartphone-related businesses? Are you looking at lower limits, or are you somewhat relaxed and going with the current forecast?

We're already a month into the fourth quarter, so things are mostly clear. To use what you just said, we're taking a relaxed approach.

The plan says that in the fourth quarter, external ball bearing shipments will fall below 190 million units. That's more than 20 million below the peak level. On a monthly basis, what is the current trend, and what products are declining how much? Also, in the next change phase, how will things recover?

The monthly average external shipment volume in the fourth quarter will be 181 million units, while the internal sales volume will be 62 million units due to decreased production of pivot assemblies. The total would then be 243 million units. On the production side, the plan is to make over 280 million units, so we believe we will be able to address the past inventory shortage.
Breaking down external shipments, last November, automotive ball bearings hit record high of over 60 million units. In December, the volume dropped due to the number of effective working days, but by maintaining near peak levels in the fourth quarter, we don't expect the automotive numbers to be weak. On the other hand, home appliances like air conditioners and cleaners have been impacted slightly by the economy. Fan motors, especially for data centers, are expected to slow quite a bit in the fourth quarter.
When looking at the fourth quarter volume being the lowest, take into account that the number of effective working days in February is fewer.

Is there a sense that monthly ball bearing volume has bottomed out?

Last January, the external shipment volume was 209 million units. Last February it was 172 million units, and last March it was 213 million units. This January, the preliminary number was 190 million units. This represents a year-on-year decrease of 7-8%, and the volume is expected to remain at this level in the fourth quarter. We do not expect this pace to decline significantly at all.

I understand the fourth quarter plan for smartphone parts is relaxed based on the current situation, but the downward revision of the fourth quarter forecast for LED backlights seems a little mild compared to other suppliers. What is the reasoning behind this?

I can't give details, but the revision has been made based on the forecasts from our customers. Also, the last forecast was a little conservative, so that's coming into play a little, too.

What changes in sales have not been linked to the volume for bearings? Is there anything irregular in there?

Net sales disclosed for ball bearings were 30.3 billion yen in the third quarter, and they're expected to be around 30.7 billion yen in the fourth quarter. This includes ball bearing sales and NHBB, myonic (Germany) and C&A Tool Engineering sales. The average unit price for bearings has not changed that much. On the contrary, there has been a slight price increase effect. However, what is also making up for the decrease in sales is that NHBB and other businesses besides conventional ball bearings have been performing well.

This time the sales outlook for machined components has not been changed. Considering that pivot assembly sales must have also dropped quite a bit, though, I get the impression that something big from outside the original plan has come into play. Is that not something irregular?

We expect pivot assembly sales to fall, but at the same time, we expect NHBB and other sales in the bearing segment and rod-end and fastener sales to increase. As such, we expect overall fourth quarter sales of machined components to come to 47.2 billion. Compared to 47.4 billion yen in sales in the third quarter, that's not much of a change.
Even if sales of miniature/small-diameter ball bearings fall a little short, our other sectors will make up for it. That is one of our strengths, and it's evident here. The aircraft industry is in good shape, and the miniature/small-diameter ball bearings made at the NHBB Chatsworth Plant in the United States are also doing very well. That mix is where the sales are coming from.

In your explanation of the 2.4 billion yen for structural reform in the fourth quarter, you mentioned an inventory allocation. Is this structural reform in the sense of improving business profitability, or does it mean that there will be a temporary expense? Can you expand on that a little more?

It's not to improve next year's P/L through inventory processing. I can't go into details as it also involves relationships with customers, but we will use proper accounting that our accountants will approve of.

Can you tell us the growth rate for bearings by use and the composition?

In the third quarter, the composition was 19% automotive, 31% aerospace, 5% home appliances, 5% office automation equipment, 2% PCs, 16% motors and 20% others.
As for the quarter-on-quarter growth rate, there was no change for automotive or aircraft. For home appliances, it was down 10%. For office automation equipment, it was up 1%, and for PCs, it was down 1%. For motors, it was down 6%, and for amusement, it was up 10% (the absolute amount is small). For others, it was up 3%.

Can you confirm the monthly internal and external bearing shipment volumes and tell us about how long inventory replenishment will continue without dropping the operation rate, assuming that the current external environment remains unchanged?

The monthly external shipment volume in October, November and December was 199 million units, 204 million units and 183 million units, respectively. In January, it went back up to 190 million units, so we anticipate that trend to continue. The monthly internal sales volume in October, November and December was 81 million units, 76 million units and 74 million units, respectively. In January, the volume dropped to 65 million units.
As for inventory, the current utilization rate will be continued until March, and we hope to have about two months' worth of inventory. There was a time when inventory was abnormally low, and there was concern that the customer's line might have to be stopped. To prevent that from happening and to make use of marine transport, we will keep it at the two-month level.

Operating income in the Mitsumi segment was revised downward from the previous plan of 26 billion yen by around 6 billion yen, including extraordinary factors. Sales were also revised downward 26 billion yen. I think that was due to game and smartphone sales, but how much did they contribute to the downward revision?

The biggest factor was optical devices, including OIS. The next biggest factor, although much smaller, was the slight slowdown in mechanical components in the fourth quarter. There has also been some slight movement in precision components and other smartphone-related components, and this has led to an overall decline in income.

It ends about main text.

Tweet