Q&A

Back to Financial Results (FY3/2020)

Investor Conference Call for 1Q FY 3/2020 held on August 2, 2019

Question and Answer

What were the ball bearing sales and production volumes for April to June and July to September? Also, what are your thoughts on a recovery after the July to September period or the bottom-out timing?

The external sales volume was 187 million units in April, 179 million in May, 172 million in June, and 183 million in July. The forecast is for 176 million in August and 182 million in September. The internal sales volume was 65 million units in April, 66 million in May, 64 million in June, and 64 million in July. The forecast is for 65 million in August and 64 million in September. The production volume was 254 million units in April, 258 million in May, 253 million in June, and 253 million in July. The forecast is for 233 million in August and 240 million in September.
As for things picking up, we initially expected a gradual improvement beginning around July. However, we can't deny the sense that things are falling behind due to factors such as the lack of signs of improvement in the Chinese economy and the lack of prospects for a recovery in data center investments in July. Nevertheless, we know what technologies are on the horizon, including 5G, so even if there is some delay in the timing, we believe that things will likely bounce back in the second half of the year. There's no hope of a full recovery unless the inventories held by our customers decrease.

U-Shin sales fell 5.8 billion yen short of the initial forecast. Could you explain how it was that income still came in at the expected level? Was it that the cost improvement effect was greater than expected or internal efforts were effective in the midst of the harsh business environment within the automotive market?

In terms of sales, there were ups and downs depending on the segment or business, but overall, sales were reasonably steady. As for operating income, the forecast was a little conservative to begin with. Additionally, out of the extraordinary factors in the first quarter, which amounted to 4 billion yen, the expenses related to the merger with U-Shin were just under 0.4 billion yen, and just under half of that was on the U-Shin side. This includes the professional fee related to improper accounting in Thailand. If you adjust for this, in real terms we were slightly better than expected.
In the automotive market, the number of automobiles shipped in China is down in particular, so volumes of products like door handles are also down proportionally. On the other hand, because of the electrification of automobiles, the volume of miniature and small-sized ball bearings can be maintained even if the number of automobiles declines a little. In this way, the situation varies a little from product to product even in the same category. U-Shin performance dropped somewhat more than anticipated, but this is due in part to the model change, so we will have to keep monitoring the situation. Looking at past results, the volume tends to go up after August starting in September. At this point in time, it's difficult to say whether it will follow the same pattern this year, so we will keep an eye on it.

If U-Shin sales continue this downturn, do you still expect to achieve the targets for income? Or will caution be required due to the difficult sales situation?

We took a conservative stance on the April to June period. Various improvement effects have been factored into the forecast for July to September and beyond based on the expectation that income will be on par with the previous year. If the assumption that the number of units and income will be on par with the previous year fails to hold, it is possible that income could also fall short.

What is the timing for the launch of LED backlights? Does your judgment with respect to the July to September period remain unchanged from the initial forecast?

The launch has been proceeding smoothly since the last month of the first quarter. At this point, there are no major changes from the initial outlook.

How should we interpret the difference between first quarter electronic device sales and expectations?

The downturn in first quarter electronic device sales was from the model mix. It was not from a change in new models.

What are your thoughts on the timing of when the issue of ball bearing distributor inventory will be resolved?

Initially, we expected things to improve starting in the second half of this calendar year, but that probably will not happen until the second half of the fiscal year or after summer. In July, external sales were up 12 million units from the previous month to 183 million units, and if this trend continues in August and September, I think we can say that a good recovery is underway, but at this stage, it's still difficult to judge.

In regard to electronic devices and Mitsumi, the forecast is for a substantial increase in income in the second half compared to the first half. At this point in time, how sure are you of a recovery?

In the first half, the macro economy slowed, primarily due to trade friction between the United States and China, but in the second half, the issues will gradually get resolved. That is the scenario, and it remains unchanged. Current reports are that all companies are taking on significant damages, but I think it's too early to say whether the situation will continue for a long time.

So at this point in time there is no need to change the forecast for a substantial recovery in electronic devices and Mitsumi in the second half?

That's right. It's difficult to make a judgment at this point in time. There will be new game and smartphone products released, but we still don't know how the market will react to them.

Can you tell us the sales composition and year-on-year growth rate for bearings by application in the first quarter?

Automotive bearings accounted for 19% of sales with a growth rate of 1%. Aerospace accounted for 35% with a growth rate of 12%, home appliances accounted for 4% with flat growth, office automation equipment accounted for 5% with a growth rate of 4%, PC and peripherals accounted for 2% with a growth rate of 5%, motors accounted for 13% with a growth rate of -19%, amusement equipment accounted for 1% with flat growth, and others accounted for 21% with flat growth.

The ball bearing production volume continues to surpass the sales volume. In the January to March period, I believe the intent was to address the inventory shortage, but was it also intentional for production to exceed sales in the April to June period? Were the production levels maintained on the assumption that things would pick up in July? Also, to bring inventory levels down, will it not be necessary to slow operations?

It's basically within the margin of error, so there's no major significance. Inventory levels are as planned.

Can you tell us the status of the launch of new camera actuator products in the April to June period and their contribution to income? I think there will also be new products launched in the July to September period, so could you provide your outlook on that as well?

We had originally expected major business opportunities with smartphones in Greater China in the April to June period, but due to the trade friction between the United States and China, some slight adjustments were made around the middle of the period. If I were going to label the results one way or the other, I would say that they were not that great. For the July to September period, new products will be launched, and I do not see any significant problems.

Can you provide the current outlook for each business in regard to how sales will grow in the next fiscal year?

In machined components, based on the expectation of an overall economic recovery in the next fiscal year, we see external sales of ball bearings easily exceeding 200 million units per month. They will recover to become a cash cow as they were in the previous fiscal year with aircraft demand remaining strong. As for motors, some volumes are down, but there will be various products added to the mix again next year for automotive, so we will work on steadily capturing demand. There have been no forecasts for LED backlight demand to vanish next year. On the contrary, looking at outside reports, it looks like our customers will also be supporting LCD. The scenario hasn't changed at all in that regard. On top of that, “stealth products" will be introduced in various domains, so we hope that will solidify growth in the next fiscal year. I also think we will be able to roll out various “INTEGRATION" activities in the next fiscal year.

You mentioned that you have not been able to buy back shares, but how do you plan to move forward on M&As this year and next?

This year net sales reached 1 trillion yen, and we had said that we wanted to put a pause on M&As, but we've been getting calls from various industries. When those deals get to a certain stage, you can't legally buy back shares. I'm not at liberty to discuss it any further.

When you look into M&As, do the resources required for post-merger integration not become a bottleneck? I believe the president himself goes to the work site to work on post-merger integration, so my guess is that quite a bit of resources are spent just in Europe with U-Shin. Under those circumstances, is it realistically possible to engage in new undertakings?

Yes. There may be concern that if you've already spent considerable resources in a particular business field, you can't allocate resources to post-merger integrations for new deals. However, we still have resources in other business fields. In other words, there are areas where we have extra resources and others where we do not. We are looking into areas where we believe we have resources to spare.

There are reports that some customers of the Mitsumi business are moving production from China to Vietnam. What is your production area strategy?

I won't get into details on specific customers, but our policy is basically to provide full support to our customers.
As for production areas, we have a plant in Cambodia that is ready to go, so we are looking into utilizing it. There are actually many inquiries coming into the Cambodia Plant. However, rather than simply shifting our internal production, we hope to utilize what we have as much as possible to benefit sales.

Were your customers' new products included in the initial forecast?

Yes.

Can you tell us about progress that has been made on improving productivity with ball bearings, such as prioritizing production at low cost plants, and what the effects will be from the second quarter on?

As explained at the last presentation, we are working on such efforts as putting low cost plants into full operation and eliminating overtime as much as possible. We expect to complete these efforts in the second half of the year, so I believe we will see certain effects in the second half of the fiscal year.

You said the timing of business opportunities related to camera actuators in China slipped in the first quarter. Can you be more specific? What kinds of things will you be doing in China in the second quarter?

We had expected that camera actuators would perform very favorably in China, but the trade friction between the United States and China intensified in mid-May, so the volume was not what we anticipated. The same goes for pop-up camera motors. Currently, demand forecast is improving little by little, and the volumes will increase starting around August or September, so we expect things to pick up toward the latter half of the second quarter.

I think the industry overall is facing a situation where production facilities will have to be relocated due to the trade friction between the United States and China. I think there are high hopes for the Cambodia Plant under these circumstances. Will there be any developments during this fiscal year?

There are some companies that are still taking a wait-and-see approach to moving production, but we have been receiving inquiries from various industries. We hope to use the extra space effectively from the standpoint of improving profitability rather than operating on a first-come, first-serve basis. As such, I can't say at this time what kinds of projects will be coming in, but there is a clear sense that various companies are getting serious about moving production.

It ends about main text.

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