Q&A

Back to Financial Results (FY3/2021)

Investor Meeting Presentation for 2Q FY 3/2021 held on November 6, 2020

Question and Answer

What was the thinking behind setting the operating income forecast to the lower limit of 50 billion yen? At other parts manufacturers, automobiles and games have done better than anticipated, and other than LED backlights, smartphones in North America have been a positive factor. It seems like you have left out positive factors such as that and only incorporated the negative factors of aircraft and the specific customer in China. Is it that you have included things like bearing production adjustments and second half LED backlight risk?

It may have sounded like we haven't included positive factors, but there are always accounting differences as you pointed out. Parts for automobiles did better than anticipated, recovering since around July, and bearings could break records. On the other hand, we deliver to a wide range of customers, so there are quite a few negative factors as well, including textile machinery, office automation equipment, and smartphones for the specific customer in China. This time, we were conservative and set the forecast at 50 billion yen, but bearings forecast, for example, go up and down every month, and demand is currently fluctuating significantly. The yen is also appreciating, so this makes precise forecasts difficult. Looking at the big picture under these circumstances, I think it's probably best to be conservative.

In regard to bearing inventory adjustments, looking ahead to next year, it looks to me like you could leave inventory levels alone since demand is on the rise. Would it be correct to say that by adjusting inventory you intend to further increase the profit margin for the future?

Yes, that's right. In these times where we don't know what's going to happen, we believe we should implement a strategy that addresses risk rather than thinking about 1 or 2 billion yen and going overboard right now to avoid adjusting inventory levels downward. There's also the problem (with the trade friction) between the United States and China, and we can't predict what's going to happen next year. As such, we believe that when we can reduce bearing inventory, we should, taking fiscal discipline into account.

The words cost reduction appear several times on the slides. Is it correct to say that this includes in the sense of ensuring cost competitiveness for bearings?

Yes, that's right. We have implemented various measures for bearings, but we have not been able to go on business trips up to now. This has made it difficult to talk face to face and communicate our thinking. We have been doing what we can, using DX tools and the like, but we hope now to implement thorough cost reductions, including ideas that we have been incubating up to now.

In regard to the North American smartphone business, will the situation with LED backlights be more difficult than anticipated going into the second half? Also, with new technology coming out for camera actuators, what is productivity like for its launch?

There have been various reports about LED backlights, but we have not been able to fully confirm whether new models or cheaper models will sell more. As for camera actuators, we have had no manufacturing problems whatsoever, and things are going better than planned.

To what extent has a potential second wave of COVID-19 been incorporated into the forecast for the second half? You recorded 4 billion yen and 1 billion yen as costs for COVID-19 measures in the first and second quarters, respectively. How will that change in the second half?

We have carefully reviewed the most recent forecasts to produce our earnings forecast, and it includes the impact of COVID-19, so we have added stress from the standpoint of demand. However, we do not expect to have costs such as loss of time in the second half like we did in the first. There are lock downs in Europe and the United States, but our assumption is that we will basically be able to continue plant production activities.

So is it correct to say that the stress will be in terms of demand and not particularly in terms of costs?

Yes, that's right.

Can you give us the results/estimates for game parts supplied for a fee in the second quarter and onward? Also, can you tell us the factors behind the substantial increase in operating income in the Mitsumi business in the second quarter compared to the previous quarter by main business?

In regard to parts supplied for a fee, in the second quarter, it came to around 40 billion yen. In the third quarter we expect it to be around 32 billion yen, and in the fourth quarter, we expect it to be around 10 billion yen. As for the factors behind the increased income, the biggest thing was game production peaking. Next was the strong showing by semiconductors at both Mitsumi and ABLIC. Finally, there was a big decline in optical devices for the Chinese customer, but we got off to a strong start with our North American customer. We anticipate that this trend will continue into and peak in the third quarter. Games will be down slightly in the third quarter, but we expect to maintain a very high level of production.

Can you give us the monthly external and internal ball bearings sales volumes and production volumes for July, August, and September? Could you also give us your projections for October and onward if possible?

External sales volumes for July, August, and September were 183, 188, and 214 million units, respectively. Internal sales volumes were 55, 52, and 47 million units, respectively. The production volumes were 240, 247, and 242 million units, respectively. As for the most recent forecasts for October and onward, we expect external sales volumes of 211 million units in October, 217-218 million units in November, and 207 million units in December for an average of 212 million units, which is slightly higher than the 210 million units you see in the material. The average internal sales volume will be 55 million units, and the production volume will exceed 250 million units. In regard to production volume, we will look into controlling it along with some inventory adjustments.

In regard to camera actuators, did things slow down with the Chinese customer after capturing heavy front loading until midway through the first half? Can you give us your thoughts on the difference between the first and second halves?

There were some deliveries in the first quarter, but production has been significantly throttled back since the second quarter, and we anticipate that this trend will continue in the third and fourth quarters. There was some front loading with semiconductors, but it is assumed that our camera actuators are installed in certain high-end models, so there was no particular front loading in that regard, and that was one factor behind the drop in revenue.

Has there been any change in your view of the share of camera actuators for North America?

I cannot comment on our view of the share, but nothing in particular has changed.

I think there is a shortage of analog semiconductors in the market as a whole due to COVID-19. You have some assembly at your Cebu plant. Have you had any particular problems in terms of supply, including distribution? There is also a shortage of semiconductors for power supply systems and such, so haven't you seen an increase in demand?

Operations are normal. We do not have any problems with processing or assembly. ABLIC does their assembly in Akita, so we want to build that up more from the standpoint of BCP. We have had a tremendous volume of inquiries from customers, and that is boosting our performance. We expect this trend to continue for some time.

I think the balance between supply and demand must be tight. Do you have any concerns about future production capacity?

We will put every effort into fulfilling our responsibility to provide our customers with a stable supply.

What is the background behind the drop in profit margin despite the increase in sales from the first to second quarter in the machined components business? Also, in the second half, it appears that ball bearing shipments will be favorable and production will not decrease that much, but what about the profit margin?

In the second quarter, sales of rod-ends for aircraft dropped, and that was one of the factors working to decrease profit. Income also dropped in conjunction with the decline in sales of parts for aircraft included within ball bearings. However, the miniature ball bearing production volume is growing, and profitability remains the same. In the second half, aircraft components will be mostly flat, but external sales are growing, so we believe the numbers in this forecast are conservative.

When it comes to camera actuators, what kinds of opportunities will there be in the North American business going into next year? What is the relationship between purchased components and the profit margin? Also, can you tell us about expanding the customer base for components for Chinese smartphones?

The unit selling price is high for new products, including purchased components. The per unit profit margin is smaller, but there is no change in the aim of offering higher added value per unit. Next year, I think we will definitely have more business opportunities, including the upcoming change in the model mix and the number of built-in components. Outside of our North American customer, unfortunately, the market for very high-performance components for flagship manufacturers has disappeared, but we expect there to be an increase in new plans next year and onward with other customers. When that is taken into account, I believe there is plenty of room for growth next year.

In regard to game consoles, what is the outlook for next year and onward? If the number of game consoles were to peak, what would be the pillar of revenue in the Mitsumi business next year?

We expect analog semiconductors, including ABLIC's, to continue growing significantly next year. We also believe that power supply components and connectors will bring in solid increases in income. Whether we could make up entirely for a hypothetical decrease in games depends on the amount of the decrease, so it's uncertain, but I believe that the results of the Eight Spears basic strategy that we have been implementing, including in other businesses, would manifest so that we would make up for it.

With camera actuators, I think sensor-shift sales will continue to increase next year and beyond, but are you planning any efforts to increase added value such as bringing parts manufacturing in-house? Also, if major Chinese companies were able to purchase chip sets from other companies, could the camera actuator business still recover?

I cannot comment on whether we would bring parts manufacturing in-house, but we will work on increasing the profit margin in many ways. As for the Chinese customer, if that possibility arose, I think we would be able to be a part of it as well.

If they were unable to design semiconductors in-house, I think it would be difficult that the actuators will be same one from a technical standpoint. Has that problem been solved? Have you even discussed it?

At this stage, we haven't yet discussed it.

In regard to ball bearings for aircraft, has there been a significant impact on the profit margin due to the drop in special ball bearings and other highly profitable ball bearings?

There has been a significant impact on the amount of profit.

I understand that the operating rate is high for analog semiconductors, but how much room is there for growth going into next year? Would growth be achieved by improving productivity or is there still room to increase the operating rate? Could you provide an explanation?

I have heard that once the operating rate gets above 85% for semiconductors it would be difficult to go any higher. Right now it's just above 80%. We also outsource production, so there is still capacity. It depends on the product mix as well, but we already have a plan for next year that lays out what we will outsource and what we will produce in-house, so just know that these will be brought into it.

Custom products such as camera actuators, games, and LED backlights are affected by customers' circumstances. On the other hand, general-purpose products are market-linked and hinge on competitiveness. In the future, what will be your strategy for highly custom products?

The custom products to which you refer are a sub-core business of our company, and we are prepared to adapt to changes in technology and other developments. Even if we were not able to adapt to such changes, we are involved right now because they are sufficiently profitable.
Our policy is to control the overall percentage and grow our core businesses or the Eight Spears as much as possible. We took a big hit, but rather than responding by withdrawing from our sub-core businesses, we hope to keep them to around 20% of the whole. Custom products have their risk, but on the other hand, they are worth it for the very high added value. However, if we were to only focus on these products, the risk would be too high, so our basic strategy is to grow the Eight Spears.

In regard to the breakdown of external sales of ball bearings, can you tell us about the current trends for fan motors, automobiles, and other uses and when they bottomed out?

Ball bearings for automobiles bottomed out in May, and by October they had recovered to a record high. Conversely, ball bearings for fan motors hit a record high in May, and since then they have decelerated and remained flat due to the trade friction between China and the United States. Ball bearings for other uses mostly bottomed out in May, and from September to October, some have reached record highs. There were some likely impacted by stay-at-home demand, such as fishing reels and power tools.

In regard to the profit margin for machined components, will it be difficult to recover to the 25% level of before without a recovery in aircraft?

If there is no recovery in aircraft, we will be in trouble. Overall, there would be a significant impact. External sales of bearings are increasing, but internal sales are struggling due to the decrease in pivots. Overall, we have entered a transitional period.
We believe that external sales will continue growing. Ball bearings for fan motors are down compared to the peak, so we see room for growth. If that exceeds the drop in internal sales due to the decrease in pivots, we will be able to increase overall production, which will increase our earning power. On the other hand, this fiscal year our policy is to purposely decrease inventory, so I think production will increase midway through the fourth quarter, but for the time being, we are consciously avoiding ramping up production.

It ends about main text.

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