Latest Update : Nov.16, 2011

Back to Financial Results (FY3/2012)

Investor Meeting Presentation for 2Q FY 3/2012 held on November 2, 2011

* Some parts have been added and modified for a clearer understanding.


Question and Answer

Monthly sales volumes for pivot assemblies have steadily increased this year, reaching 32 million units in the first quarter and 34 million units in the second quarter. We expect that the monthly sales volume for the third quarter will drop to 26 million units. While it should bounce back to somewhere around 33 million units in the fourth quarter, the outlook for the future is still a little cloudy right now. Internal ball bearing sales are expected to decline in the third quarter as well. Our Ayutthaya plant, which produces ball bearings for pivot assemblies, saw a drop in production volume in October but production should be back to normal in November. We don't have any concerns about ball bearing supplies for both internal use and external customers. Since we make machined HDD spindle motor parts like hubs and shafts at both the Navanakorn and Bang Pa-in plants, we will never fall short of these parts but we are now working to secure alternative parts suppliers. Although we are not currently producing HDD spindle motors, we have sufficient stock to meet the demand for the time being. While our vertically integrated production system allows us to maintain a large inventory of parts, we still don't have all the parts we need right now. We are making arrangements to get the parts we need so we can gradually resume operations early this month.
Our initial projection for the third quarter HDD market made before the floods hit Thailand was 175 million units but this figure is likely to drop by 40%. Our forecast for the fourth quarter will be 10% off our original projection of 170 million units.
Operating income for the third quarter will fall to 1.6 billion yen but will bounce back to 4.3 billion yen in the fourth quarter.
Sure, I've met with many customers and suppliers whose facilities have been hit by floods that have told me they want to move. The truth is our new plants will soon reach their maximum production capacity if we keep getting orders at the current pace. The Lop Buri plant will reach its maximum production capacity for LED backlights once we begin production of LED backlights for smartphones. We've already received enough orders to keep the Suzhou plant running full swing. We have also strategically planned out a production schedule for our new Bang Pa-in ball bearing plant with an eye to maximizing production capacity. While our Cambodian plant is a large facility boasting a floor area of 28,000㎡, it should reach full production capacity within a year according to our plan, so it's not really a major concern.
Monthly ball bearing sales volumes for internal and external sales combined were 207 million units in the first quarter and 216 million units in the second quarter. The monthly sales volume for the third quarter is expected to total 195 million units. External sales will remain unchanged while internal sales will dip slightly. The monthly sales volume for the fourth quarter is expected to climb back up to somewhere near 220 million units. While operations at the Ayutthaya and Bang Pa-in plants slowed down in October since many employees had difficulty commuting to work, everything was back to normal in November.
We raised our product prices in the second quarter, but the higher rare earth material prices generated a net loss of approximately 0.8 billion yen since there is a two-month time lag before the increased product prices offsets our losses. The impact of the price hikes for rare earth materials and magnetic steel sheets on our third quarter performance is estimated to total 1 billion yen. We should be able to offset half of this amount by raising the prices of our products, so the third quarter results will be that much better than the second quarter results. We expect to see about the same impact on our fourth quarter performance. After that, we will be able to offset most of the losses on higher rare earth material prices. Once the newer products, employing less rare earth materials are approved, the risk will decrease.
Our only concern would be the problem with the flexible printed circuit (FPC) supply chain. While our major FPC supplier's plant suffered severe flood damage, we are close to getting approval for replacement FPCs. The Suzhou plant started production of LED backlights for tablet PCs this month. Since the plant has only been in operation since April, efficiency will increase over time and the plant will eventually begin pulling its own weight.
We believe that we should make our low-priced motors where labor costs are low. That's why we chose Cambodia and decided to move our production base there. When we look at Cambodia as a possible production base for any of our businesses, we have one basic criteria. That is labor cost. If we stick with this criteria, we are sure to get positive results. As we were looking into different M&A deals, we realized that there is a difference between the way we have always viewed manufacturing and the way low-priced motors are produced in the industry today. We have to change the way we make products and we are now trying different approaches. While we never compromise production quality, we can't afford to overlook low-cost manufacturing options. If we can make the most of these options, we should be able to significantly improve the profitability of our motor business.
Since our insurance policy covers the repurchase value of our assets, most of our fixed and inventory assets are fully covered. We don't know the exact amount yet. The difference between the acquisition value and the book value of the fixed assets will be posted as an extraordinary gain. This extraordinary gain is nontaxable according to the recently revised Thai tax regulations. Since we don't know how much it's going to be and when it will be posted, the gain has not been included in our forecast. Our insurance policy also covers lost earnings, but the amount is not included in our forecast either since it has not been determined yet. So you can see there are some factors that we have not been able to take into account for this latest forecast.
Many small and medium-sized companies seem to have no insurance, and some are considering withdrawing from the market while others are still deciding what to do. We believe in always being ready to make enough products to meet whatever the demand may be at any time. That's just part of our corporate mission. I instruct our people to make enough parts so that we always have enough stock available.
The ball bearing production volume for the second half was 227 million units/month, which was our maximum production capacity. While the monthly production volume dipped to 150 million units in October due to the impact of the flooding, it will recover to 210 million units in November and 220 million in December. Overall the monthly production volume for the third quarter should reach 194 million units. Monthly external sales for the third quarter will remain unchanged at somewhere between 123 million and 124 million units. While the monthly internal sales volume for the second quarter was 90 million units, it is expected to reach 70 to 75 million units in the third quarter. We expect sales to be driven back up in the fourth quarter by the increasing demand associated with reconstruction, reaching 135 million units for external sales and 80 to 85 million units for internal sales. The monthly production volume will remain below 200 million units in January because of the Chinese New Year holidays but will reach 230 million in February and March. The monthly production volume for the fourth quarter will hover around 220 million units.
As of today, we still don't know how long it will take to fix all of the plant's machines. We just started working on putting everything in place, including machinery repairs, so we can resume operations. One of the obstacles we face is a problem with the HDD supply chain due to a temporary halt in production by many of our customers. Roughly speaking, we have a little more than one-month's supply of finished goods and one-month's supply of parts in stock. We will work with this inventory as we make machinery repairs and secure supplies from external sources. Although we are aiming to get production back to the pre-flood level by January of next year, we are still not sure if that's possible. Now that we have placed orders for new, more efficient machines, we will focus on increasing efficiency as much as possible at the beginning of the next fiscal year. While the overall HDD supply chain is expected to fully recover next year, it's unlikely that we'll see it in January. We just have to wait and see how things will go.
The biggest problem we have now is the fact that productivity in Thailand is falling. Although increased production volume has kept sales up, productivity is down because we are at the point where we are biting off more than we can chew. The good news is that our Suzhou plant in China started making LED backlights for tablet PCs this month, which will lead to lower fixed costs per unit. We need more space in our Thai facilities to make room for more production.
Here's the combined sales ratio for ball bearings and rod-end bearings for the second quarter. Automobiles accounted for 16.2%, up 11.7% from the last quarter, aircraft 25.3%, down 6.5%, home appliances 4.8%, no change, office automation equipment 5.8%, up 10.3%, personal computers and peripheral equipment 5.8%, up 7.3%, motors 16.2%, down 10.9%, and other areas 26%, for a 7.4% decline.

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