Q&A

Back to Financial Results (FY3/2020)

Investor Conference Call for 3Q FY 3/2020 held on February 5, 2020

Question and Answer

There was an explanation that ball bearing inventory with the higher cost was shipped first. I think this was known at the time of the announcement of second quarter results. What was different from your anticipation? Also, in April to June in the next fiscal year, is there potential for the operating margin to go higher than the past average with the effect of lower costs from increasing operations now and the effect of productivity improvements made in the past when you had some leeway in operations?

I'll start by explaining the factors behind third quarter operating income for machined components dropping compared to the previous quarter to ¥9.6 billion. First, in regard to machine components related to aircraft, some are included in ball bearings, and others in rod-ends and fasteners. This income was down. The main factor behind that was that there were fewer working days in Europe and the United States due to the Christmas.
Next, regarding ball bearings, from the second to third quarter, the external shipment volume increased from 185 million to 202 million units, but income did not increase as anticipated from that increase in shipments. Including internal shipments, the production volume stayed quite a bit lower than anticipated in the first, second, and third quarters at 255 million units, 244 million units, and 259 million units, respectively. This resulted in an increase in the average unit price of inventory. As a result, income was lower than anticipated.
As for the outlook, internal shipments will remain at a certain level, primarily for HDD, but we anticipate significant growth in external shipments, so we plan to increase production accordingly. The inventory turnover period is several months, so by clearing these high cost inventories, we anticipate that profitability will be greatly restored starting next fiscal year. As such, third quarter income was down slightly, but we believe it will recover quickly.

In addition to the accelerated pace of production in the second half and growth of external shipments next fiscal year, when the efforts to date for reducing production costs are considered, is there a possibility that the operating margin may increase in spurts around April to June? Or will it bounce back gradually?

We believe that we will see a return to last year's profit levels relatively soon, but the situation needs to be examined a little more carefully.
Note that we have formally raised the production capacity from 300 million units to 315 million. By "formally," I mean that the machines are in place, but not all of them are operational or being used. The reason for that is that the total sales volume combining internal and external sales has not yet reached 300 million units.
When we say that external shipments will be 210 million units in average next year or potentially higher on a monthly basis, the intent is to get back to a total production volume of at least 300 million. The remaining capacity of 15 million units is to make sure that we can handle any situations that arise right away.

The full-year forecast for operating income in the Mitsumi business has been increased, but what kind of developments will there be in the third and fourth quarters by product?

In regard to the third quarter, game-related business exceeded expectations as explained. As for optical devices, some portion planned for the third quarter was pushed back into the fourth quarter due to supply chain issues.
In regard to the fourth quarter, the new coronavirus has not been taken into account, but we expect to have added value in the product mix from new models of Chinese smartphones. I cannot comment on specific customers, but there are plans to introduce new models, so there are business opportunities.

What were the monthly external shipment, internal shipments, and production volumes for ball bearings in the third quarter?

By month, external shipments came in at 195 million, 206 million, and 206 million in October, November, and December, respectively. Internal shipments came in at 65 million, 67 million, and 65 million, and the production volumes were 254 million, 260 million, and 263 million, respectively.

Will internal shipments and production increase further in the fourth quarter?

Not taking into account the new coronavirus, the average will be 205 million, 67 million, and 271 million for external shipments, internal shipments, and production, respectively. We expect March production to approach 300 million units.

In regard to LED backlights, I believe the third quarter results were strong, but could you explain how the outlook for the fourth quarter, and next fiscal year has changed since the briefing in November of last year?

First, the third quarter results for electronic devices were as expected for the most part.
In the fourth quarter, favorable performance of existing models will complement the launch of new models, and operations are currently being maintained. As such, we believe that we will be able to secure at least a certain level of income in the fourth quarter.
As for next fiscal year, I can say once again that liquid crystal displays are not going away. I cannot say anything about volume, but considering various predictions, you can understand that we will have plenty of business opportunities.

What kind of affinity or complementary relationship will ABLIC have with the Mitsumi's analog semiconductor business when it is made a subsidiary?

As it says on page 19 of the material, when it comes to the markets for automotive, industrial/housing, and medical equipment, ABLIC has the stronger position. At the same time, we want to expand sales of IGBT and analog/digital converters, so we can expect there to be collective strength as an analog semiconductor business.
It will also contribute to the business continuity plan for our analog semiconductor business. As for production facilities, our wafer processingis in Chitose, while our assembly is in the Philippines. Theirs are done in Chiba and Akita, respectively, so that allows us to have two facilities in different places.
Moreover, we have a combined total of around 250 engineers. Analog semiconductors are an area of strength and a niche market for Japan, so we want to keep a firm hold.

Did falling average unit prices or a decline in the product mix have the effect of pushing the ball bearing operating margin down?

The ball bearing sales disclosed include bearings for aircraft by NHBB and others. As explained earlier, those sales decreased, so when the average unit price is calculated from these ball bearing sales and the external shipment volume, it appears to have fallen significantly, but the actual unit price has not fallen that much. Also, in regard to the product mix, sales for fan motors, which have a relatively low unit price, have begun to bounce back, but this has not brought the overall average unit price down significantly.

What were the production and sales volumes for pivot assemblies? Also, when looking at the motor sales situation, it seems that the internal shipments volume for ball bearings is a little high. Does this mean that inventory has accumulated?

Motor sales have not increased significantly, but motors using ball bearings have begun to account for a larger percentage of the number of motors produced.

What can you tell us about the background behind the minimal drop in LED backlight sales in the fourth quarter and what the next fiscal year holds in store?

Sales of electronic devices, including LED backlights, are expected to come to ¥45.3 billion in the fourth quarter, compared to ¥55.8 billion in the third quarter. This is because orders for previous LCD models are favorable, and LED backlights for new model have been launched. At this point in time, the new coronavirus has not had any effect, but basically, the trend is steady.
I believe that next fiscal year, LCD models will remain in various forms. We also expect that the volume will be enough to provide business opportunities.

In regard to Mitsumi business sales, you say that they will drop from ¥79.2 billion in the third quarter to ¥70.2 billion in the fourth quarter. Why is that?

As explained, we anticipate mechanical component sales to drop to an extent in the fourth quarter, but we expect to be able to produce more than usual fourth quarter. As for optical devices, on the other hand, in addition to business opportunities in North America, there are business opportunities for Chinese smartphones, and there are businesses with high average unit prices, so we expect an increase in sales. Breaking it down, we expect Chinese smartphones to grow more than the others.

Can you give us more details on the new factory of camera actuator?

The floor area is 15,000m², making it roughly the same size as the existing No. 12 factory on the slide.
About ¥3.0 billion will be invested in the building, and equipment is gradually being installed. Ultimately, the investment will come to around ¥10.0 billion.

How has the new coronavirus impacted operations in China?

As mentioned, except for certain regions, manufacturing has been shut down until February 9. We are gathering various information, including how many employees will be able to come back to work on the 10th or later, the situation in the supply chain, and the situations of our customers.
However, basically operations had been suspended for the Chinese New Year, so it will be around the middle of next week before we can get an overall picture.
At the same time, we have heard unofficially from various customers that they want to catch up in March, so we hope to support those efforts as much as possible.

It ends about main text.

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