Q&A

Back to Financial Results (FY3/2021)

Investor Conference Call for 1Q FY 3/2021 held on August 4, 2020

Question and Answer

In light of what you told us earlier, I surmise that in the second quarter you expect sales to rise about 80 billion yen and profit about 12 billion yen quarter on quarter. Can you break down these increases by segment?

First let me share our outlook for the machined components business, the thinking behind it, and our view of current market conditions. The Aircraft market will continue to lag behind not only in the second quarter but throughout the fiscal year, but the figures for automotive ball bearings are expected to climb. Given that, we expect sales and profit for the machined components business to increase slightly.
In speaking about the electronic devices and components business during the previous investor meeting, I noted that the sales volume of LED backlights would gradually taper off, but it is expected to peak in the second quarter due to some carryover. Motor sales and profits should increase as the automotive industry bounces back, and that's the big picture. We have been receiving more and more customer inquiries about LED backlights.
Generally the Mitsumi business is seeing the automotive and other businesses move back on track. Sales of mechanical components will peak in the second quarter, and production is back in full swing thanks to large orders we've received. Sales of optical devices vary from one market to another. While sales are upbeat in North America due to big orders we've gotten there, in China sales of high-end products, in particular, are slowing. The semiconductor business has been steady at both Mitsumi and ABLIC.
The U-Shin business is expected to see an increase in overall sales since automakers have been increasing their production after a number of countries ended their lockdowns in the first quarter.

If you were to rank your business segments in terms of performance, would Mitsumi account for the bulk of the quarter-on-quarter increase in the second quarter, followed by the electronic devices and components business and the machined components business, with U-Shin nearly breaking even in the second quarter?

We are not certain that U-Shin will break even, but it should see a major improvement over the first quarter, but in general the outlook is just as you put it.

I can understand why you kept your full-year earnings forecast ranges, but why didn't you announce a forecast for the first fiscal half at this time?

We announced our forecast ranges in order to avoid misleading investors. We decided that we should provide qualitative information to give you a general outlook for our full-year performance rather than announcing specific figures for the first fiscal half.

What kind of momentum do you see in each business segment and each product line in comparison with the previous forecast? Which ones are likely to reach the upper end of the range in the second or third quarter or fall below the range?

When it comes to automotive products, which are the reason why we still kept our forecast ranges, we are finally starting to see a glimmer of light at the end of the tunnel.
The original plan was to cover our losses with sub-core businesses in the first fiscal half and pursue a recovery in the core businesses: Eight Spears, such as our new analog semiconductor business, in the second fiscal half.
However, given the current outlook, we are still not sure that any of them will really take off in October and onward. At this stage, they are within our projected ranges. How well the core businesses, a.k.a. Eight Spears, will recover and contribute to the bottom line will be the deciding factor for the second fiscal half.

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

External sales volumes for April, May, and June were 177, 173, and 166 million units. External sales volumes will be 183 million for July and a little more, but not any lower, than 180 million, in the second quarter. We expect external sales to reach 190–200 million units in the third quarter and onward.
Internal sales for April, May, and June were 55, 51, 52 million units, and should remain on an even keel, reaching 54 million in July and 51 million for the rest of the rest of second quarter.
Production volumes for April, May, and June were 258, 208, and 236 million units, and our current projection for July and onward is 240–250 million.

ABLIC's net sales and operating income for fiscal 2018 have been announced as being a little over 30 billion yen and 4 billion yen, respectively. Can you give us the results for fiscal 2019 and the first quarter of fiscal 2020 along with your projection for all of fiscal 2020?

Although the business is currently affected by some macroeconomic factors, the full-year results will be somewhere around these figures. First quarter net sales came to almost two months' worth of the figure you mentioned and operating income amounted to about two months' worth of the projection.

Can you tell us why Mitsumi experienced a substantial quarter-on-quarter profit drop?

One reason is that demand for optical devices passed its peak in the fourth quarter. More specifically, demand from Chinese customers peaked in the fourth quarter and then dipped in the first quarter. Although we expect demand to rise again in the second quarter mainly in North America, lagging sales of high-end products for Chinese smartphones made a big dent in the bottom line.
Another reason is that game production stalled in the first quarter. We were unable to produce as much as we planned due to a problem in the parts supply chain caused by the novel coronavirus, which had a big impact on our performance.

Can we assume that your share of the North American optical device market, which increased in the fourth quarter, will remain up?

I'm afraid I can't give you any information about our market share, but we are now steadily preparing to ramp up production and are looking at very high production through the second quarter.

What about the game-related business?

Our factory operations in China were affected by the lockdown in the fourth quarter. Although this problem was resolved in the first quarter, we were faced with the shortage of parts. The parts shortage began to dissipate in June and production is expected to peak as we go into full swing operation in July and onward.

Could you go into detail on the inventory increase? Looking at it by segment, which one accounts for the most?

First of all, inventory increased because we consolidated ABLIC.
Inventory also increased because we were unable to manufacture game-related products in the first quarter due to a shortage of some parts, despite plans to boost production. This inventory problem will be resolved in the second quarter since we plan to really ramp up production.

How much inventory does ABLIC have?

Although we have not disclosed any figures for ABLIC, we are operating at a normal inventory level for the semiconductor industry.

You still haven't started bulk production of optical devices, right?

Right. We don't have any problem with the actuator inventory.

In regard to increasing actuator production, you said at the previous investor meeting that you would put a freeze on plans to build a new factory. Can you give us an update on your plans for the future?

We haven't made any changes to our plans. For now we will focus on increasing the productivity of our factory in the Philippines with an eye to improving its capital efficiency. We will allocate overall production volumes, including those for Thailand and Cambodia, next fiscal year and onward when we will have more business opportunities.

Can you tell us about the progress with PMI for U-Shin? How well do you think you are doing in this extremely tough market?

The coronavirus had put a complete damper on production until only recently when we were finally able to resume operations. In working against this backdrop, we are trying all sorts of things. For example, we are looking at the markup on each product and feeling out customers on price increases, withdrawal, or transferring operations to Southeast Asia, etc. So you can see we are working hard and trying to leave no stone unturned in the process.

You didn't change your earnings guidance. Can you tell us what risk factors you have in mind or are concerned about in the second fiscal half? If possible, could you give us some possible scenarios for your core businesses: Eight Spears, and sub-core businesses?

Besides forex, which is always a problem, the biggest risks ahead of us that I'm keeping in mind are the U.S. presidential election and how it will affect U.S. relations with China. Our smartphone-related business had been running smoothly, but now that our Chinese customers are having a tough time with their high-end models, we have to keep a close eye on how the situation is developing.
Another thing I'm concerned about is how the COVID-19 pandemic will unfold. I have no idea what the future holds when it comes to this pandemic. When you look at the vast number of people that have been infected, even during the summer months, I think we could be facing a risk in the northern hemisphere comes this winter.
I remind you that since our products enjoy a big market share, they're bound to generate good sales figures once the market recovers. In any event, we are prepared to weather any storm ahead so there is no need to panic. We just have to keep a close eye on the risks and manage them accordingly in order to ensure we maintain the manufacturing capacity needed to supply products in quantities customers need.

You are constantly exploring and developing new products, do you have anything up your sleeve that will contribute to your bottom line in the second fiscal half and next year?

Everything has been delayed due to COVID-19, so we won't have anything like that this fiscal year.
One of the challenges we are taking on is the release of smart locks. We will hopefully launch them on the market by around October.
We also sell masks, and since it's a good opportunity to increase the recognition of our brand among general consumers, we will work on products like this that will make a good jumping board for going B2C, although they won't contribute that much to our sales mix. Going this direction is sure to become a big trend in the future, so I want us to get in on the ground floor.
When it comes to our major operations, everything has been delayed, so much so that we can't even conduct audits on our factories. The trouble is, we're not the only ones not making progress on factory audits. None of our vendors are making any progress either. Once we get past the pandemic, we should be able to work on new products and projects.

How do you account for COVID-19 costs of 4 billion yen? Are they accounted for as SG&A expenses or cost of sales?

They are included in other expenses under our statement of income.

Do you expect to incur an additional amount in the future?

The total amount should decline although it won't hit zero since the severity of the lockdowns have changed significantly.

How are you currently dealing with the pandemic?

We used to have two or three global meetings a week to address the issue, but it's now down to once a week.
At the moment the situation is becoming more serious in Mexico and the Philippines, where the number of cases is gradually increasing, but we know what we are supposed to do and are doing that without letting our guard down.

Does that mean you are controlling the spread of COVID-19 so no one will get infected?

Yes. We are taking various measures, such as preventing any infected person from entering the factory, providing PCR tests, etc. to all employees when necessary, and implementing protective isolation on an as needed basis.

Can you tell us about your strategies for U-Shin? Looking at the current status of the automobile industry, it looks like it will take two or three years before it returns to its pre-COVID-19 condition. Given the circumstances, it would take a long time for earnings to return to what they were via ordinary measures. Are you implementing current measures more quickly than initially planned?

We are moving faster than we initially planned.
We view Europe as the biggest problem. Pricing practices there don't add up in many ways and we've started to fix this problem.

You said that the external factors affecting acquisitions had improved. From a stock market perspective, the value of good companies' stocks is increasing while the share value of companies with extremely poor performance ratings is dropping, making cheap buys high risk investments where you could lose money. What's your take on that?

Things are just as you say, so we will proceed with extreme caution. Every company is different though and it's always possible to find a diamond in the rough. The most important thing is whether a company has the potential for creating synergy with our company, and that's what we look for in an acquisitions deal.

Can you give us the first quarter sales figure for Mitsumi parts supplied for a fee as well as your estimate for the second quarter?

Sales for the first quarter totaled 12.7 billion yen and sales for the second quarter will be approximately 40 billion yen.

Can we assume that sales of mechanical components also increased because first quarter sales were higher than the previous quarter?

Yes. Production was extremely low in the fourth quarter of the last fiscal year because our Chinese factory shut down for about two months. The factory was back up and running in the first quarter even though we had a parts problem.

Given the breakdown of Mitsumi sales, can we assume that sales of camera actuators dropped substantially during the same period?

Yes.

In regard to camera actuators, can you give us an update on the Cebu plant? There was a news report that a stricter curfew was imposed in some areas of the Philippines, that included Cebu. Will you be able to start up operations under these circumstances?

Right now it is fully operating.
As I noted earlier, we are implementing very strict controls and have not had any problems so far. In large-scale operations, like the Cebu plant, we are taking measures such as sending personnel from departments that have extra resources to help out other departments that have a labor shortage. We can take various measures to deal with problems at large-scale factories.
It's a bigger problem when the infection spreads in a small factory like the one in Mexico, where there is no extra personnel.

I heard from an overseas supplier that rod-end and fastener sales to the aircraft industry would drop even further in July through September and that the outlook would get even cloudier further down the road. What should we expect?

As I mentioned back in May, it largely depends on how the COVID-19 pandemic is controlled. There's no doubt that there will be a major movement of people once the stay at home request or lockdown is lifted in Japan and around the world, so if the pandemic is effectively controlled, sales should pick up soon.
Sales are quite sluggish right now and we have factored that into our outlook for the future. Since we have a defense-related business, we believe that the impact will be limited.
We are instead taking this opportunity to even more carefully manage inventory as well as work-in-process on the factory side.

Will sales basically remain at the level they were in April through June?

Yes, that's right.

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