Q&A

Back to Financial Results (FY3/2011)

Investor Conference Call for 1Q FY 3/2011 held on July 30, 2010

Question and Answer

Please tells us the first quarter sales volume and second quarter estimates for ball bearings, pivot assemblies, and HDD spindle motors.

Regarding first quarter sales volume for ball bearings. External sales between April and June were approximately 123 million units/month. Internal sales were 79 million units in April, 80 million units in May, and 84 million units in June. Total sales volume was 202 million units in April, 203 million units in May, and 207 million units in June. The second quarter estimate for July is 204 million units in combined sales, with 121 million in external sales and 83 million in internal sales; for August, 212 million units in combined sales, with 125 million in external sales and 87 million in internal sales; and for September, 216 million units in combined sales, with 126 million in external sales and 90 million in internal sales. We think that the third quarter will exceed the second quarter by a little.
First quarter sales volume for pivot assemblies was 32.7 million units in April, 32.6 million units in May, and 29.5 million units in June. Estimated second quarter sales volume is 27.3 million units for July, 33 million units for August, and 33.5 million units for September.
First quarter sales volume for HDD spindle motors was 3.9 million units in April, 3.9 million units again in May, and 3.2 million units in June. Estimated second quarter sales volume is 4.2 million units for July, 4.6 million units for August, and 5 million units for September.

Apart from changes in external conditions, please tell us how company actions have affected results for HDD spindle motors.

HDD spindle motors faired worse than we envisioned. Currently we are undertaking a complete relocation of our production lines for rotary components at our Bang Pa-In, Lop Buri, and Navanakorn plants in Thailand. This was not something we originally envisioned, but once it became clear that we had to include significant investment in order to increase production, we made the decision to completely realign the plants. Our entire production line for small stepping motors at the Navanakorn plant is being relocated to the Bang Pa-In plant, and we are moving machining lines for HDD spindle motors to Navanakorn. The actual project will take by the end of December, though major work will be finished by the end of August. The orders we had placed for machines to increase production are now arriving one after another, and so we have had tooling and various other temporary expenses. Another factor was productivity, which also fell as a result of the relocation. Then sales volume fell significantly and we were unable to recover our costs. June losses in particular were well beyond what we envisioned.

The large relocation of production lines you mentioned wasn't included in your original forecast at the beginning of the fiscal year?

Well, because we had decided that we would go ahead and make thorough changes and not just redo rotary components, that meant, for instance, realigning the Lop Buri plant to make space for increased production of LED backlights. This was always the plan but we deliberated until the last minute just how far we would go, and then decided to do it between April and August of this year. Part of the issue in relocating rotary components was the lack space needed for increased production of pivot assemblies. To make space meant relocating the rotary component production line, but only recently did things take concrete shape. We had been concerned about a possible short supply of pivot assemblies, but we were actually relieved to see the slowdown in the HDD market for the months of June and July.

What is the profit outlook for HDD spindle motors?

I think that profits in the second quarter as a whole will be difficult. That said, we estimate that production and sales for September will be just over 5 million units, so we should come close to balancing our expenses and revenue.

What has been the effect of exchange rates on the machined components segment, and what is the forecasted effect of exchange rates for the second quarter?

We calculate the effect of exchange rates on the group as a whole, not by segment. Given the continued rise in the yen's value, we substituted the exchange rate of two days ago for the first quarter rate to recalculate sales and operating income. Based on that calculation, sales fell by over two billion yen, but operating income was higher. The yen's solitary rise means lower revenue from U.S. sales, but our domestic sales to Japan are quite profitable.

Apart from the HDD market, have there been any changes to external conditions worth noting?

On the whole, orders received for the second quarter exceed those for the first. It's looking like sales for stepping motors, fan motors, and the like will grow by 10%. Once the relocation of the rotary component production line is complete, we expect to be in a good position to see healthy profits.

You mentioned temporary expenses for the factory realignment. About how much of that are SG&A expenses?

The factory realignment expenses are entirely factory costs, not SG&A expenses.

Looking ahead, I expect that you will be increasing production of ball bearings and rotary components, but if you deduct first-quarter results from your first half-year forecast, the second-quarter shows lower income and lower profits over the previous quarter. Is that because you are taking a conservative approach to the second quarter?

We are not revising the forecast at this time, though I think that operating income for the second quarter could be higher than for the first. At that point, I think we could revise the forecast.

How big are the factory realignment costs?

In total, I believe we're talking a figure close to a billion yen. We're building a new clean room for pivot assemblies, and significantly expanding LED backlight production at the Lop Buri plant. We haven't studied the specifics of our decline in productivity, but the relocation involves stopping and reinstalling machines so it's to be expected that productivity would fall for the number of days the machines are stopped.

What's behind the increased forecast for sales of ball bearings?

Much of the ball bearing is used for rotary components. If you look at fan motors, you see that home electronics, office equipment, and the like are all growing. The majority of stepping motors are directed at office equipment, and we believe that the market is growing steadily. Automotive is growing as well.

A new brushless DC motor business was recently added. What impact did it have on your P&L statement and balance sheet?

Sales in the first quarter were 4.5 billion yen, and operating income was good and above even what we envisioned. Inventories are up by roughly one billion yen.

Looking ahead, what is the recovery forecast for rod ends?

Income in the first quarter was challenging, especially in the U.S. market, and only recently Karuizawa and the U.S. are approaching full capacity. We believe that sales and income will both improve in the second quarter, and improve further still in the third. While sales will be affected some by the rising Japanese yen and falling U.S. dollar, we are hopeful that second quarter sales will be around 5 billion yen.

Please tell us how combined sales for ball bearings and rod ends compare to the same period last year in each market segment.

Automotive was 3.03 billion yen, up 40% from last year. Aerospace was 4.886 billion yen, down 11% from last year. Home electronics was 1.068 billion yen, up 27.1% from last year. Office equipment was 1.352 billion yen, up 67.7% from last year. PC/Peripherals was 1.135 billion yen, up 64.3% from last year. Motors was 3.542 billion yen, up 50.1% from last year. Other sales were 4.574 billion yen, up 36.3% from last year.

What is the status of external sales by region and market segment?

Regionally, China has the greatest rate of growth. I believe that is because so many end products are being manufactured in China. In terms of market segments, automobiles, office equipment, home electronics, and other market segments are all showing healthy growth.

Is supply and demand strengthening of late?

As before, inventory continues to be quite tight. Machines to increase production of pivot assemblies will be mostly in place by the end of August, so production should increase in September and inventory be fine by October. The new facility for ball bearings won't be operational until the next fiscal year, so we've directed existing plants to increase production. Our production target is 220 million units/month and we estimate production of 218 million units in August, so we are on track.

What is the increased production of ball bearings coming along?

The first-quarter monthly average was 206 million units, while in June we increased production to 211 million units. As production volumes rose and our manufacturing costs fell, our profitability improved further, leaving us with greater unrealized profits that posed something of a dilemma. We will continue to increase production—to 214 million units in July, 218 million units in August, and 210 million units in September. Even so, inventory buildup will be a mere two to three million units.

The price of HDDs is falling. What downward pressure is there on component prices?

In this industry there is always downward pressure on prices. That said, we expect to maintain current pivot assembly prices. With HDD spindle motors, we are not the price leader so we will adjust ourselves to the market. That said, we don't expect that there will be a significant drop in prices.

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