Earnings Call: Q3 2020

Feb 5, 2020

I'm Yoshida. Today, I'd like to explain the consolidated financial results for the third quarter of the year ended March 31, 2020 and then Mr. Kai Numa, Representative Director, CEO and COO, who explained the highlight including business updates. Consolidated net sales for the third quarter of fiscal year ending March 31, 2020 was up 7.2% year on year and down 4.2 percent quarter on quarter to total 1,000,000,000. Net sales hit the 3rd quarter record highs. Operating income was down 25.9 percent year on year and up 19% quarter on quarter to total 1,000,000,000. The results for the third quarter of fiscal year ended March 2019 include a one time profit gain due to changes in the personnel system of extended retirement age as well as other special factors which all added up to a gain of approximately 1,000,000,000. Is this amount were not to be accounted for year on year decrease in operating income would be 11.7%. Profit for the period attributable to owners of a parent was down 21.5% year on year and up 36.5 percent quarter on quarter to total 1,000,000,000. Currency fluctuations brought net sales up an estimated 2,000,000,000 yen quarter on quarter and down 1,000,000,000 year on year. It also brought operating income up 1,000,000,000 quarter on quarter and down 1000000000 year on year. Moving on to the next slide. This is a quarterly trend in net sales, operating income and operating margin. The bar graph on the left is net sales and the one on the right is operating income along with a line chart for operating margin. The operating margin for the 3rd quarter was down 3.9% percentage point year on year but up 1.7 percentage point quarter on quarter to reach 8.6%. However, expenses including business integration cost of Uxin, totaling approximately 1,000,000,000 are accounted for a special in the third quarter. Otherwise, operating margin would be 8.8% if these expenses were excluded Also please note that figures of fiscal year ended March 2018 are based on JGAAP and are provided for your reference so that you can look at past figures. But same applies hearing after. Moving on to the next slide. Here shows the difference between the forecast as of November and actual results for net sales and operating income by business segment for the third quarter. Net sales for the Machine Components business segment was almost on par with a forecast sales for electronic devices and components business segments were higher than forecasted, thanks to steady sales of trinet devices overall sales for a Mitsumi business were below the forecast due to shipment delays for some optical device products although shipments of mechanical components were higher than projected. The Uxin business saw lower than expected sales due to a significant slowdown in production as a result while a machined Components business segment saw external shipment volume for ball bearings bounce back, The operating income fell shy of a forecast since we shipped inventories that incurred higher manufacturing costs first. Where electronic devices and components business enjoyed higher than expected operating income as a result of increased sales operating income for the Mitsumi business was higher than projected mainly for mechanical components and analog design conductors Yushin saw higher than forecasted operating income as a result of improved profitability of its automotive business. Moving on to the next slide. Here shows the difference between actual results for the third quarter of fiscal year ended March 2019 and actual for the third quarter of this fiscal year for net sales and operating income by business. Our results are as shown in this slide, operating income for the Mitsumi business was roughly flat in reality since its operating income for the third quarter of fiscal year ended March 2019 include a one time profit gain as a result of changes a personal system of extended retirement age as well as other special factors which all added up to a gain of approximately 1,000,000,000. Next slide please. Now let's take a look at the results by segment starting with Machine Components Business segment. On the left is a graph indicating quarterly net sales trend and on the right is a graph with above chart showing quarterly operating income trends along with a line chart for operating margins. Net sales for the third quarter increased 0.2% from a previous quarter to total JPY 45,200,000,000. Ball bearing sales increased 1% quarter on quarter to a total of 1,000,000,000. External shipment volume of ball bearings totaled 202,000,000 units per month on average. These figures are the result of continuing steady demand from the automobile industry greater year on year demand for ball bearings using some motors and growing demand for bearings for air conditioners. Sales of rot and fasteners totaling 9,500,000,000 were down 0.8% over the previous quarter. Business for the aircraft industry especially Small and medium sized aircraft remained steady. Sales of pivot assemblies decreased 1.6% quarter on quarter to reach 1,000,000,000 While we were impacted by the weakness of our entire HDD market, our ability to maintain 80% share that market has provided stable earnings. Operating income for the quarter totaled 1,000,000,000 and operating margin was 21.2%. While this represents a 1.4 percentage point decrease in operating margin, operating income declined 6.1%. Looking at the results by product, also the external shipment volume of ball bearings was up, profit declined quarter on quarter Since we shipped inventories that incurred higher manufacturing costs first, after seeing the total sales volume including turn off sales exceeded the production volume. Moving on to the next page. Next, let's look at the Electronic Devices And Components segment. Net sales increased a 10.1 percent quarter on quarter to reach 111,500,000,000 yen by product Sales of motors were about the same as last quarter at 1,000,000,000. Electronic devices sales increased twenty point 5% quarter on quarter to total JPY 55,900,000,000. This was because LED Backlight sales which had been booming since the second quarter remained solid in the third quarter. Sales of sensing devices increased 4.8% to total 1,000,000,000. This was due to a general sales to a handful of customers The segment recorded an operating income of JPY 8,800,000,000 and an operating margin of 7.9 percent Looking at the results by product, operating income was mainly driven by electronic devices moving on to the next slide. Let's look at the performance percent quarter on quarter to hit the JPY 79,200,000,000. Line sales of optical devices, analog semiconductors and automotive parts increased sales for other products, primarily mechanical components are decreased profit rose quarter on quarter mainly for optical devices and analog semiconductors with operating income totaling 7,300,000,000 and the OP margin reached 9.2%. Operating income was down 2.4%. Quarter on quarter, while OP margin was up by 2.1 percentage points for the same period. Next slide please. Finally, let's look at the Uxin business segment. Net sales decreased 1.8% from the previous a quarter to total at JPY 31,500,000,000. This was due to a significant production decline as a result of slowdown in the automotive markets in China, Europe and elsewhere, there was approximately a 1,000,000 yen of one time expenses in third quarter related to special factors such as business integration expenses and ramp up expenses for new products. One time expenses for who you are is expected that to be approximately 1,000,000,000. Operating income for the quarter grew 2.3 times higher than the previous quarter to total 1,200,000,000. Operating margin increased 2.2 percentage point to 3.8%. Next slide please. The bar graph here shows trends in profit attributable to owners of the parent while the line graph charts changes in the profit for the period per share, the profit for the period was JPY 19,000,000,000. Earnings per share was JPY 45.8. Moving on to the next slide, our next we have the quarterly inventory trend. At the end of the 3rd quarter, inventory is a total of JPY 175,900,000,000, which is JPY 5,500,000,000 less than what it was 3 months ago and 16,200,000,000 yen of Yixin inventory was included because of the consolidation. Next slide, please. This chart contains a bar graph showing a trends in net interest bearing debt, which is total interest bearing debt minus cash and cash equivalents and the line graph indicating free cash flows at the end of the quarter net interest bearing debt totaling JPY 82,900,000,000 was up JPY 61,200,000,000 from the end of March 2019, Next slide please. This is a summary of the forecast for the fiscal year ending March 31, 2020. All the profit for the first three quarters exceeded the expectations. The picture of global economy including the impact of the new coronavirus and the fluctuating exchange rates is becoming increasingly unclear as it is not possible to predict the impact of these factors on our business performance present, we have decided to keep our full year business forecast unchanged. We will keep a close eye on developments and I will make an announcement if there are any major changes in our business forecast. The exchange rate assumption is $108 to a dollar. Next slide please this slide shows the forecast by business segment that we did make minor changes to performance forecast by business segment given our current status, this is all for my presentation. Thank you for listening. Thank you. This is Kainuma speaking. So I'd like to present my part. First, please look at page 15 of the slide, which are today's highlights. Overall, The impact that U. S.-China trade friction hit us. This is a fact But in terms of risk diversification, our portfolio is diversified in a well balanced manner, which is supporting our bottom line as you can see from the presentation. This announcement With regards to the new coronavirus, it's not included. This impact is not included in this announcement. When we are making this presentation, restoration was worsening, as you all know, operation started from 10th, but the supply chain might be impacted in somewhere another. In 2011, there was a flood in Thailand the scale is entirely different from a present situation, but that also greatly impacted our supply chain. Now, final products, we cannot imagine other final products without any components from China So we believe there will be some impact, but We are considering catching up from March. So as soon as restoration gets more clear, we'd like to inform you we ask for your understanding. As for machined components, Bow Bearings, external shipment volumes as I mentioned before, is showing a clearly recovery trend. External shipment strategy for the next terms already being made. 210,000,000 units per month on a monthly basis external shipment is scheduled. But in the company, we are looking at a higher level, but as of today, 210 million units is a figure. One lesson that we have now is that to manufacture volumes, we reduce manufacturing cost per unit So in the next term, considering the current situation, We would consider more aggressive pricing policy and secure the maximum possible volume. For electronic devices and components and Mitsumi in the 4th quarter, More than we have assumed, frankly speaking, we have impressions that restoration is better. I would like to repeat that the current situation in China is something that we will keep watching to overcome the fourth quarter. For Yushin, the same might have been in other companies as you might all be familiar with, the automobile market is slowing down greatly So more than we had expected, we cannot avoid having quite poor results. But what we have to do is very clear To improve our performance, we will keep doing what we have to do If time it changes, we are sure we will be able to turn around for the share buyback. This was started from last December. One topic is now is that book value per share achieved the highest ever. Next page external ball bearing shipment volume as you can see it is clear. But as I have mentioned, next fiscal year the client will be very aggressive. Recovery of revenue is something that we assure we will be able to achieve. The next page also shows the same. 210,000,000 units as I have mentioned, we hope we can add more on top of this In the previous after the previous presentation financial results, we announced The stock purchase of Eblick, I would like to explain about it. Page 18, Development Bank of Japan holds 70% and sequinced 30% So those are the major shareholders of Ablikh, and we are going to acquire 100% this agreement was reached and now already we for relevant countries. With authorities related to anti monopoly, we have submitted our application. Results of the last 3 years is shown on the slide. Next is page 19. Page 19 shows what kinds of, synergies are expected because of this integration and I would like you to read it during your leisure time. And moving on to page 20, 8 sphere strategy includes analog semiconductors and based on 10 year plan of which we announced last year. 9 years from now, we would like to grow our semiconductor business to JPY 100,000,000,000. Now that is what we said. And when this becomes a success, then we will be able to make a company with 1,000,000,000 sales and in the next 9 years, both organic and inorganic approaches will be taken and we shall be able to achieve 1,000,000,000 and JPY 100,000,000,000 and 8th square of the strategy analog semiconductor business will be able to form the basis for this. Page 21, as you are aware, The smartphone is having many lenses and the new technologies will be introduced and in order to cope with a strong demand at a seibu plant, what we call the number 12 by building number well, but features a camera actuator factory, right next to it, we are to build a new factory. The bulk light We can no longer expect a big volume like we used to do and, sub core, a business, camera actuator, backlight, camera actuator and backlights, volumes are declining, but it can be offset such a decline can be offset to some extent. So, we would like to solidly help solidify our positioning in this area. Case 22, this is the outline of share buybacks, we will continue to buy back our shares for some time. So this is the end of my brief representation. Thank you for listening. The first question from Goldman Sachs, Mister Takayama, please. Thank you very much. I have two questions. Thank you. First, is about ball bearings that the inventories with higher cost were sold first and in the interim results last year, I think you should have known that but that is surfacing on accounting basis now. I find it strange. So what was it that you didn't you have not seen and for next year towards April, June, if utilization gives up goes up. That seems to be good. So operating margin as you have mentioned previously, might get higher. Compared to the price? Is there such a potential higher operating margin from April to June? Yes, this is Yoshida speaking. About the machine components operating profit, 9,600,000,000 And in the previous quarter compared to previous quarter, it is worse and the reason for that Before talking about ball bearings, the aircraft business, which is included in the ball bearing segment and also This is also included in the rod end sector as we've had been explaining so far. In the second 3 quarter on quarter on quarter, there's a quite a large drop in income because 7 37 max, this is a partial reason by the third quarter, including Christmas, the days of operations in case of aircraft, though since there are many most of it is manufactured in Europe and by US, there is a decline. So that is one factor for over decline and for external shipments for ball bearings, the average on second quarter is 185,000,000 and now is 202,000,000. So there is an increase, but the increase in sales the profit was not as much as we had assumed. In the 1st, 2nd, 3rd quarter, production, well recovery of a market was slower than what we had expected. So production volume in the first quarter 225,000,000 and in the 2nd quarter, 244,000,000 in the 3rd quarter 259,000,000. So it is much less than what had assumed. So that raised the inventory level. And as a result, profit was not as much as we had expected. So what is different from our assumptions? Declining capacity utilization for that portion, we thought we would be able to increase production, but in the third quarter, we're not able to do so that is the major factor. And as for the future production Well, external shipment will increase and HDD market is not that good, but considering that we have external shipment. So we plan to have this production level and the turnover of inventory is a few months. So if we can overcome that situation from the next fiscal year, we believe profitability will return. So there's a slight drop in profit, but in the third quarter, during this period, there was a decline in income, which we believe will soon be able to recover. And in addition to that, when you are busy distribution cost and production improvement might be too tight, but when you have some room, you may try to increase, profit margin as a manufacturer. And with shortage of production, I believe that had an impact, but the pace of increased production is the 2nd half from April to June quarter, manufacturing and and the cost of benefit relationship, that may influence and for next fiscal year April to June, will that be a moderate increase compared to the fourth quarter? What curve do you assume? How will production level be increased when we manufacture 300,000,000 production cost or by having appropriate inventory, for example, compared to that we could be more efficient. So we believe the level is lower. So at a relatively early stage, increasing income over income level of the previous year I believe will be recovered, but at the moment, we want to examine more frustration Let me make some additions. This is Kanyuma speaking. Basically, external shipment and internal shipment, both is a total of bearings, sales in the past we had a capacity of 300,000,000, but we raised as a formality to 315,000,000. What I mean is that there are machines, but it's not that everything is being utilized in full because total of internal and external shipments has not reached a 300,000,000. And what have I mentioned in Francisco year? External shipments on single month might be 220,000,000 and a certain volume, the monthly volume bearings. At the minimum, we went to recover to a 300,000,000 and the remaining is what we must we want to keep, in case something happens, but internal production is declining and pivots has happened compared to the past. So the total volume compared to the best situation, the total volume is low. And so this is another reason. As you have mentioned, including the price, profit margin will rise by increasing volume, right? Yes. Total volume of bearings adding internal and external shipments per month the sales volume per month should be raised and by doing so we want to increase production volume. This is what you are trying to do. Thank you. And, with regards to Mitsumi Business, So, the full year has been raised and, Q4 is to maintained the same level of profit and revenue and a game console did well, but actuator, there may be a time lag in Q3 and Q4. So, there seems to be an upside for both revenue and profit Could you elaborate on that point, please? First of all, Q3, Regarding game console, as you are aware, the sales are booming. As you might have heard in the market. And, accordingly, we saw a better results than expectation and optical devices, the things that were planned in Q3 were pushed back to Q4, not because of our plan, but because of the supply chain, whether the parts and components are sufficient or that type of issues. I don't know if that is true, but some will be pushed back to a Q4. And regarding Q4, coronavirus, problem, how it's going to evolve is unknown but excluding that, there will be a new models for our Chinese, smartphones and we will be able to supply our products and therefore Q4 and we should be able to achieve a certain level of revenue. So, Mitsumi business 205 and, 65 is the profit for full year. If it seems to be pretty good for Q4 game consoles well although there is a seasonality in North America by is it because of China? Well, I cannot disclose this information about each individual customer, but particularly a product mix. New the models are with a new functionality are being launched and that impacted. Understood. Thank you very much. Please push as a risk one for your question and If you want to cancel, push asterisk and number 2. The next question. Morgan Stanley, MUF Gee Securities? Satosan, please. Thank you. This is Satos speaking. I have three questions. My first question is about the volume. In the third quarter, external shipments of, Bobary 202,000,000. What is the monthly external internal shipments and production from October in terms of 1,000,195. 2206, 206, external cells, and neutrinos, 65, 67, 65. 65, 67, 65. And how about production? Production, 2, 54, 260, 263. The last one is 263. Thank you. From January, March quarter, do you expect an increase? Including external internal shipments and production. Yes, I'll let repeat on assumptions that there is no coronavirus impacted for internal 200 external shipment, 205,000,000 and the internal shipment, 67 1,000,000 and production 271,000,000 and March nearly 300,000,000. My second question from LED backlight or electronic devices, Q3 was very strong. In Q4, what's the situation after Q4? In the briefing at the second quarter, you provided a smooth explanation And compared to that, the forecast for the next fiscal year, have there been any changes? First, Q3 Electronic Devices was so and so and Q4, there was start of new models and production of conventional models were doing well. So, a certain level of utilization is still going on and the profit accompanying this situation in the Q Four, we'll be able to secure certain level of profit for the next fiscal year. It is difficult to say as I have been saying so far, LCDs, will not be gone. And the what is the background for the volumes? There are many forecasts available in the market. If you consider that, we can see that we have a certain level of business opportunities Early November to the situation early in November and the current moment, the forecast for the fiscal year, has there been any changes? It's very difficult to say about our next fiscal year, but at the moment, we believe there will be no major changes. Thank you very much. And a break, lastly. Interpresentation material it was introduced about ABLEIC. But could you explain the same intellectual business of Mitsumi what kind of technological affinity will there be and what is the supplementary relationship between sir 2? Could you explain briefly. This is Kanyuma speaking. Page 19, please look at Page 19. For automobiles and for industrial machinery and for medical sector, These are markets that they are strong at and in our case, as we have been saying, with IGBT coming on and digital analog converters, we want to expand sales in these areas. So analog semiconductors, a comprehensive power that is just like a trading firm, we'll be able to have this kind of comprehensive ability. And the BCP is becoming such a problem now. And our, post process is Philippines and the case is Akita Salisbury two locations and the preprocess is Chitoseh Hokkaido and Chiba. So there'll be 2 separate locations. There are about 250, there will be 250 engineers. For analog semiconductor, which is an area that Japan's strongest. And this is a niche market So this will not be gone, but it's a very niche market which we want to secure. Thank you very much. And engineers, you said the 250 people in total 250 for both together, how many for each In our case, we have 100 people as we have always been saying. Thank you very much. Thank you. Let us move on to the next question from Nomura Securities, Mr. Akizuki. Mr. Akizuki, please ask your question. Thank you for this opportunity. This is Akizuki from Nomura Securities. So, I would like to ask you about a bearing business. So by calculating in dollar denominated way, the unit price seems to be declining Q on Q. On the other hand, in the first half, when adjustments were made, the unit price was rather high. And, inventory adjustment after the inventory adjustment, the ones that, have a rather a low unit price are recovering and due to our such a product mix maybe the result is not growing as much as the expectation but how do you analyze this situation if you can share with us that another another thing about the wearing a P bought volume. Could you, you know, give me the pivot, volume numbers? And the internal shipment, a number seems to be high 66,000,000 internal shipment I, I'm wondering you may be trying to build up inventory for, internal shipment. That is my first question. First of all, the average, unit price or selling price or bearing the bearing, information that we disclose includes aircraft bearing, I see, New Hampshire, bearing, and etcetera are included. As I said previously, the sales of that a portion is declining So, production volume and the revenue, if you calculate using those numbers, it may seem that a unit price is falling very significantly, but actually a unit price is not falling that dramatically but the fan motor is the one reason previously but it's recovering but unit price, of a farm order is rather low and having said that, however, it's not pushing back over unit price. So, aircraft, the bearing of the special aircraft that is included in the number is the factor behind this decline turning to pivot. Q2 or Q3 production and sales were 20,000,000 each And q 4, 19,000,000, 19,000,000 each In other words, 1,000,000 lower compared with the market trend, you may think this number is law, but with regards to P BOT, comparatively we are trying to, level off the production and the market as you may know, We think that we understand the market, the situation to some extent and therefore we are trying to manage the appropriate inventory level meaning that it's not the excess So it's 40,000,000 for Peabot and 60,000,000 in the Internal shipment and therefore the remaining internal shipment for other than pivot is 26,000,000 And this year, motors are not doing well. So this abbreviation between internal shipment and the pivot that that was what I wanted to ask. With regards to that, mortars overall, Motors are not growing that much. As you can see in these numbers, However, the rate of the motors that are usable bearings are increasing gradually the automotive market is struggling. However, we are capturing new opportunities and the rate of the motors that use ball bearings is increasing gradually. Thank you. Just one more question. If I may, back lights. If I do the calculation, decline in q4 may be very low, looking at the segment. Having said that, the models that are selling, they are selling, but, they are expected to go down and, the reason why the revenue, stays at the high level and also towards the next the backlight, for LCD, there is such a model and the mainstream high end, should I a ticket as a mainstream high end or is it, a legacy model? If I may ask such a question, to the extent possible, please respond. First of all, the digital devices, the Q3, 5, 118, and a 453 is the Q4 number and a 453 maybe too high, you may be implying but new models. So to speak, LCD model, or last year's LCD model, order placement, progressed well and truly new models are starting. That is the reason why we came up with this number and in January there were there wasn't much impact of coronavirus and things Staquaiya smoothly and to ours next year. The Turo LCD model how we should think about the total volume of LCD models, the new models as people are saying if it's entirely OLED LCD models will remain in one form or another several tens of 1000 of units, we will still have a business opportunities and instead of several tens of 1,000,000 So that is how we think about this. The mainstream high end, the models may be added on top of that I expected, but you don't know for sure at this point in time. I cannot comment on that at this point. Okay. Thank you. The next question, please. From UBS Securities, Mr. Hirota. Hirato from UBS. Thank you. I have two questions. My first question is we heard previously about Mitsumi Business Q4 profit, sales was from 79.2to70.2000000000 And from the 3rd fourth quarter to Mitsumi, what is the situation of actuators as a whole? What is the situation mechanical components? As you know, mechanical components are going down and compared to the full year, mechanical components are areas that we can have a good production, but assumption is a very bad decline in the this quarter. And for North American business, there will be more business opportunities and a mix also. Business with higher, average unit prices available. So it's possible to expect certain profit. And so do you believe, obstacles will slightly decline for obstacles? We expect to increase in income. And North America, is not so, but there will be a general increase. Well, I cannot, refer to the contents about Chinese smartphones will increase relatively speaking. And another question. And the last part of presentation material, you talked about the the new factory for camera actuators, could you explain the details about it? How much capacity will increase with this? What is the investment amount? What is the destination? Who have our customers? Could you explain a little more of the details? The investment size I cannot mention the specific numbers, but as you can see in this presentation, 15,000 square meters is the size of a factory as an actuator factory, this is not small. So we will build this building and we want to operate this 1. So in general, we can say that investment is not that small. This is Kainuma speaking. Let me add. As you can see, it is exactly the same size building number 12, as I mentioned before. This is for North America. On the other hand, If it is the same thing we are manufacturing now, we can double our production, but there will be different lines of a size is larger. So in terms of unit volume is not that level, but, that is what we assume in general. As for investment amount, And basically, we want to gradually introduce facilities into this factory So, ultimately, it would be around 10,000,000,000. That is a general image, but at first, we have to make a clean room, and we must, make this facility. So a building itself will be about 3,000,000,000. That is a general image. As far as destinations, the ultimate customers region would be North America? Yes. And so you want to aggressively increase the share. Is that the objective? I I already mentioned that in November. Thank you very much. Another question, our impact of the coronavirus at the moment what is restoration in China operations? China, as you know, your microfamiliar with Astraisha from Monday to Friday, IRB is ahead of the operations and trying to collect information until the 9th manufacturer industry was shut down excluding some regions and other regions have a longer shutdown, but until 9th, manufacturing was stopped. So after 9th, How many employees can commute? And also there is a supply chain and customers are also under holidays or Chinese New Year and China in general still enters their New Year's holiday in general. They are not yet operating. So I think we can we will be able to identify a general situation by sometime after mid next week. However, informally, we have we are talking with many customers that they want to catch up by March as much as possible. So including that, we will take all the possible measures that we can take. Thank you very much.