Earnings Call: Q1 2019

Aug 3, 2018

This is Yoshida speaking. I would go over the consolidated financial results for the first quarter fiscal year ending March 31 2019. And then Mr. Kainuma, Representative Director, CEO and COO, will give the update on machine components, electronics, and devices, and the Mitsumi business. Please note that starting this quarter, Some information such as changes in inventory and SG and A expenses have been attached as reference pages and will not be included in the explanation The consolidated results for the first quarter were net sales were up 9 point 1,000,000,000. Operating income was down 14.4% year on year and up 2.2 times quarteronquarter@14.291000000000 yen. Profit for the period attributable to the owners of the parent was down 13.6% year on year and up six times quarteronquarter@10.886000000000. Net sales were the highest ever for a first quarter. In addition to steady performance in double bearing, motor, and other businesses, a contract change in the fourth quarter of the previous fiscal year pushed up the sales of Mitsumi Business currency fluctuations brought net sales down an estimated 1,000,000,000 quarteronquarterand2.5000000000 year on year and brought operating income down 1000000000 quarteronquarterand2.6000000000 year on year. We adopted international financial reporting standards or IFRS instead of Japanese standard JGAAP from the current fiscal year. The differences between JGAAP and IFRS for the full year and the first quarter of the last fiscal year are shown on pages 1617, respectively. If we apply IFRS for the full year of the last fiscal year, the operating income would be 68,900,000,000 yen down by about 10,000,000,000 yen from 79.2000000000, mainly due to such temporary factors as shift from extraordinary loss. On the other hand, Non temporary factors include billion increase due to reversal of goodwill amortization which is included in SG And A and 1,000,000,000 increase due to shift from non operating profit and so on. If we apply the JGAAP to this 1st quarter, operating income would be 300,000,000 less due mainly to the difference in accounting treatment for goodwill amortization that is up 300,000,000 due to IFRS adoption. Please move to the next slide. Here you can see the quarterly trends 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, and the line chart is the operating margin. Which for the first quarter was down 2.1 percentage point year on year, but up 0.1 percentage point quarter on quarter. At 6.7%. Compared to 2 years ago, net sales and operating income have almost doubled while the operating margin improved roughly 1 percentage point, reflecting a huge contribution from the integration with Mitsumi. Please note that figures of the fiscal year ended March 2018 and before are based on JGAAP and are provided for your reference. The same applies hereafter. Next slide. Here you can see the results by segment starting with machined components business segment. On the left, quarterly net sales trends, and on the right, a bar graph showing quarterly operating income trends and a line chart for operating margins. Net sales for the first quarter remained at the same level quarter in quarter at 1,000,000,000 yen. Both during sales rose 9% quarter on quarter to total of 1,000,000,000. The average monthly external shipment volume hit an all time high of 203,000,000 units marking a year on year increase for the 23rd quarter in a row The monthly production volume for May hit an all time high of 296,000,000 units. Sales of rod ends and fasteners totaling JPY 8,900,000,000 were up 2% quarter on quarter. Sales have pivot assemblies increased 5% at 7,900,000,000 5% increase quarter on quarter. Our ability to hold on to over 80% market share has generated stable earnings. Previously recorded under other CNA tool engineering has been included in ball bearings and Mac Aero has been included in Rut Ents and fasteners beginning this fiscal year. Operating income for this quarter It's a quarterly record high of 11,700,000,000 bringing the operating margin at 24.8%. Operating income rose 12 percent quarter on quarter and the operating margin was 2.7 percentage points higher quarter on quarter. By product profits were higher for ball bearings, rod ends fasteners, and pivot assemblies in all. Next slide. In Electronic Devices And Components segment, Net sales declined 10% quarter on quarter@91.7000000000 yen. By product, steady sales mainly in the automobile market kept motor sales at the same level quarter on quarter at 1,000,000,000. Sales of electronic devices were down 24% quarter on quarter at 1,000,000,000 mainly due to the weakness of the smartphone market. Sales of sensing devices grew 5% quarter on quarter. To hit 9,100,000,000. Operating income was 1,900,000,000 bringing the operating margin at 2.1%. Operating income decreased 75% quarteronquarter and the operating margin declined 5.2 percentage points. By product, motors and sensing devices remain steady. While electronic or electric electronic devices, operating income decreased due to an inventory adjustment in the smartphone market and one time cost increase for the new production launch. Next slide. Finally, let's look at the performance for the Mitsumi business segment. Net sales was 73,900,000,000, which remained rough the same from the previous quarter. This was the result of net sales of mechanical parts declining slightly, while net sales of camera actuators increased. The impact of the sales increase due to contract change with customers was JPY 24,200,000,000 in the previous quarter and JPY 23,900,000,000 yen this quarter. Operating income was JPY 3,000,000,000, putting the operating margin at 4.1%. That means operating income increased 2.2 times compared to the previous quarter, while the operating margin grew 2.3 percentage points. Next slide, please. This is a summary of the forecast for the fiscal year ending March 31, 2019. The full year profit forecast has been revised upward to partly reflect the better than expected profit in the first quarter. Operating income for the full year has been raised upward by JPY 2,000,000,000 from JPY 83,000,000,000 to JPY 85 1,000,000,000 yen, and net income has been revised upwards by 1,000,000,000 yen from 65,000,000,000 yen to 66,000,000,000 yen. Due to remaining uncertainty of the foreign exchange and the smartphone markets, conservative estimates has been used in the forecast. The exchange rate is assumed to be 105 yen to the U. S. Dollars. Moving to the next slide. This slide shows the forecast by business segment. Next slide. Next, let me explain about the shareholders return policy. The dividend per share was increased significantly last year to But this year, we plan to set the dividend at a payout ratio of around 20%. Next slide, please. I'd like to talk about 2 recent topics concerning our ESG initiatives. The first is that beginning in June 2018, we have been included in the MSCI Japan empowering women index. We believe that this is an indication of how our promotional diversity and proactive disclosure recognized as being good. The second is that we plan to publish an integrated report aiming to provide a clear explanation of our mid to long term growth strategy and value creation story. We hope that it will help you understand our strengths and our ideas on how to achieve sustainable growth. We'll provide a separate notice when it's published. So I hope you'll be able to read this That's all from my explanation from Yoshida. I would like to hand over the microphone to Mr. Karinuma. Good afternoon. My name is Kanuma. So from today, So the for the 1st quarter and the excuse me, for the 2nd quarter to put a 4th quarter, to phone conference, I will participate. So maybe there has been some speculations about that. But there's no special announcement that I want to make. If you look at page 11 of our presentation, so overall, it seems that we have been able to have a much better than expected start. So what's different from last year is that this year, we are more focused skewed on the second half. Last year, I think the first half we were able to show good performance for the LED backlights and the game console business is different from this year to last year. So I think basically our performance is more or less focused on the second half. Of this year, the first quarter operating profit, 10,000,000,000 was the assumption, but, I think basically we have been able to achieve 14,000,000,000. And going forward, we have three quarters left for this year. Is some uncertainty going forward. So about, about up out of the 4,000,000,000, we allocated the 2,000,000,000 for the upward revision of our forecast. I am going to mention it later, but the mechanic components is showing a very good performance and this is in line with our expectation. So LED backlights, in terms of the manufacturing technology related, issues we have been able to overcome. We have had a little concern about this, but I think basically we have able to see a good outcome and let's go to page 12. This is about the ball bearing business. As I, as mentioned in the presentation, the first quarter, for the 23rd consecutive quarter on a year on year basis, we saw an increase of external shipment. So I don't think that we see this kind of product and this growth is not stopping actually. In July, so 250,000,000 external has been able to be achieved. And, basically, this is another record broken. In terms of the ball bearing production, we thought that in August September, we would be able to reach a 300,000,000 units, but have been able to exceed that 3,000,00301,000,000 units were achieved in July. That was a record high level. So 200 and 94,000,000 included. We had some internal business as well. So this is the actual external shipment for in terms of bow bearing, in terms of July. So in terms of demand, as we have been able to expand both. So in July next year, we excuse me, we're going to achieve $215,000,000 in July next year, but the investment that we make for the previous equipment is going to start operation in next fiscal year. So going forward, the demand supply balances remain a concern, but according to our forecast, maybe there is some plateau around that period of time. However, every time, I say I think that there will be a plateau in this, quarter, but for instance, we think we have been saying that we'll be able to reduce the air freight cost. But we are not being able to, reduce that. It was the last month we have to spend about 100,000,000 yen of air freight. So I think this plateau has to continue or else it's difficult for us to reduce the air freight costs. But on the other hand, there has been some impact of increasing prices gradually have been able to reflect that to our performance from October onwards. I think, basically, the Guohammad million in more of impact, coming from the price increase will start to show. And what has been, strong out of our expectations is the C and A that which we had, acquired. So the new Hampshire ball bearing group, maybe I should call by that name. So the profitability of this company has been, improving dramatically. The major reason behind this is that the LTA long term agreement in the I think, well, depending on the customer, the custom funding, it will run for 2 to 3 years, but the LTA was concluded in in the, under conditions, but it has started to transit to a better LTA conditions. And the market is becoming better, and the selling price has started to improve. So the LTA renewal by progressing the LTA, the progress of the LTA renewal, meaning that At NHPP, the high and, level of the margins will be achieved in their aircraft related business. And Mach Arrow at the center the India of the business at India, there has been a lot of good reports coming from that business. And the acquisition that we conducted last year for the following couple of years, they will be I think there'll be a good supplement to a strong profitability that we can expect for the fastener business Hudisang to Hudisang, I'm seeing, saying it to my, each month, and the profitability has started to improve. And it's completely in the black right now. And but basically this is in line with the expectations. So in terms of Machine Components segment, it has shown strong results. So JPY 49,500,000,000 operating profit is our forecast for this fiscal year. I think we'll be able to achieve this this machine components business, if they are able to achieve 50,000,000,000 of profit, that means our profitability will improve furthermore. Next going to page 13. So the LED backlights, I think a lot of people were concerned about this business and the share prices reflected that concern. And so it was, moving down But thankfully, these LED backlights in terms of the technological difficulties, I think we'll be able to overcome these difficulty. So, it, you we were expecting this to be detained more or less, but it is moving faster than we expected, and we are launching lines every week. So I don't know how many new products is going to be sold, but this LDP Backlight business the launch of this, business. I don't think we have to worry about this anymore. So the motor business is continues to perform well. So beginning of June, we had a groundbreaking of the start of operation, the Slovakia a factory. A lot of European manufacturers are putting a lot of expectations on this factory. So the Slovakia factory will certainly, within these 2 to 3 years, will become a good, weapon or our expansion of business. Going to page 14, this is the Mitsumi business. As explained earlier, but compared to what we had expected, performance was higher than our expectations. So the optical devices business has started to contribute to the performance among which for the Chinese smartphones, they are higher specs required. That trend has started meaning that a lot of inquiries are coming to us. In the Other Mitsumi business, there has been a lot of improvement. So analog semiconductors, they are, performing strongly. And these various businesses, profitability improvement has started to contribute. And I think that's a thing that I can say surely. But that said, the pillar of Mitsumi business is the optical devices and the game business. That is a source of their profit. So we have to look at what's going to happen going forward. But for the game business, Maybe, we are starting to see some, delay, but, in terms of the customer's outlook, I still strong. So we will continue to manufacture the volume that the customers are requiring and so that we can hope, the good business to happen in the second half of this year. So, this has been a very brief presentation. But that's all from me. Thank you. We will now take questions. If you have any questions, please push the star key on your phone. And made for the message acknowledging your question. If you wanna cancel, please push the star case twice and wait for the cancellation message. When your name is called upon by the moderator, please state your name and your affiliation. And please limit the number of your question to 1. First question from Goldman Sachs, Mr. Takayama. My first question, Electronic devices. You did explain the LED Bucklight business, but in terms of price, selling price? I know this is a sensitive, a matter, but, are you already finalizing the selling price And, what you said, Mister Kainu Ma, I think you do get the feeling or at least my impression was that your projections have been satisfied. Am I hearing you correctly? Yes. I think so. Of course, selling prices have been determined because we have started the operation. I see. So with that, the electronic devices. I think you do have the expectation for the second quarter with increased projection for the first half. Well, earlier than projection, the ramp up, has begun, well, albeit, just slightly, but that is being reflected. Thank you. My second question about your Mitsumi business on the full year basis, the operating income projection has not been changed But for the first quarter, there was a sizable, upside and, same for the second quarter. Are you just being conservative? You did talk about the game console business. Indicating that there is some delay. So towards the second quarter, do you get the feeling that it's going to be lower than your projection. I guess we are making a conservative projection. I see. Got it. My last question, a technical question about the adjustment. First quarter was rather small, limited. Maybe that was the reason for the upside whereas for the 2nd quarter onward, Again, there's gonna be a quite a sizable amount. What are the factors? Why is it that the adjustment was small in the first quarter and why is it that you did not change the 2nd quarter direction? First quarter, IFRS adoption makes a difference. So the goodwill amortization reversal as I as was explained earlier. In addition, the changes, following the adoption of IFRS. Things that were previously recognized elsewhere is now assigned to 2 different businesses previously. They were the culprits. And although this is really hard to say, but, usually, mergers and acquisitions and other things are being considered. And associated expenses were not incurred during the first quarter. That's another reason. And during the first quarter, the bonus payments to the executives were made. So there was a change in reserves as well as the actual payment. There was a gap between the two. Resulting in the first quarter, adjustment amount being smaller. So there are some special factors. So in a full year forecast, 16,000,000,000 yen, is being rejected. And we believe that This is the adequate level, assuming ordinary operation. So in that sense, we have not changed the projection. For the second quarter, minus 4,900,000,000 in your revised forecast. Are you already seeing, those adjustment amounts being visible, or again, are you being conservative? Again, very to explain, but generally speaking, the expenses in the second quarter, many things are being visible. I see. Thank you. I would like to go to the next question. Morgan Stanley Securities, MUFG Securities, Amit Sathosa, please? Hello, this is Sato. So I have two questions. First, is the Mitsubic camera actuator 1st quarter situation. The sales has increased say, but what is the background of this? What is the change in each of the markets? And the 2nd quarter Mitsami operating profit. So from 3,000,000,000 was the 1st quarter in the 2nd quarter is going to increase substantially to 8,000,000,000 So if you break it down between games and camera, camera Xterators, so which is the biggest contributor, bigger contributor So could you please explain as far as you can? Well, for the camera actuator business, Sales has increased, but it's not a substantial increase. In terms of if you look at the numbers. So, if you are pressed to say whether it has increased or decreased, it has increased. So that's the range of sales increase that we're looking at in terms of the change So the fourth quarter, with the last fiscal year, the operation has been at a low level. The first quarter, basically, we had been able to see a more, operation. So for the camera actuators, exactly, if you're talking about the camera actuators, that's the biggest difference So besides the major clients, we have started to see more utilization of our lines. And I think that's some of the contribution coming to the sales increase. And for the first quarter and the second quarter of being profit 3,000,000,000 in the first quarter increasing going to the 2nd quarter, going to your question about that? So so, I cannot specifically say what's come it's coming from, whether it be games or not, but In terms of the machine parts, I think basically that's what the contribution is. So first quarter against the 2nd quarter, what's going to drive this growth will be more more or less the mechanical parts, excuse me. Understood. Thank you. Well, my second question is that So the LED backlight for the new smartphones, the production startup, you said that it has been earlier than planned. If you look at the utilization, first quarter, second quarter to 3rd quarter, what is will be the trend that we should be looking at? Would you give you some, ah, some hints So the when will be the peak of the utilization? And in terms of the LED backlights, and the it's Sumeet's optical device business, or that will be the camera actuator business. In terms of the ramp up of the operation, or is there is there any difference in terms of how the, peak will be in each of the start? Well, in terms of the ALV backlights, currently, the start has, it's just now we are starting this. And, the 3rd quarter will be the peak whale of the back lights. So in terms of the level that we're talking about, there are very sensitive matters that are involved, but I think basically, we are assuming that the peak will come in the third quarter. And based on that, we are announcing our guidance So the up in terms of the launch of the optical devices, Compared to the LED backlights, maybe it will be slightly earlier. And that's the overall preparation that we are making. And with discussions with our clients, we are trying to formulate the latest startup schedule. As a major trend, I don't think that there's no difference. It's slightly earlier than the LED backlights, but I think basically a peak will be coming into second and the 3rd quarter. So if that is the case for the Mitsubishi business, so the increase of profit in the 2nd quarter is coming from the mechanical parts business. I think that has been the, explanation. But in terms of the optical devices, you mean that from the starting from the second quarter, the sales will start to be booked. Is I may not I'm not mistaken to make the assumption. Yes. That's correct. Thank you. Once again, if you have any questions, so please push star 1. And if you're gonna cancel, please push star 2. Next person from SMBC Nikko Securities. Thank you. From SMBC Nikko. Slide 13 shows the organic LED OLED. So to the extent possible, can you talk about the things that you are working on now? That's my first question. This is Kainuma speaking. We have already given you the information to the extent possible. The, consumed power, power consumption, and durability owe that, we we have con confident is better, but the difference Things that we have not yet cashed up. It's a contrast that is how you show the Black part being black. So if we can improve that performance to the comparable level, LED backlights, we believe will continue to be used for quite some time. And therefore, Initially, when we worked with the supply chain partners, the innovation in terms of design to be realized with LCD was what we worked on, but now we are focusing on the black performance. So happens that yesterday, I did see the work in progress And I've noticed that it's really very good in terms of the black representing performance. So I think we are doing a very good job. I see. My second question is on ball bearing. You said that maybe it is going to plateau soon, still. You are seeing an upside in terms of volume due to the efforts made, by the field Now, this 3300000000 to, 313,000,000 Is that still possible, do you think, or do you think there is a room for upside, or is it hitting the limits Well, I don't think there's much margin left, meaning that should there be more going forward, the price is gonna go up. And therefore, we are hoping that the plateau would come. It's not magic. The number of manufacturing units is limited. We have worked on the productivity improvement. So new machines Well, in July, we are in the beginning of August by theendofthismonth. All of the new machines will be installed and the operation will start. So even with the upside we're just talking about millions of units. I think, it's safe to say. That's just about the size of the upside. It depends on the number of operating days, of course. I see. So for the industry, the small ball bearing utilization rate is, I think, is high. So the bottleneck so it could become the bottleneck of the manufacturing overall, or, maybe you can make a compromise in terms of having the lower priority products pushed back. So how are you going to satisfy your supply responsibility? Well, we want to satisfy, fulfill our responsibility as supply as much as possible, but it's really hard to foresee. So for now, we're showing this is our capacity. This is the maximum capacity that we have. So I don't think it makes sense to talk on the hypothetical basis. Currently, we feel that the plateau is going to come sooner or later. That's what the sales and marketing people say because of the Bitcoin situation being where it is today. I see. Next question please. My security is Mr. Akizuki. Mr. Akizuki, please. So thank you for taking my question. I have some simple questions. First of all, for the motors business, I would like to ask questions about that. For the full year compared to the full year plan, the first quarter sales I don't I'm questioning that how much the progress is going. So I think basically assumption is that sales is going to grow more in the second half. And the first quarter progress, maybe that's a profit based on the assumption, but you referred to Bitcoin Do this fan motors or ball bearings? Maybe it's slightly impacted by that. So I would like to ask about how much the progress is going for this business. Well, the motor business in terms of sales at the beginning of this fiscal year, Compared to that, a number, maybe the sales had a size shortfall against our initial forecast, but If you look at the most recent situation, I basically, I don't think there is a major concern about this business. For the 2nd quarter, their various motors will start to generate sales. And I think basically, for the full year, I think we'll be able to see, these sales to be online with our assumptions. So in terms of your question about the Bitcoin, will the ball bearing business Basically, we have a high market share. And for the Bitcoin business, We are engaged in those type of businesses, but for the other businesses, like, fan motors, for instance, whether the impact of the Bitcoin is coming or not, we do not disclose those type of information but the Bitcoin slowdown, does it have a big impact on the motor sales? But basically, our numbers actually have already reflected that impact and we have disclosed our numbers reflecting that impact Understood. Thank you. My second question is about the inventory quarter on quarter, it has increased by 109,900,000,000. So for instance, because you have to parallel or, increase the manufacturing for the game business because before the summer season. So In terms of utilization, does it have any impact? So can you give us the information about the impact on the first quarter? So in terms of the inventory, where is it, increasing I think towards the second quarter, there's some seasonality products that, we are product producing, beforehand. So inventory, strategically, in some cases, we hold inventory. So in terms of the 2nd quarter, excuse me, for the 1st quarter, how much that the operation gains are coming, if you look at the Mitsubishi quarter on quarter performance, I think basically you'll be able to understand that. Some at the 4th quarter, some were not, utilize, but, actually, we start to see the utilization go up. Some of the utilization gains is being reflected in the first quarter. I think that's all I can say about that. Thank you. So my third question is that maybe, you're suffering from some, reputational, adverse impacts, but For the new models, for the smartphones would be OLED, there's some rumor. I think in Taiwan, they will have some reports about that and I think that's kind of rumors recurs constantly. So the new model for next year Well, LCD will still be used. That's the basic understanding. Well, I cannot go into tell about this, but as you have mentioned, well, this is basically we are this is a kind of a negative impact coming from rumors. So that's all I can say, so we have we have to do something about this. I would like to sue them. This is rumor and we are being negatively impacted by it. Thank you very much for a very strong message. That's all for me. Thank you. Once again, from the moderator, if you have any question, please push star 1 to cancel your request for question. Please push star 2. The next person from UBS Securities, Hiroat Hassan. Thank you. Hirotta from UBS. I have two questions. First, on Mitsumi Business. Earlier in your response to one of the earlier questions, you said that for the first quarter, It was better than your projection. But for the second quarter, you do have conservative view. Can you elaborate for the mechanical components? Is that where you're being conservative, or is it political device on which you have the conservative projection. So can you elaborate? Again, as you know, this is the B2B business, and so it's hard to give you the details. Guidance wise, in both areas, we have somewhat conservative projections So it's not a question of which it's really for both. Understood. Related question for optical device, you have conservative forecast Is it because of rather a sluggish smartphone, or is it the market share or the yield factors? Market share yield. So far, we do not see much changes especially regarding the market share. And for yield, looking at the current ramp up, it's going very smoothly. Thank you. My second question This is a really general question. I apologize. Looking at the US China trade friction. Since you are operating many different regions, do you see any impact and what counter measures are you envisioning? Well, as you know, in China, we do have a major plant operations and in North America as well. Especially for the, space and air and bull bearing. We do have our operations. The products in China being shipped to North America, US, and, our North American operations do have these supplies from China. But, there is no direct impact of the friction. I wouldn't say there's zero impact, but the impact is quite limited. Of course, we are the parts manufacturers. So our customers might be affected by this trade friction between the two countries, but we don't know the extent of that effect Our strength is that in areas other than China, we do have operations doing manufacturing. So we'll leverage that diversity in our operational operations so that we can flexibly respond to the current environment. Because time is limited. We'd like to declare the next question to be the last. Going to the next question from Israel Securities. Goto san, would you please ask your question? So this is Mr. Hill's securities, Goto speaking So this is related, to the question about risk. So in terms of the affect industrial equipment, machinery business. There are some manufacturers that are saying that the orders is declining for the ball bearing and the motors business. So robotics for the industrial machinery business, is there any impact from the deceleration of this market or in terms of potential of deceleration. Do you have any view on this? That's my first question. And on the question, but I would like you to ask this question first. Of course, in terms of what we can see is that the after, the customer changes the manufacturing plans or the adjust the inventory, So in terms of the numbers that we have seen, it's not the case that we are seeing a plateau in this overall business. In these type of businesses, we will continue to observe what's happening and then, decide what we'll do going forward. Another question I have is that you talked about the China smartphone high spec. We're going to more high spec and there's a positive impact on your business. So you have this doable, triple, cameras, the more high function, cameras, meaning, what's the opportunity? How how does your opportunity change with this high spec. So in terms of the triple cameras, the North American customer, well, in the major, brand customers, what will be the opportunities? Can you comment on this? So, I cannot comment on specific tumors and specific models, but basically So this very precise OIS or VCM will be necessary in this kind of trend We consider this a positive development. If there are more and more models, going to this more higher spec, there'd be more business opportunities for us. And I think basically what you have pointed out is true. Please hold on. Well, actually, there has been a more increase in inquiries, and we have started to see inquiries coming. And this trend for us, is not bad at all. Understood. Thank you. That's all for me. Thank you. I would like to repeat Once again, if you have question, please press star 1 to cancel your request It looks like there are no further questions So we're going to complete the Q And A session. I'm going to ask Mr. Khanuma for the closing remarks. Well ladies and gentlemen, thank you for your participation. We're going to do our best for this fiscal year as well. So I ask for your continued support. Thank you.