Earnings Call: Q1 2018

Aug 4, 2017

This is Yoshida. I would like to explain about the Q1 results of fiscal year ending March 2018. Consolidated financial results for the fiscal the 1st quarter of the fiscal year ending March of 2018 totaled 193,000,002,04,000,000, that figure is up 60.6% year on year, but down 1.6% quarter. Operating income increased 2.4 times year on year and 19.3 percent quarter on quarter to total SEK17.62 1,000,000,000. Net income was up 4.5 times year on year and down 12.6 percent quarter on quarter to hit the JPY 14,181,181,000,000. Net sales operating income ordinary income and net income were all 1st quarter record highs. This achievement was due to the higher than expected shipment volume of smartphone parts on top of the strong performance of the ball bearings and mortar businesses. Currency fluctuations brought net sales down an estimated JPY 3,800,000,000 year quarter on quarter and 1,000,000,000 year on year. Foreign exchange rates also brought to operating income down 1,000,000,000 quarter on quarter, but up 1,000,000,000 year on year. Next slide please. First, the quarter net sales hit an all time high. LED backlights and camera actuators for smart foreign and other applications are expected to drive a sales up in the second quarter when demand is usually high. Next slide, please. Our first quarter operating income was also the highest ever. For 3 consecutive quarters, we saw operating income rise year on year. The 2nd quarter operating income should exceed the first quarter results as demand for LED backlights and camera actuators for smartphone pickup. Next slide, please. This slide shows the results for the Machinda Components segment. 1st quarter net sales were down 2% quarter on quarter to total JPY 40,600,000,000 while operating income was up 3% to reach JPY 10,400,000,000 and the operating margin grew JPY 1.1 percentage points to hit the 25.6 percent. All the production and shipment volume of ball bearings remained high the appreciation of Thai abart against dollar had a negative impact. Even though bow bearings sales remain the same as the previous quarter at JPY 25,200,000,000 profits increased. The average monthly external shipment volume, which increased year on year for 2019 consecutive quarters was 181,000,000 units. We are making steady progress with our efforts the production capacity by improving productivity as we explained in May. The monthly production volume for May June hit an all time high of 267,000,000 units due in part to the strong yen, sales of broadband fasteners totaling JPY 7,500,000,000 were down 3% quarter on quarter. Profits also declined quarter on quarter. Sales of Peabot assemblies dropped 6% quarter on quarter to hit the JPY 7,900,000,000 although the shipment volume fell 7% quarter on quarter, pivot assemblies yielded steady profits as we held over 80% of the market share. Please have a look at the next slide This slide shows the results for the electronic devices and components segment. 1st quarter net sales were down 9% aquarteron quarter to total JPY 104,400,000,000 operating income rose 22 percent to total JPY 6,800,000,000 and the operating margin edged up 1.7 percentage points to reach a 6.6%. Motor sales steadily grew mainly in the automotive market totaling JPY 44,000,000,000 for a 5 percent quarter on quarter increase. Net sales of electronic devices dropped to 13 percent quarter on quarter to total JPY 51,300,000,000. While sales for last fiscal years, 1st quarter were affected by special circumstances where the smartphone market underwent inventory adjustments, demand in the first quarter of this fiscal year remained within the usual range of ups and downs and production of LED backlights for our major customers kicked off without a hitch. Both sales and profits will grow even further in the second quarter as demand peaks. Sales of sensing devices totaled JPY 8,300,000,000 This figure would be about the same as the last quarters if you were to disregard the one time consolidation of an additional 3 months of Milivera impacts. Turnix at TNH Financial Performancees in the previous quarter. Next slide please. This slide shows the result for the Mitsumi business segment. The 1st quarter net sales a total of JPY 48,100,000,000 operating income totaled JPY 3,800,000,000 and operating margin reached 7.9%. The factors driving the segments a good performance included significantly improved product activity for camera actuators, the launch of a new game console as well as the father enhanced the profitability of precision components, power supplies in vehicle product, semiconductors, etcetera, which all added to the bottom line, we expect that both net sales and the profits to increase in the second quarter as demand shall remain high. Next slide please. First quarter net income also reached an all time high. All the net income declined quarter on quarter if we were to exclude a gain on negative goodwill and the loss from the redemption of bonds which were, respectively, recognized as an extraordinary gain on loss in the last a quarter, we would see a large increase substantially. Next slide please. Quarterly SG and A expenses rose JPY 500,000,000 a quarter on quarter to total JPY 23,800,000,000. The SG and A expenses to sales ratio grew 0.4 percentage points from the previous quarter to reach at 12.3%. Next slide please. Inventories at the end of the first quarter were up JPY 13,600,000,000 from what they were 3 months ago, to total JPY 134,000,000,000. The increase was due mainly to the inventory of components for new smartphone models and the game consoles held prior to the shipment inventory should reach an optimal level at shipment volumes increased further in the 2nd quarter. Next slide please. Capital expenditures for the first quarter totaled 1,000,000,000, while depreciation and amortization amounted to 1,000,000,000. We expect capital expenditures as well as depreciation and amortization for this fiscal year to be higher due to mainly to the mid to mid business segments, camera actuators. Next slide, please. At the end of bearing debt, which is total interest bearing debt minus cash and cash equivalents, was down 18,400,000,000 from the end of This fiscal year, we expect free cash flow to increase significantly as profits grow and net interest bearing debt decreases even further. Despite increasing capital expenditures. In the meantime, we will continue to actively pursue M and A opportunities with an eye on medium term growth. This is a summary of a forecast for the fiscal year ending March 2018. We expect net sales, operating income ordinary income and net profit to hit record highs this fiscal year. In the first half of this fiscal year, we expect increased external shipment volumes of old bearings continuing from June quarter in addition to higher sales of LED backlights camera actuators and game consoles due to the peak demand period. Based on our best estimation of the total impact of the current market conditions or other factors will have on our operations, we made upward revisions to our forecast. We decided to make no revisions to the second half forecast due to the uncertainties in the currency market and unforeseeable customer demand. Next slide please. This slide shows a forecast by business segment. Please go to the next slide. This slide shows the current performance of miniature bull Bearings, our anchor product line. External demand for miniature boat bearings is quite strong. The external shipment volume for the first quarter has grown year on year for the last 19 quarters in a row and hit a monthly record high of 187,000,000 units this June. This increase is mainly due to strong demand for automobiles, high end home appliances and servers and we expect demand to steadily grow. On the other hand, internal demand for ball bearings, which are mostly used for pivot assemblies, and motors currently has also remained steady overall despite recent slowdown in the HDD market. The total shipment volume for external internal sales combined has continued to exceed the production volume. Since September 2016. That is why we had to urgently boost production capacity. We have been making steady progress in our efforts to increase products and capacity by improving productivity which we explained at the investors meeting for the previous fiscal year held in May. The production volume hit a record high of 260,000,000 units in May June. As for the capacity expansion by capital expenditure, we announced at the Investors Meeting for the third quarter of the last fiscal year in February, we are going to put it off, put off installing new equipments as much as possible. For the time being, we'll prioritize on improvement of productivity within the existing capacity. If we should start operating the equipment that we have invested in for that capacity, our production capacity should reach 300,000,000 units per month by May 2018. Please go to the next slide Let's now move on to look at the status of our LED backlog business. Production of LED backlights for our major customers got off to a smooth start this first quarter. As demand remained within the usual range of ups and downs, which is not the case last fiscal year. Boosting high quality and low cost Orders for our LED backlights remain steady. Also, we are going to finish the accelerated depreciation for production equipment of LED back lights by the end of this fiscal year. This means that the financial impact has been minimized even if we see a decline in the future for this business. Although we assume it should be a bit too premature to decide how the trend of smartphone displays in the future would be, We will prioritize on expanding sales of LED backlights mostly for high end automobiles even further. For the smartphone market at the same time, we will keep developing full screen full screen type LED backlights since we assume there could be demands for LED backlights to some extent in the next year as well. Moving on to the Misumi business. We saw operating income for the first quarter substantially outperformed our initial projection and increased quarter on quarter. The factors behind this increase of Mitsubishi's business profit includes the better than expected demand for camera actuators and new game consoles which we categorized as sub core business at the Investors Meeting in May. In addition, we saw significantly improved profitability for sensors, connectors switches, power supplies, wireless products, and analog semiconductors, which are the core business and make up the 7 spheres of Minabir Mehtumi. The Mitsumi business will ride the current market wave as it will buoy shipment volumes from a camera actuators and new game consoles in the second quarter. We will continue to work on improving productivity for other operations as well as ensuring a steady stream of revenue for the Mitsumi business. We are in good shape strengthening the core business while generating cash from sub Now I would like to touch on the joint business development agreement with Weco to commercialize our best sensor system which we announced on May 18. Being market to nursing care facilities, our pet sensor system combining Minabia Mitsubishi's sensor technology with the Wicos Group's data collection technology we can measure a patient's weight, body location, respiratory status, and other data in real time. We are aiming to earn 1,000,000,000 from sales to nursing care facilities in Japan during the fiscal year ending March 2021. Moving forward, we are leveraging Mitsumi's technologies to develop IoT related products, not only for the healthcare market, also for automobile and social infrastructure applications, but then aim to make them our number 3 profit generator. So that's all from me. We would like to move on to the Q And A session. Star key and 1 and wait for the message that says confirmed. If you wish to cancel, please press star key and 2, and you should hear a message that says canceled. When your name is called, please We have the first question from Mr. Takayama of Goldman Sachs, Japan. Mr. Takayama, please go ahead. This is Takayama. Thank you very much for this opportunity. Hello. Can you hear me? Yes. Thank you. First of all, about electronic devices and components. So you made an upward revision So JPY 43,000,000,000 of net sales. This has been revised and this is probably mostly the backlights. So could you elaborate on that? In other words, the former models, the older models, continue to do well in April to June period and the net the LCD models, the demand for LCD models coming ahead of the schedule or the pricing related factors, I could you on be more specific. First of all, The main reasons are for North America, the backlight, demand for Baclides in the North America is very good. That is the biggest and probably the only reason. And there are no pricing related reasons. In that sense, This change from 184,300,000,000 to 220,000,000,000. This is a huge difference. And is volume going to grow significantly? So do you say that the demand is so strong? So we do not know what is the share that our competitors have but we seem to enjoy, a good demand in all segments So it's not the old model. Well, new models is included partially but new models will grow significantly in 2nd quarter onwards. Understood. The reason why I asked you that, the question is the customer's volume expectation remains more or less the same. So the reason why you made an upward conservative, or are you taking away share from your peers? If I may repeat, We do not know what is the, volume or orders that our competitors have. However, the overall size of the pie remains the same. Likewise, the Mitsub meets, budget changed or forecast that changed. So the sales is JPY 15,400,000,000. And what is the background? Is it the game consoles or actuators and this upside in profit? So it's like JPY 4,600,000,000 increase. So what is the biggest factor contributing to this number. The sales overall the situation is quite positive, particularly game consoles had the biggest deposited by impact. Visavis the original forecast, I see. But others like actuators, the sales forecast. Am I right in understanding that the sales forecast remains about the same, but the profitability, improving Well, as you may know, in China, it's slowing down a little bit and it had an impact and that is, included. So optical devices Regarding that, the segment, there was some negative impact because of that. So for confirmation, So April to June July to September, it's going to be 1,000,000,000 up from 4.8. But I would assume there should be a bigger increase. Is that because of the on capacity, inclusive of game consoles, the 2nd quarter sales should increase even more Is that because of the limitation on capacity production capacity? The no limitation. There is no limitation on the production capacity. Basically, we can make our products to fulfill orders. And as you rightly said, game consoles and so forth. In Q2, we are expecting to see a huge increase in demand. So we are preparing steadily for such an increase in demand. Thank you very much. So let's go to the next question. This is Morgan Stanley, MUFG satosa, Mr. Sato, please. Sam Sato from Morgan Stanley Securities. Thank you for taking my question. So I have three questions. Number 1, so in terms of upward revisions, So for the first quarter to 2nd quarter, the sales are JPY 50,000,000,000 increase That's the plan. On the other hand, so there's a JPY 3,200,000,000 increase. So the profitability So the reason for the improvement in the product availability, is there any special reason behind this? Or in terms of the forecast of the 2nd quarter, is it you have a conservative outlook? So the electric components, profitability, the reason the profitability is declining in the same quarter. Would you please explain that? That's the first question. So let me answer that. Well, in the first place, for our major product manufacturing sites, Thailand, that's Thailand. The Thai Bots is a bit strong. So that is the difference from the 1st quarter. And for that, if we reflect that change, then that is assumptions that we are placing for a 2nd quarter outlook. But that said, from the 2nd quarter onwards, the currency assumptions isn't changing. Is that right? Yes. In that sense, Well, let me clarify. So we assumed to talk about or excuse me, for the currency assumption for the business plan, it is unchanged. So So the but appreciation has been slightly reflected. I think that's the way we see it. Understood. Besides that, there's no special reasons behind this? No. Understood. Thank you. The second question is that So for the Mitsumi business, so the camera actuators productivity improvement So how is this progressing? I would like to hear that especially. So the conventional whether than the conventional models for the new smartphones, the productivity improvement is going to proceed further? Can we expect that? Or maybe that's placing too much expectations how should we interpret that? Well, first of all, So in the previous financial report meeting, we have explained the minute where I meet to me integration, since this has been decided, our management and other people have been striving to improve the profitability of the Mitsumi business. And as a result, the productivity has improved by threefold. I think that's three times. So that has been the actual situation. So through the daily effort, bit by bit, we have been proceeding on the productivity improvement. So in terms of the difference in for the new models, basically, We have been able to horizontally blow it and know how. So in this type of momentum, we think we'll be able to further improve the productivity. Thank you. So the productivity improvement by 3 times is only for the camera actuator or for the Mitsumi overall productivity has improved by that level? Well, this is for the camera actuator productivity improvement. That's what I'm referring to. Understood. So if that is the case, mid to me over as mid to me overall, so besides smartphones and game consoles, is it's actually, contributing to the stipulations of profitability. So it's been 6 months integration of the business So what has been already been executed and what other challenges remain what is your acknowledgment? So in terms of the management integration, we have conducted that and we have seen improvement in some short term areas, for instance, with the joint procurement of materials has led to the cost reduction or logistics integration that has led to cost reduction. So I think on a short term basis, there has been things that we have been able to improve And I think for that type of improvement, we have been able to progress nicely. On the other hand, we have kind of the integration with Mitsumi and a bit portfolio has expanded and developing hybrid products or commercializing these hybrid products has been the major target of this management integration. So in these areas, in terms of when the result is going to come out, I think basically it'll take longer time. So for this aspect currently, we are conducting efforts. Thank you. Understood. Thank you. And this is my last question. So the first quarter, the effective tax rate is 18.4%. So it's low. Is it because the Mitsumi business is low? So on a consolidated basis, the effective tax rate is low. Or and for the second quarter onwards for the next fiscal year or next fiscal year, what is your outlook on the effective tax rate? So please hold on. Well, these groups for this fiscal year, from this fiscal year, in Japan, including Mitsumi Group's subsidiary, we have started a consolidated tax reporting. For the Mitsumi business, there has been a accumulated loss from a tax perspective. So through that, tax carry forward, the overall effective tax rate has gone down. And for going forward, I think because we have accumulated loss from a tax perspective from the mid to mid business that will contribute for the effective tax rate Well, I think be in the range on the lower side going forward. So more specifically, how much would be this effective tax rate would be? How much how should we assume do you have can you give us any hints? Well, in the first quarter effective tax rate compared to that, it will be slightly higher, maybe a little over 20% think basically that will be the range. Thank you very much. Let's move on to the next question. SMBC Nikko, Mr. Watanabe. Please go ahead. This is Watanabe from SMBC Nikko. About a foreign currency, I would like to confirm a few things in Q2. The impact of tie parts is already included, you say, but in this for the second half, you have not included assumptions. Therefore, Am I right in understanding that there may be some impact of the tie parts in the second half? Yes, you are right. About the sensitivity, So you have disclosed the sensitivity and it's not it has not changed significantly from what you disclosed. Yes, as I briefly explained to you previously, quarter on quarter, the impact of foreign currency or FX is about the 1,400,000,000. In our case, as you may know, visibly, the total sales, dollars account for 70%, but various currencies fluctuate and therefore in order to avoid a misleading, we do not estimate in dollar denominated. And therefore, I would like you to make an assumption on your part. Another point is regarding Mitsumi Business, I would like to confirm once again that in Q1, profits in Q1, when it's seen Q on Q. So the factors for variance what had the positive impacts and what had a negative impact that would you explain more in details? For example, actuator volume declined, but the game consoles will grow probably or agree of Q on Q But other factors, I didn't understand what I don't know. So please explain. I do apologize, but we do not disclose profit and loss or detailed profit and loss for each segment. But overall, things improving, In particular, as you may know, as we explained in Q on Q Optical devices such as OES, And the mechanical parts were really robust. Understood. That is sufficient and about the tax rate. So the deferred tax losses for how many years is it going to continue? Because it's a quite amount and you may not be able to use it completely. But for how many years do you think it's going to continue? That is my last question. 9 years, it can be deferred, but we are assuming for 5 years. In 5 years time, we are planning to use it up. Understood. So you are planning to use the entire amount. Yes. At this point in time, I cannot say for sure, but we are hoping to use it entirely. That is all. Thank you. So I'd like to inform you once again. So please press star 1 and cancel star 2 when you want to cancel. Are one more questions or 2 or cancel. Thank you for waiting. I would like to go to the next question for Mr. Securities, Cotoza, Mr. Coto, please. Hello. Can you hear me? Yes. Hello. So I have some questions. First of all, for the backlight business, so currently it's doing very well. I think it's the correct understanding, but the shift to OLED I think basically it's going to accelerate from the January to March quarter. So even if it's a has there been a following for first half, maybe in the second half, maybe this will be a negative factor. So in the second half outlook, maybe have affected that element button of a second half plan, whether this will return as a negative impact what is your take on that? Well, whether things are going to transpire in the second half, we have not we have not, have had substantial information in deep in the first half, it has been a good situation, but that decelerating largely in the second half, currently we're not aiding that. Understood. So again, this is about a question about the backlight. Business. In today's material presentation, I think it's on page 16. You explained about the back life. So you're seeing that for next fiscal year, you anticipate some shipment for the smartphones. But when you think about a midterm plan for next fiscal year, the North American client may shift to the shift to OLED is going to accelerate. I think there has been assumptions So in this presentation, there hasn't been any change from your conventional thinking or maybe some else model will remain until 20 eighteen. So that's something to go arguing. Are you have you taken into that consideration? Well, I have to apologize. So I have I have explained this presentation currently whether you're asking the question I cannot comment about this at the present time. Please understand. So this is my third question. For the camera actuator business, so product improvement, predictive the quality improvement has been conducted. So has there been any change from the evaluation of the customer side in terms of allocation? Has there been been some improvement or there's a possibility of the improvement of the allocation. Can you expand on that? Well, in the previous, investors meeting, I think Mr. Kainu might have explained about this, but because our share to get share in this business, we we so we do not have a basic policy for instance that reduced price to get share. So for this business, so we will be a good second supplier, we will be maintaining that position for this business. So when we secure this position, so deliver at the good at accurately with the a good quality if we're able to deliver products in that manner, maybe we'll get a better allocation, but currently, it is not the case that we are we are assuming that happening. Understood. Well, this year model, for the mass production for the actuaries for this U. S. Model currently, are there any bottlenecks or obstacles right now? Everything is going smoothly. For the North American models, productivity has improved substantially, including that aspect. So as the manufacturing sites are doing a smooth ramp up of bearing for a ramp up. So there has been no, issues Understood. Thank you so much. Next question will be from Mr. Akizuki of Nomura Securities. Mr. Akizuki, please. Hello. Good evening. Thank you very much. This is Akizuki. So excellent results. Electronic devices and components quarter on quarter, JPY 10,000,000,000 decrease what's seeing. However, the segment profit increased JPY 1,200,000,000 So decrease the revenue and increase the profit. But, why you had this result? So we should be able to provide me with more detail the information. 1st of all, Motor Business, it's going quite well. So that is all I can say If that is the case, electronic devices, like backlights, made a huge improvement. This model, we are accumulating a lots of knowledge and experiences which were reflected upon improvement of productivity. So inventory increased the Q on Q So you are producing, the components for the new model and you have absorbed fixed cost, which may be one of the reasons for improvement because the startup in the Q2 is expected to be quite sharp. So you are asking me about backlight. Yes. So the backlight inventory increased as sales increased, but accumulating inventory. I mean, the incremental, the inventory, that is not the case. So it's within the normal range. I see. So it's purely the productivity improvement of each generated improvement in profitability So is that right? Therefore, electronic devices, yes, that is correct. My second question is about above our bearings, the ratio by each application as well as a year on year growth, if you could share with me? Bowl bearing ratio, automotive, 20% the aircraft, 32% aircraft on space are 32% and home appliances. A 4% office automation, 6%, PC and peripherals, 3%. And motors 17%, others 17%. And you want to know year on year growth, right? Yes. So year on year growth, right. 1st, automotive 10%. Aerospace, a negative 5%. Home Appliances, plus 21%. Office Automation, plus at 12%. PC and peripherals negative 17% motors plus 11%. Others plus 5.9% in total, 5.2% positive 5.2%. Thank you very much. Finally, Bow Bearings Profitability. So, the home appliances are probably air conditioners are growing But, maybe you are using air freight, pitches, of course, so closely. But when a shipment volume increases and a production capacity catches up, Can I expect a further improvement in ball bearings profitability? Well, in machine, a component segment, the total profit is JPY 10,400,000,000 out of Fitch Ball Bearings the profitability has been improving significantly. On the other hand I briefly touched upon during my presentation. Rod ends. The margin declined or the profit declined as well as the sales. So the rod ends are declining, and that is because the production of a wide body aircraft is declining. And also in the broad end segment, the defense related works, are included. And that is also decreasing. So rod end, profitability is, worsening a little And that is the reason why we had this, final number. So, the capacity of, capacity is increasing, but inventory is still at the low level, the ball bearings. And therefore, basically, there is a room for improving productivity But other than that, our basic ability to generate profit has been improving. Understood. Thank you very much. You would like to inform me once again. Thank you for waiting. Let's go to the next question. So this is Sigrata from UBS Securities. Hello? So this is a question. This is about the Mitsumi business. And after the revision plan, the 1st quarter sales 48,100,000,000 and the 2nd quarter is 60,700,000,000. So there's a 12,600,000,000 of increase of sales. So what is the content How should we think about that? So as FX explained previously, So between the 1st quarter 2nd quarter major changes, is the optical devices, so like OIS, in terms of the orders, it's 3 giga peak. In terms of the game console related business, there has been a major production increase So that will be compared to the first quarter. The reason why the second quarter sales is going to increase substantially. So in terms of contribution, which will have a higher contribution among these 2? Well, the game console will have a bigger contribution. So if that is the case, in terms of your actuator for your major client, the plan for the major clients, from the beginning of the year, there has been no major changes. Is that correct? So overall, so I think the trend is on the positive trend, but as you know, the Chinese smartphone players, there has been a, it's going to be a slight slowdown. What the North American players, it has increased. So it's a kind of an offsetting situation. I think that's the way to understand this. Understood. So my second question is that so I took about the game business, there's no issue about capacity. But that said, but demand is more than your, outlooks. So what is your initiative to so that actually there's no to right now, what you have done. Well, 1st of all, of course, the demand is increasing, but in the past, we have the knowhow of, reducing these situations or terms of game consoles we have had experienced in terms of what we're making is quite different, but because we have know how, right, in terms of manufacturing and sites, they have that know how. And then, this is a new type of game consoles, and, we have increased capacity for these specific manufacturing capacities necessary for these new types of products. And by doing so, we have been able to answer to those types of increased demands. Thank you for your answer. So lastly, again, this is about the numbers. So you talked about your monthly numbers. For the ball bearings for April to June, internal sales trend and the People Assembly April to June a trend in terms of production and can you give us the numbers? So please hold on. Subo Bearings, sales is only sales, okay? Yes, for the internal sales, yes, please. My internal sales, April So by 1,000,000, 85, May 88, June 87. So those are the April, May, June, if yes. So in terms of production, can you give us production numbers? For production, April, 250,000,000, May, 267,000,000 So pivot assembly, that's again, sales and production. So pivot production, April 30, May 30, June 29. Sales, April 25, May 29, June 25. So thank you so much. Thank you very much. We would like to end the Q And A session finally, Mr. Yoshida of Banenio Bayo and Mitsumi would like to say a few words. Thank you very much once again for participating in this conference call.