Minebea Mitsumi Inc

TSE:6479

Earnings Call Transcript 2019-Q2

[Kenji Yahiro, executive]

We would like to begin the session. Thank you very much for coming to the analyst session of MinebeaMitsumi result of first half of year ending in March 2019, despite your everyday schedule. The participants from the company side are the Representative Director and CEO of the company, Yoshihisa Kainuma. Next to him is the Managing Executive Officer, Katsuhiko Yoshida. My name is Yahiro from IR department. I will have the privilege of serving as emcee for this session.

First, Yoshida will explain about the financial results. And then Kainuma will talk about the business update and management strategy. Then we will have Q&A, and we plan to finish this session at 8:30.

Regarding the details of the financial statements, please refer to supplementary information as well as [indiscernible] flash report. As for the press release about allocation of the surplus, retained surplus and revision of the dividend payout, please refer to them as well.

And may I ask you to fill out the questionnaire form because it will provide us good feedback in order for us to do this in a better way. And this meeting will be uploaded to Internet inclusive of Q&A, so this will be recorded -- this session will be recorded. And may I also ask you to refrain from taking photos and sound the recording.

Then, Mr. Yoshida, the floor is yours.

[Katsuhiko Yoshida, executive]

This is Yoshida. I would like to explain the consolidated financial results for the first half of the fiscal year ending March 2019.

Consolidated net sales for the second -- or the first half of the fiscal year ending March 31, 2019, totaled JPY 236,330,000,000, down 0.6% year-on-year, but up 10.9% quarter-on-quarter. Operating income dropped to 20.6% year-on-year, but increased 37.3% quarter-on-quarter to total JPY 19,624,000,000. Our profit for the period attributable to the owners of the parent was down 15.6% year-on-year and up 46.7% quarter-on-quarter to total JPY 15,970,000,000. Both net sales and operating income were as expected with solid sales of ball bearings, mortars and other products, despite timing issues and onetime costs in some businesses.

Currency fluctuations brought net sales up an estimated JPY 3 billion quarter-on-quarter and down JPY 100 million year-on-year. It also brought operating income up by JPY 2.1 billion quarter-on-quarter, but no change year-on-year.

Also we adopted IFRS instead of JGAAP from the current fiscal year.

Moving on to the next slide. The bar graph on the left shows net sales, and the one on the right is operating income along with a line chart for the operating margin. The OP margin for the second quarter was 8.3%, down 2.3 percentage points year-on-year, but up 1.6 percentage points quarter-on-quarter. Now please note that the figures of the fiscal year ended March 2018 and before are based on JGAAP and are provided for your reference so that you can look at the past figures. The same applies hereinafter.

Next slide. Here shows the difference between forecast as of August and actual results for net sales and operating income by business segment for the second quarter. While net sales for the machined components business segment were almost on par with the forecast, sales for the electronic devices and components business segment were higher than forecasted, mainly thanks to electronic devices. On the downside, the Mitsumi business sales were lower than projected mainly due to timing issue for smartphone-related parts, although operating income for the machined components was about the same as projected. Operating income for the electronic devices and component business as well as Mitsumi business segment were lower than forecasted due to the changes in shipment timing of smartphone-related parts, but Others and Head Office adjustments improved slightly. Also please note that temporary expenses approximately a negative JPY 1.0 billion from the Hokkaido Eastern Iburi earthquake was included in the Mitsumi segment.

On the left -- next slide, on the left is a graph indicating quarterly net sales trends. And on the right is -- graph is a bar chart showing quarterly operating income trends along with a line chart for operating margins. Net sales for the second quarter were up JPY 900 million from the previous quarter to reach JPY 48.2 billion. Ball bearings sales increased [ 2% ] quarter-on-quarter to total JPY 31.1 billion. The average external monthly shipment volume hit an all-time high of 206 million units, marking a year-on-year increase of over 24 quarters in a row. The monthly production volume for August hit a record high of 302 million units. Sales of rod-ends and fasteners totaling JPY 9.1 billion were up 2% over the previous quarter. Sales of pivot assemblies increased 2% over previous quarter to total JPY 8 billion. Pivot assemblies certainly contributed to our bottom line as we held on to 80%-plus market share.

Operating income for this quarter hit a record high of JPY 12.5 billion to put the operating margin at 26%. Operating income was up 7% quarter-on-quarter, while the operating margin was 1.2 percentage points higher than what it was last quarter.

Looking at the results by product, we see that the profits for ball bearings, rod-ends, fasteners and pivot assemblies all rose quarter-on-quarter.

So this is about electronic devices and components. Net sales fell 5% quarter-on-quarter to hit JPY 87.4 billion.

Looking at the results by product, we see the sales of motors grew 4% quarter-on-quarter to reach JPY 49 billion, as sales remained strong primarily in the automobile market. Sales of electronic devices were down 19% from the previous quarter at JPY 27.9 billion. This was primarily due to the shift to new model of LED backlight for major customers. Sensing device sales grew 2% quarter-on-quarter to hit JPY 9.3 billion.

Operating income totaled JPY 4 billion, while the operating margin reached 4.6%. We saw a 2.1-fold quarter-on-quarter increase in operating income, while operating margin climbed 2.5 percentage points. Looking at the results by products, we see that all categories, including motors, electronic devices and sensing devices, were higher operating income.

Moving on to the next slide. Lastly, this is about the Mitsumi business segment. Net sales increased 36% quarter-on-quarter to hit JPY 100.6 billion. Sales in all products increased primarily in mechanical components.

Operating income reached JPY 7.5 billion to put the operating margin at 7.4%. These figures reflect the one-off expenses in semiconductor business from the Hokkaido Eastern Iburi earthquake. So the operating income rose 2.5-fold quarter-on-quarter, while the operating margin grew 3.3 percentage points.

Moving on to the next slide. Next, this is the quarterly inventory trend. We see that as of the end of the second quarter, inventories amounted to JPY 176.8 billion. The figure is up JPY 7.7 billion from 3 months ago. The increase was largely due to the increase of strategic parts inventories considering market conditions. Inventory should reach an optimal level in the third quarter and onward as demand peaks.

Moving on to the next slide. This graph contains a bar chart showing trend in the net interest-bearing debt, which is total interest-bearing debt minus cash and cash equivalents, and a line chart for free cash flows. At the end of the second quarter, net interest-bearing debt totaling JPY 62.8 billion was up JPY 10.3 billion from what it was at the end of the previous year. Despite increasing capital expenditures this fiscal year, we expect free cash flow to increase as profits grow and the inventory decreases, and net interest-bearing debt to decrease significantly at the end of the fiscal year. Please note that these figures do not include the impact from TOB.

Please go to the next slide. This is a summary of the forecast for the fiscal year ending March 31, 2019. In the second half, we expect machined components and motors to continue to grow steadily, and smartphone components to make a contribution to earnings from the third quarter. However, future trends in the global economy are uncertain due to factors such as trade policies, exchange rate trends and geopolitical risks in each country. Under these circumstances, we have revised the forecast of the profit of the period to the extent that we are currently able to forecast. The exchange rate assumption was changed to JPY 110 to the U.S. dollar.

Moving on to the next slide. This slide shows the forecast by each business segment.

Please go to the next slide. Finally, I'd like to go over our sustainability topics. We are actively addressing ESG, that is environmental, social and governance issues, recognizing them as business opportunities as we aim for sustainable growth and response -- respond to the various needs of society.

Here are 2 recent topics, I would like to share with you. First, NMB-Minebea Thai, our Thai subsidiary, won the Thailand Labor Management Excellence Award 2018 for its 2 factories. These awards are a testament to our ongoing efforts to build better and safer workplaces across the globe.

Secondly, we are doubling our efforts to disclose ESG information. Specifically, we issued an integrated report in addition to a CSR report. We will continue to realize sustainable growth by contributing to solutions for social issues. That's all from my side.

[Kenji Yahiro, executive]

Next, Mr. Kainuma, please.

[Yoshihisa Kainuma, executive]

This is Kainuma. Thank you for staying with us for many hours. From now on, I would like to talk about the business update and management strategy. As Yoshida explained, 2000 (sic) [ 2018 ] was affected by a disaster, and JPY 1 billion damage incurred and backlight in the first half suffered losses. But JPY 34 billion, more or less, the operating profit was generated. That means that we have been strengthening our capabilities. And machined components, JPY 50 billion operating profit was the target. And JPY 1 trillion and JPY 100 billion in March 2021. When I set this goal for the first time, this was JPY 50 billion. It was also the target I set, but it's likely to be achieved 2 years ahead of that time. And Trump administration, the Chinese economy are slowing down, so on and so forth. But as you can see here, MinebeaMitsumi's diversity in this critical time, we have been able to effectively cope with those things. I will come back to this point later on.

This time around, our initial projections remain virtually the same. As you already know, there are many uncertainties, but initially we took a very conservative view in formulating the plan. So we changed the ForEx, so JPY 110 to a dollar, and we should be able to achieve the target.

Machined components. Last month, the automotive achieved 60 million pieces, which is 11% growth year-on-year. Next year, 11% to 12% growth is anticipated. In the background of that, the water, oil and air, all those pumps will be electrified. So automotive as electrification progresses, the more durable ball bearings will be necessary. So there is this peak anticipated in the demand, and only MinebeaMitsumi has the production capacity to meet that demand. And price hike effect, for example, last month, we have been able to raise JPY 2 in average. And cooling fans, 5J, ADAS and base stations, the infrastructure preparation will progress going forward. And therefore, even more cooling fans will be needed that will operate 24/7, so very durable ball bearings will be required. And therefore, we anticipate 10% annual growth in this area as well.

Now highly efficient vacuum cleaners is seeing boom. A certain non-Japanese manufacturers and vacuum cleaner and the like, the Chinese customers are wanting high rotation bearings, so a 20% increase. Ball bearings overall, I have no concerns at all.

So production and sales, we seem to have a little more production than the sales. But airfreight, which costed JPY 100 million, is coming down, and we would like to reduce that to JPY 20 million per month. And we would also like to optimize inventory level as well. Ball bearings we tend to focus on. But what is having high performance is rod-end and fastener business. As I may have explained to you several times already, the Mitsumi's techniques are applied to ball bearings and 3,500 -- or 35 million pieces and 15 million and the rod end. And last month, Karuizawa had record high shipment and the impact of that on rod-end is being very positive. And fastener has had complete turnaround. Last year, we anticipated JPY 800 million of swing, but bigger swing than that can be expected from fastener business.

And C&A and Mach Aero growing steadily, so the U.S. rod-ends are growing very steadily because of booming economy. And now is the time for renewing long-term contract and, therefore, prices have been raised. And this trend is to stay for some time because the prices will be raised and they will stay that way, and about JPY 55 billion per month -- per year, and 10% additional increase is anticipated next year.

Next is backlights. So there was a timing issue, and analysts are writing detailed reports about smartphone industry, so I would like you to refer to those reports for more details. But now the smartphone -- smartphones are slowing down. But this year's model compared with last year's model, the main models -- that this year's model has a fewer parts. So the profit that can be generated by smartphones, we didn't anticipate that much. So the impact this time around is, even if smartphone business doesn't progress as planned, the impact will be limited.

And automotive motors, the motor business is JPY 200 billion. And automotive is the most promising one at JPY 34.7 billion and 107 -- JPY 143.3 billion and JPY 48.1 billion, JPY 53.5 billion from 2016 till 2019. And actuators, we're having many inquiries. And 2021, the European regulations, the emission regulation, the PM motors, the BLDC, brushless, those motors are growing steadily.

Mitsumi, turning to Mitsumi business. Optical devices have timing issue as well, but Chinese smartphones are having better specifications. So we are recording lots of revenue in that area. So impact on profit and loss, we took a conservative view. Therefore, probably we can offset the impact. And what is most powerful in Mitsumi business is the semiconductors, particularly analog semiconductors. So the Japanese pepper grain may be small, but it does sting your tongue. So it's focusing on limited area of high-end smartphones. The 75% of the global market has Mitsumi's analog semiconductors. And mechanical components, according to the analysts, they are writing reports about game consoles, so on and so forth. And the revenue is likely to be in line with the plan.

Risks. So we are very resistant to risks now, and Trump administration's issues. So China Plus One by U.S. companies is starting, so far the cheap ones. We gave cheap ones -- the business of cheap ones to Chinese players in the U.S., 20 million pieces were sold in the U.S. But now it's down to 8 million, and they were replaced by Chinese players. But 25% tariff will be imposed, and we are now seeing inquiries from them or for those products, not just bearings, but in other product areas. We have recommended our Cambodian plant many times, but they were not interested, but this time they are becoming interested. So if the current trend continues, probably the customers -- an increasing number of customers will be wanting to use our Cambodian plant. And so this is an opportunity and not a risk.

So this is a TOB tourist division with U-Shin. I made a presentation to this with you already. So I do not want to repeat it, but I'll have 5 synergies that we have listed here.

So JPY 300 billion coming from the automotive business, we have that in the view. So from the JPY 130 billion MinebeaMitsumi automotive business, that's the current level. On top of that, we have JPY 150 billion coming from U-Shin. That's 280 billion in total. So this is going to grow, meaning that this JPY 300 billion -- we'll be able to easily surpass this JPY 300 billion for the automotive business.

So this will be the updates on the new product trio, the SALIOT, because a lot of good inquiries coming, and there are a lot of bulk orders 100, 200 units at one time. So next fiscal year -- at next fiscal -- after that I think this -- we can put a lot of expectations on this SALIOT. So we would like to -- I can't give an example of where it is used, and there are a lot of places they're using SALIOT, but we can't be able to disclose. But in your presentation material, we have those brochures, and there's a lot of development using SALIOT going forward. So including the quality of the light, the customers' feedback, we get very good feedback from the customers.

For the Bed Sensor Systems, so RICOH from August has started to sell the Bed Sensor systems. So currently, we're struggling right now for this product. In terms of the product appeal, maybe it is lacking a bit. So we have to put in some improvements and then go forward on this business.

With Smart City, mainly in Cambodia, so we have 5,000 orders came, and then we have 15,000. So it was 65,000, this is all pay-as-you-go system. So various types of connectivities is development because various things will be connected. But maybe this will take a little bit of more time to develop further.

So this JPY 1 trillion/JPY 100 billion hitting these targets ahead of schedule, I think I have already shown you this before. So JPY 85 billion is 2019 March period is what we're going to forecasting. And 2020 March, this is how we want to achieve our targets in this manner. In the previous presentation, there has been a question about this. From my point of view, so in terms of our M&A strategy, I have no intention of not focusing on M&A strategy because we take a lot of time to seek for these opportunities and try to tap into these opportunities. But because we have to consider the account of partner and there's a lot of competition for M&A. So to be able to -- for us, to achieve this, this will be very difficult. But if a company has a synergy with our company, we'll focus on those type of companies. For next fiscal year, JPY 1 trillion/JPY 100 billion will be the target that I'm determined to achieve.

So we are going to increase the dividend, it was -- considered by JPY 1 for the interim and year-end. So JPY 67 billion of the net income is our forecast, so this will be a record high level for us. So compared to the previous year, so there has been less extraordinary loss compared to the previous year that has been a help. And steadily, in terms of the effective tax rate, we have been able to contain that. So that's the reason why we have decided to increase the dividend by JPY 2. So this JPY 1 trillion/JPY 100 billion, to be able to achieve the target for this fiscal year, it will take whatever means that is possible to hit these targets.

So that's all from me. Thank you so much.

[Kenji Yahiro, executive]

We would like to move on to our Q&A session. So only institutional investors are allowed to ask questions. And please state your name and affiliation before asking questions. If you have any questions, please raise your hand. So in the fifth row, in the middle section.

[Daiki Takayama, analyst]

Takayama from Goldman Sachs. So full year, the electronics and Mitsumi electronics and Mitsumi, so electronics, JPY 10 billion sales. And the North American smartphone, the business seems to be faced with tough time. And I have -- what is the plan that you overcome that in order to actualize upside? And Mitsumi, a plan is maintained, but after including Hokkaido earthquake, is it included? So could you elaborate on that point?

[Katsuhiko Yoshida, executive]

I would like to report to you about that. The smartphones or backlight last year wasn't really started. But now we are having a better visibility right now, and changes that you have mentioned have been incorporated. Regarding Mitsumi, JPY 1 billion in Q2, that number is included in the impact of earthquake. In addition, there may be an additional impact in Q3. So whether we can overcome that impact or not, we are thinking right now. So the overall revenue is growing. And therefore, it's not because of one single factor, but overall revenue growth.

[Daiki Takayama, analyst]

Backlight, so original forecast was too conservative. Are you saying that?

[Katsuhiko Yoshida, executive]

Yes, you can understand that, like that.

[Daiki Takayama, analyst]

My second question is, the bearings. In the past, Mr. Kainuma said that it leveled off on a plateau, and revenue seemed to have dropped slightly in Q3. But how deep is this? And 10% increase is possible next year, you mentioned. So is it in your sight already? And what is the curve you are anticipating?

[Yoshihisa Kainuma, executive]

So back then, I participated in a conference call for the first time, and probably the way I explained was not really appropriate. I didn't -- probably people thought I said that there was -- the things were at leveled off, but that's not what I meant. I thought that if things would slow down or reach or start to level off, it will be -- make it easier for us, but that was misunderstood. And Bitcoin was slowing down, and the momentum towards the investment, the China, the motivation was cooling down. And probably, those factors did affect our business; however, electrification of automobiles will progress for sure, and the servers' installations will take place without any doubt. So whether or not things will slow down, I don't know. But order received last month, 48 million pieces last month, 1.5 month worth of orders, so that we have a very solid bookings. So overall, I'm not that concerned.

[Katsuhiko Yoshida, executive]

So Page 18, it says that earning capability is being enhanced. So the profit margin will improve. Yes, it is already improving. So bearings, it's seen improvement in profit margin. Rod-end fastener is in the same situation, the profit margin is improving.

[Kenji Yahiro, executive]

Any other questions? So I suppose, we take the next question.

[Manabu Akizuki, analyst]

Akizuki from Nomura Securities. I have some questions to ask. So in terms of ball bearings, I would like to ask a question there. So this is a more short-term question. So first quarter results when the material that was JPY 250 million and JPY 212 million for the external sales and 260 -- JPY 206 million. I think basically there has been a shortfall for the 2 months if you look at July to September. I think there has been some inventory adjustment and there may be some change in the customers' behavior. On the other hand, as Mr. Kainuma has said, so towards the European car manufacturers, there is going to be a increase. So in terms of seasonality, there's going to be a kind of a rest trend. So we do -- towards the second half, can you please clarify what's going to go down and what's going to go up?

[Yoshihisa Kainuma, executive]

So in terms of what's going to go down, basically, I -- we do not know from our business. So JPY 3 million, JPY 4 million, we talk about that level, basically JPY 300 million is a denominator. This is the margin of error. So if it's down by JPY 30 million, that's a big thing. But we are not nervous at all for that level of fluctuation, but because currently we had that capacity in place. And in terms of the cooling fans and automotive applications, that will be the drivers for this business. And we will want to prepare for that business, and we will hold inventory targeting those businesses.

[Manabu Akizuki, analyst]

The second question is therefore the Mitsumi business, I want to ask a question. In terms of the sales outlook, you have reduced this by JPY 110 million and [indiscernible] you haven't changed your outlook. So would you explain why you have made that kind of revision?

[Katsuhiko Yoshida, executive]

So the reason why we made this temporary and downward revision, if we look at the bounce between the first quarter and the second quarter, with all standard projection, there has been a minor adjustment. It is not a major issue here. So as you all know -- so whether, for instance, mechanical components, smartphone-related products, they will be changing various changes in the market environment. So the -- I think this will be again like a marginal level of adjustment. So the overall trend, I think, basically -- overall I think basically we think that we will be able to achieve these figures that we have announced.

[Manabu Akizuki, analyst]

So my third question is, again in the same line as I've been saying. So the backlight business, so you have not changed your initial -- your view from the initial announcement. So honestly speaking, maybe volume wise, you'll not be able to achieve your target, but we see you didn't change your outlook because you have the assumption of the pricing? And at the beginning of year, Mr. Kainuma, you said, because you have to be -- say the situation is tough where you won't be able to raise the prices, maybe you were very conservative in the assumption of the prices. Maybe the pricing was better than you have anticipated, meaning that in the beginning of the year, you were a bit conservative in your outlook? How would you try to explain about that?

[Yoshihisa Kainuma, executive]

Well, in terms of pricing, I think we are able to sell our products. I think basically that goes without saying. But as I said, the model -- the last year models, I think the profit structure is completely different compared to last year's models and this year's models. So in terms of the value of the profit, well -- compared to -- let me reword it. So against the assumptions that we were thinking from last year in terms of profit, this new smartphones' profitability, or say, or the -- and the profit generating power, I think is completely different from last year to this year. So in terms of the impact on the performance, it will be mitigated. So we have been conservative in our outlook, but we have said that JPY 50 billion for the -- outlook for the machined components, but right now it's tracking at JPY 55 billion. So initially, we're saying that we will be able to achieve this level. But that is what we have -- thought that we'll be able to achieve. But including the negative factors and including some positive impacts from our other businesses, mainly I think our profit we'll be able to achieve at this level. But in terms of the currencies situation, maybe we won't have much room to have a profit there. So that's the reason why we set it at JPY 110 and then said that we're not change the initial outlook. So of course, the backlight business initially, well, I think the market consists of us -- was like sell a lot. And secretly, I was looking forward to that kind of thing happening, but maybe that was kind of a dream.

[Kenji Yahiro, executive]

Any other questions? So the person in the second row from the front.

[Fumihide Goto, analyst]

This is Goto from Mizuho Securities. I have 3 questions. First, the assumption for ForEx, so JPY 110 to a dollar, and the renminbi assumption has been changed as well. So this will have a positive impact, but still profit projection remains the same. So smartphone-related risks and game consoles and such uncertainties have been included in the numbers, as I understand. Am I right? So that is my first question.

[Katsuhiko Yoshida, executive]

First of all, we cannot comment on the situation of a certain customer. And therefore, I cannot comment on the currency situation related to a certain customer. However, your understanding is more or less correct.

[Fumihide Goto, analyst]

My second question is the Q2 actuals, electronics and Mitsumi. You said the timing issues, is that because of the changes in the production timing on the customers' part? Or were there internal factors?

[Katsuhiko Yoshida, executive]

It's basically the customers' circumstances.

[Fumihide Goto, analyst]

Understood. My last question is about ball bearings. In the equity market, people think that it will peak out, and how much downside will be there is the concern. So what is the ratio of the product likely to go down? So -- and having listened to your explanation, probably we don't need to be concerned that much, but if you can quantify the potential downside?

[Yoshihisa Kainuma, executive]

So large bearings and small bearings, people tend to mix them up. But they are totally different. The industrial machines -- when industrial machines business became sluggish, the bearings' shipments didn't decrease because of some applications. The some applications use a huge volume of bearings, which could replace the decline in other areas. But of course, if economy deteriorates significantly, it will be another story. But as long as the current situation continues, there should be no major declines.

[Kenji Yahiro, executive]

Yes, the gentlemen in the fifth row.

[Hiroharu Watanabe, analyst]

Watanabe from SMBC Nikko Securities. I have 2 questions. So for the ball bearings inventory, is it to normalize that? So conducting -- if you look at the gap of the production and order, you talked that you had been -- you want to reduce the airfreight cost to JPY 20 million, if that is adequate. But what -- how long would you think it'd take that?

[Yoshihisa Kainuma, executive]

Well, it depends on where you're going to hold the inventory because you have to observe the market carefully to make that decision. So according to our experience, so including the high inventory level, say, maximum of 3 months, maybe it was too high. But if the market economy is good, then you'll be able to go down immediately. So -- and since I have started working in this company, I have no experience of disposing ball bearings in the inventory. So currently, so we put at 300 million units per month. So if we sell 300 million per month, so in 3 months, it'll be in 900 million, so maybe that would be holding too much inventory. But for 2 months' worth, maybe we can hold it as inventory. So specifically for automotive and fan motors because the fan motors demand and the productivity improvement when reached the peak, coincidentally, it was the same timing. So we were able to supply. If we didn't have any inventory, won't be able to supply or if we didn't do any productivity improvement won't be able to give the supply. So because I think basically it would have led to a tight situation in the serving market. Our strength is that when there -- even if there is a downside, we will be able to be prepared and respond to that. And that has been a source of our competitiveness. Specifically for ball bearings, that will be a very important factor in this business. So I have always instructed so to the people in charge of ball bearings. So if there's 2-month worth of inventory, it means that this 1 year, so there's only about 10 million gap. So even at maximum, maybe it'll take a year or 2 to take care of this inventory.

[Hiroharu Watanabe, analyst]

The second question is that -- well, the bottom line is that as long as there is no massive slowdown, you don't have to worry, I guess?

[Yoshihisa Kainuma, executive]

Correct.

[Hiroharu Watanabe, analyst]

So my second question is that, in terms of the -- your China Plus One strategy, please elaborate. So I think as a overall concept, including products outside of non-ball bearing, so what type of products are the customers requiring?

[Yoshihisa Kainuma, executive]

I think the most understandable situation is that the U.S. companies, when they are doing the assembly in China, these U.S. companies -- basically, their products will be imposed of this tariff that we're talking about. So the midterm elections has ended today, and so what type of foreign policy is going to be placed? We don't know whether it's going to change or not. If -- but this -- if this trend continues, they have to change their location where they produce. So those type of customers -- that is the type of customers that we're talking about. Ball bearings, I don't know whether -- well, no -- some people are saying that they produce in Mexico and then ship it out of there. So I do not think that if there's a 25% tariff, all of that will come to MinebeaMitsumi. I don't think that all of the ball bearings they will want to buy from us even with a 25% of tariff. But actually, we are getting -- we have requests to submit these RFQs. So from my point of situation is that we will observe the situation. And thankfully, we have some excess capacity when we operate. And so that is one of our characteristics in Cambodia that we still have a lot of capacity. So if that is the case, we'd be shifting our production there. Well, I think I'll take another 6 months for me to talk more specifically. I think the customers have started to study the situation. They've just started to look at the situation.

[Kenji Yahiro, executive]

So next is the person in the fourth row.

[Akihiko Uchino, analyst]

Uchino from Mitsubishi Securities. I have 2 questions. The first one is somewhat related to the previous question. It's about tariff, the U.S. tariff. And Mitsumi business in Q2 and Q3, because of a start-up of a production, was there any timing difference in shipping -- shipment? And are you going to review the production sites?

[Yoshihisa Kainuma, executive]

Mitsumi business is wide-ranging. And Mitsumi's assemblies, there are some products for which the customers suggested relocation or transfer. So it depends on -- I mean, depending on the customer enthusiasm, level of enthusiasm is different. So I cannot speak for all of them. I -- it's rather difficult for me to give you a more specific information. I hope I answered your question. But regarding Q2 and Q3, some of them are quite bulky and bloomy. No particular movement with regards to those products.

[Akihiko Uchino, analyst]

Understood. My second question is about backlights. So I understand this year's trend. And about demand forecast for next year, if you have any updates?

[Yoshihisa Kainuma, executive]

I don't know if it is appropriate for me to talk about this, but please take this as my personal view. It won't go away. It will not go away. And it turns out right every year, so the tone remains the same, yes, that is right.

[Kenji Yahiro, executive]

So if you have any questions, please raise your hand. Yes, we have one person.

[Shingo Hirata, analyst]

Hirata from UBS Securities. So my first question is that the -- when the backlight electronics devices, you said that there has been some timing differences. In terms of your productivity and yield in the second quarter, how is the situation? And towards the third quarter, what are the outlooks for these areas? So if we look at some reports, the backlight is short of supply. Some media is reporting about this, so can I confirm about that?

[Yoshihisa Kainuma, executive]

Well I can't go into detail. But in terms of yield, there's no issue about yield.

[Shingo Hirata, analyst]

So Mitsumi's business, smartphone-related business, no issue at all?

[Yoshihisa Kainuma, executive]

Yes, no issue.

[Shingo Hirata, analyst]

My second question is that -- so the full year plan for the backlight, so you have upgraded the sales by JPY 10 billion. And for the second quarter results, so in terms of the sales, it has been over your expectations. So the full year plan increasing that by JPY 10 billion, meaning that have you changed your view about the product mix against your initial forecast? Or is it just only the change of prices or less -- more sales of the older model and less sales of the new models? Would you please clarify on that mix?

[Katsuhiko Yoshida, executive]

On the second quarter, the sales was more than we have anticipated. For that area, initially we were too conservative in our outlook for the second quarter, so the actual results were better than the conservative outlook. And for the second quarter end, we have the contribution coming from the new products. So that has been one of the factors. So the initial guidance from our side has been too conservative. In terms of the product mix that you have referred to, I think there are various variations that you can consider. But basically against the -- in terms of the product mix that we have anticipated at the initial guidance, we will not change that dramatically from what we said initially.

[Shingo Hirata, analyst]

So my last question, this is rather technical. So in terms of the elimination, the first quarter, this first half is JPY 6.5 billion. The second quarter, we have this U-Shin acquisition. You said you have some costs allocated for that. So it means that it doesn't [indiscernible], if you just traject that from the second half. So is there anything that you have in view? But -- is it a risk with the buffer for the smartphones or the game console business?

[Katsuhiko Yoshida, executive]

So in the second half, as Mr. Kainuma has been explaining from before, we are going to be proactive in M&A activity. So that will be the assumption. And that is the reason why we are budgeting various expenses, that assumption is that being -- meaning that this is the -- U-Shin is not the only M&A that we are looking at. The second half, so some environmental-related countermeasures, this will be some extraordinary cost that will come up, that will be included in the intercompany elimination for the second half.

[Shingo Hirata, analyst]

So if possible, when you're talking about the environmental-related countermeasures, what level of costs are you referring to?

[Katsuhiko Yoshida, executive]

Well, in each of the locations, it's not only one location that I'm talking about. So the related -- the authorities -- regulatory authorities, we are discussing various things. We're just in the midst of these discussions, so I cannot mention specifically where and how much.

[Yoshihisa Kainuma, executive]

So just to avoid misunderstanding, it's not -- in terms of the magnitude, it's not that large. Just to give you some idea of how large this is, it's not that big of a magnitude.

[Kenji Yahiro, executive]

So the person in the front row.

[Shoji Sato, analyst]

Sato from Morgan Stanley. I have 2 questions. The first one is ball bearings production capacity. At this point in time, it's 300 million pieces per month. But up to 315 million pieces, you can increase production. And when is it likely to be? And beyond the 315 million pieces, when do you plan to increase production beyond that level?

[Yoshihisa Kainuma, executive]

So 315 million, that is ongoing. And as I said the other time, in order to suppress our investment, so the next 100 -- or the 50 million pieces, we have improved our productivity and we would like to introduce machines at lower prices, and machines will be installed in the middle of next year onwards. So 315 million pieces will become possible from the end of next year till early and the beginning of 2 years later. Beyond that time frame, I have no ideas yet, up till 335 million pieces can be produced by the existing plants. So 335 million pieces, we can use the current production sites. But if that is not enough, then we will have to build a new factory. But at this point in time, we are not seeing any signs for that.

[Shoji Sato, analyst]

My second question is Mitsumi business, particularly camera actuators in Q2. The new product's actual results and Mitsumi's overall sales will go down in the second half. But starting in Q3, camera actuator sales are likely to increase going forward. So what kinds of actual results are you seeing at this point?

[Katsuhiko Yoshida, executive]

First of all, the camera actuators, the situation is as you pointed out in Q3, towards Q3, and it will increase. So we are now working on trying to -- responding to that. And we are enhancing our capabilities and as Kainuma explained, in addition to the North American customers, the Chinese customers we are talking with, so we would like to make sure to respond to them. So North American -- several North American customers, I should say.

[Shoji Sato, analyst]

Understood. Q3 and Q4 seasonalities, what is your view on seasonality?

[Katsuhiko Yoshida, executive]

So there are various changes anticipated. But at this point in time, Q3 will be the peak. And in Q4, things will slow down. That is our assumption behind our guidance.

[Kenji Yahiro, executive]

Any other questions?

So if you have any questions, please raise your hand.

So there are no other questions. We would like to end the business results meeting. Thank you very much for participating today.