Minebea Mitsumi Inc

TSE:6479

Earnings Call Transcript 2021-Q2

[Kenji Yahiro, executive]

As the time has come, I'd like to start the meeting. Thank you very much for participating with MinebeaMitsumi's business results presentation for the second quarter of fiscal year March 2021.

Let me introduce today's presenters. To your right, Representative Director, CEO and COO, Yoshihisa Kainuma; Senior Managing Executive Officer, Katsuhiko Yoshida. Thank you.

First, Mr. Yoshida is going to explain about the financial results. And next, Mr. Kainuma will give a presentation about the business update and management strategy. After that, we will go into a Q&A session. We are planning to end this presentation by 7:00 p.m.

As for the financial statements, we have the supplementary material and a brief report of the financial results on the website. So please refer to those materials as well. And on the upper right side of the screen, there is a link for a questionnaire. This will be very important for the IR activities to get your feedback. So please respond to the questionnaire.

In this presentation, including the Q&A session, we are recording the proceedings so that it can be viewed on our website afterwards, please. We ask for your understanding. Mr. Yoshida, please.

[Katsuhiko Yoshida, executive]

My name is Yoshida. Today, I would first like to explain the consolidated financial results for the second quarter of the fiscal year ending March 31, 2021.

Consolidated net sales for the second quarter of the fiscal year ending March 2021 was down 1.9% year-on-year and up 46.3% quarter-on-quarter at [ JPY 274,260,267. ] Operating income was down 10.5% year-on-year and 3.3x higher than the previous quarter, reaching JPY 17.557 billion. Profit for the period attributable to owners of the parent was down 6.4% year-on-year and up 3.7x [than] the previous quarter to total [ JPY 13.239 billion ].

Operating income for this quarter includes special expenses of approximately JPY 1 billion incurred due to the impact of coronavirus, et cetera. We estimate the foreign currency translations impact is minus JPY 1.4 billion quarter-on-quarter and year-on-year, minus JPY 2.9 billion; and minus JPY 1.2 billion impact on operating income and minus JPY 0.3 billion operating income for the quarter year-on-year. We had made a slight [ adjustment to the exchanges] to last fiscal year's financial statements due to the PPA we're using. Please note that the figures on the following pages are revised figures.

Please go to the next slide. This is the quarterly trend in net sales, operating income and operating margin. The operating margin for the second quarter was 6.4%, so it was down 0.6 points year-on-year and up 3.5 percentage points quarter-on-quarter.

Moving on to the next slide. Now let's take a look at the results by segment, starting with Machine Components Business segment. On the left of the graph indicating quarterly net sales trends, and on the right is a bar chart. As the quarterly operating income trends and the line chart for operating margins, second quarter net sales increased 7.1% quarter-on-quarter to total JPY 38 billion. Ball bearing sales increased 10.2% quarter-on-quarter to total JPY 26 billion.

The monthly external shipment volume was up 13% quarter-on-quarter for an average of 195 million units. Sales rebounded mainly for automobile applications. Sales of aircraft bearings remained sluggish due to the stagnant market. Sales of rod-ends and fasteners totaling JPY 6.9 billion were down 6.5% from the previous quarter. Aircraft manufacturing has not yet recovered and is expected to remain in the doldrums for a while.

Sales of pivot assemblies recovered, increasing 13.7% quarter-on-quarter to reach JPY 5.1 billion, as production cutbacks and some supply chains due to lockdowns in the previous quarter were resolved. Operating income for the quarter totaled JPY 6.9 billion, and the operating margin was 18.2%. On a quarter-on-quarter basis, operating income fell 3.4%, while the operating margin dropped by 1.9 percentage points. Looking at the results by product, we see the profits for ball bearing assemblies increased quarter-on-quarter. Our profits for rod-ends and fasteners decreased.

Moving to the next slide. Now let's look at the Electronic Devices and Components segment. Net sales increased 23.8% quarter-on-quarter to hit JPY 98.6 billion. Looking at the results by product, we see the sales of [ motors ] increased 24.8% quarter-on-quarter to reach JPY 49.1 billion due mainly to the recovery of the automobile and other markets as well as steady performance of new businesses.

Sales of electronic devices were up 22.1% for the previous quarter to total JPY 39.7 billion. This is thanks to strong sales of major customer smartphone models that use our LED backlights in addition to recovering sales to the automobile industry. Sensing device sales grew 25.5% quarter-on-quarter to hit JPY 8.7 billion.

Operating income came to JPY 5.5 billion and operating margin was 5.6%. We saw a 2.5x quarter-on-quarter increase in operating income, while the operating margin climbed 2.8 percentage points. Looking at the results by product, we see the profitability of sensing devices improved in addition to better profitability of motors as a result of cost cuts and product mix improvements.

Next slide, please. Let's look at the performance for the MITSUMI business segment. In this first quarter, ABLIC, which was merged with MinebeaMitsumi as of April 30 was included in the scope of consolidation. Net sales rose 95.5% quarter-on-quarter to total JPY 110.7 billion. Sales increased across all product lines, including mechanical components, where full production continued in preparation for the year-end demand season, and camera actuators, whose production went into full spring -- full swing following the launch of new products by major customers. Operating income totaled [about ] JPY 7.6 billion, while the operating margin was 6.9%. We saw 5.6x quarter-on-quarter increase in operating income, while the operating margin declined 4.5 percentage points. Results by product showed profit growth across the board.

Next slide, please. Finally, let's look at the U-Shin business segment. Net sales increased 70.5% quarter-on-quarter to hit JPY 26.6 billion due to a better-than-expected albeit uneven recovery of the overall automobile market, where some customers bounced back significantly and others lagged behind. Operating income came to JPY 1.2 billion, and the operating margin was 4.5%.

The business found itself back in the black, thanks to improved quality and productivity as well as a strengthened management system following the business integration and better profitability due to rebounding sales that all worked together to lower the breakeven point.

Next slide, please. The bar graph here shows trends in profit attributable to owners of the parent. While the line graph chart changes in the profit for the period per share. The profit for the period was JPY 13.2 billion. Earnings per share was JPY 32.4.

Next slide, please. Next, we have the quarterly inventory trend. At the end of the second quarter, inventory totaled JPY 186.5 billion, which is JPY 17.9 billion less than what it was 3 months ago. This is due primarily to the start of full-scale shipments of some OEM products and our efforts to optimize inventory levels in light of changes in the situation associated with the prolonged spread of COVID-19.

Next slide, please. This graph contains a bar chart showing trends in net interest-bearing debt, which is total interest-bearing debt minus cash and cash equivalents and the line chart indicating free cash flows. At the end of the second quarter, net interest-bearing debt totaling JPY 137.6 billion was up JPY 62.4 billion from what it was at the end of the previous fiscal year. This figure includes the cost of acquiring shares in ABLIC, JPY 35.4 billion and the cost of acquiring additional shares in C&A JPY 4.6 billion.

Next slide, please. We revised the full year forecast for the fiscal year ending March 2021, which were announced the ranges at the beginning of this fiscal year. The revised forecast are JPY 940 billion of net sales and JPY 50 billion of operating income. While operating income for the second quarter was just about on target, we factored in the ongoing slump in the aircraft market, a lack of any sign that the U.S.-China trade frictions will be resolved as well as the reemergence of COVID-19 in the U.S. and Europe. The exchange rate assumption is JPY 105 to USD 1.

Next slide, please. This slide shows the forecast by business segment. We also revised initial forecast by business segment, which was in ranges. This is all from me. Thank you.

[Unknown Executive]

Next, Mr. Kainuma, please.

[Yoshihisa Kainuma, executive]

Good afternoon. This is Kainuma speaking. Please turn to the next slide. So Mr. Yoshida has explained about the situation this year's forecast. So we were saying that between JPY 50 billion and JPY 60 billion will be the operating income. That has been the initial outlook. However, this time, the lowest range of JPY 50 billion will be this year's forecast. The reason will be explained in detail later.

So from April to May, the COVID situation was tough, and we were wary of what's going to happen going forward. But last year's first quarter and second quarter was not good, because the laws in Thailand has changed. And in terms of the deficit on the reserve for the pension, so there was a JPY 3 billion deficit. So that was a special factor for last year. So taking this into account, the first half of this year will be in line with last year's first half. That was our anticipation. So that was the basis of our outlook.

For the first half, I think, basically, we were in line with our expectations. However, that said, and I will go into details later, but the basic earnings structure there has been no major changes, and I am very convinced about that. So next year, for sure, the COVID will be under control more than ever. And the -- we would like to make a starting dash for next year. So the second half, we'll be looking at that initiative, and we'll put in various measures to be able to make that start dash for the next fiscal year.

And the inventory level has been high temporarily, but in terms of the fiscal discipline, we should not go after profit and have [ full ] production. We decided that the inventory should be controlled to the previous level. So we want to put in these measures.

Next slide, please. So as I have said, so JPY 50 billion to JPY 60 billion range. Well, the JPY 50 billion is a kind of a bottom-up recent figures was JPY 50 billion operating income. That was based on the bottom of recent figures. So it was very conservative back at that time. And I consider the operating income capability and I put in various stresses. And the top range was JPY 60 billion.

So I think some of you remember, but the COVID, towards the second half of this year, will be somewhat controlled. That scenario was the basis of the JPY 60 billion range, with the vaccine. I think more recently, we were talking about the vaccine being ready within this year. But right now, it's the 6th of November, it turns out that the vaccine will not be ready by the -- within this year. And Europe and the United States, the infection is spreading rapidly. So if you take these into account, the lower range of our outlook has to be considered.

There are 2 major outstanding points here. One, is the aircraft market. As I said previously, and we thought initially in the second half, some things will recover somewhat. But unfortunately, for this fiscal year, the aircraft market cannot -- we cannot predict the recovery for this market. And what I missed the point most was about the U.S.-China trade conflict issue. In May, after the Golden Week holiday, I think, about 2 to 3 weeks after that, from the United States to Huawei, there has been a sanction imposed for the export of semiconductors of Huawei. I was wondering whether this will become realized. Back in September, this came into effect.

So based on this, so towards Huawei, we actually deliver a lot of our products. And this business stopped. So this was an unexpected outcome. So in the first half, I said that things will be the same as last year, but this JPY 23 billion, we -- initially, I was confident that we'll be able to work -- be over this JPY 23 billion line. But in May, due to this trade conflict of U.S. and China, this came to the surface. So unfortunately, the products supplied to Huawei has -- we cannot do that. We cannot supply products to Huawei. So that is another reason why I am saying that our outlook for the operating income is at the lower range.

But on the other hand, in terms of an indicator for this economy, the ball bearings would be the indicator of the economy. So it is showing a very powerful trend. In June, the bearing sales -- external sales was 166 million; in July, it was 183 million; and August, 187 million. So that has been the trend. In September, 213 million; October, 210 million; this month has been a record high, 217 million. So that will be our outlook for the external sales of ball bearings.

So the second half of this year, each month, more than 200 million of units is going to be sold for ball bearings. That is our outlook. So in that sense, the global economy will start to recover. I think that is an unmistakable fact. So against this backdrop, the -- [ so 230 million. ] This month, we're going to have a record high level of volume for ball bearings.

So what stands out is the automotive market. The automotive ball bearings is going to hit a record high level. And as you say, others, in other segments, we have the other segment. So this will reach a record high level as well. So the ball bearings and growth for the future, I'm very confident they will continue to grow. But for the internal sales for the [pivot ] for the hard disk drives has dropped compared to the past. So I think this -- we are in the transitional period. So in terms of use of the [ ball ] bearings, we had a lot of demand. I think, basically is being handed over to the external sales.

I think this is a transitional period. This trend, if the COVID situation is under -- going to come under control, it means that external sales volume is going to continue to grow. On the other hand, the inventory level, so it went up to 700 million in one period of time. However, originally, is to be -- we want to bring down the inventory to a lower level. That is our idea. So currently, as of end of March, about the second half of [ 500 million ] or the [ mid-500 million ] level to that level, we want to reduce the inventory of ball bearings. So when the things are good, reducing the inventory, that is a very important activity. So we will go forward with that.

And one other point I want to make is that so the profitability of ball bearings will have to become higher. And from December, whether it be Thailand or Cambodia, I am able to go to these business trips. And after I come back, I won't have to go to self-quarantine. So I am scheduled to go over to Thailand and Cambodia. So the cost measures that I have been preparing, I will be put them into execution. And towards next year, the substantial improvement of the profitability is what I am aiming for.

Another point is that this is for the aircraft business. So when is the aircraft market is going to recover? It is very difficult to make a prediction. But what we can do right now is that I'm calling this from push to pull activity. So the pull product -- type of production structure should be put in place, will be all the global aircraft related business. I have instructed them to do so. In the past, late delivery affected quite severely. But we are building system -- production system in order to avoid late delivery compared with our competitors. In other words, we are changing the risk or problems into opportunities. So that is what we hope to do.

The motor business, fortunately, we have been able to solidify the foundation in order to expand profit. Fan motor, we have entered into Cambodia, and we are now seeing profit and the volume compared with the number we saw in the past, has increased. And VAC motors are also increasing. So various motors are experiencing improvement in OP margin of 10% and JPY 20 billion were the targets for motor business, but JPY 20 billion, which was the initial goal for us is now in the achievable range and [ lean bus ] supported motor and [ grill shedder ] the motors for such vehicles. We will be increasing volume and therefore, the motor business is now very promising. This is the second spear out of Eight Spears, and we have been able to solidify the foundation.

Backlight. As I have kept saying, backlight will not cease to exist. And I think that is almost determined, not into perpetuity, of course, but for some time to come, Backlight the business shall continue. But of course, we cannot expect the same kind of profitability as we experienced in the past about other Eight Spears, will generate effect in order to compensate the decline in Backlight profitability. That is what I believe.

MITSUMI business, so the hardest business is the semiconductor at this point. The operating profit of semiconductors, JPY 10 billion has become achievable. It's far above JPY 8 billion. That is a profit earned by semiconductors. And to what extent we can further increase that will depend upon my hard work and my ability as the top management.

Optical devices, we are to become #1 in the industry, aiming at achieving JPY 100 billion. And the core business for Huawei has disappeared.

Semiconductor. For the analog semiconductors for the smartphone application. The Huawei, even if the Huawei volume of mobile phones goes down, it can be offset by other manufacturers. However, OIS because the specification is different company to company, therefore, in a short term, we will be affected, but this is a wonderful technology. And therefore, we would like to expand sales to other companies.

And Eight Spears, speaking about Eight Spears. The connectors and power supply, which were rather quiet in the past, but automation is progressing. And the market is huge, and it will never cease to exist. And production system has been established, and it's being shared by many plants worldwide, feature product [indiscernible] are basic capabilities. And therefore, we strongly believe that MITSUMI business will grow and develop going forward.

Next is U-Shin business. Since April, because of COVID-19, U-Shin business was most severely hit. Because this is -- this focuses on automotive business. However, fortunately, in July, it turned profitable, and it's improving little by little. Having said that however, Europe and the U.S., as you are aware, the situation is really bad. And therefore, the things that we can do is rather limited. However, we must continue working hard on improvement activities. So that is very critical.

And also, we have put together a very clear set of strategies. So in the past, we sort of focused on low end cheap parts, low value-added products. But now we are shifting towards more value-added products like flash handle and CSD, the compact spindle drive, it's an automation mechanism for hatchback rear door. So focusing on these things, if we are to improve the U-Shin business. So I have given a clear instruction to do that and people working in the field clearly understand that. So it will take time, of course, but we are changing gear to change U-Shin business positively to achieve a JPY 10 billion profit.

And smart lock by the end of this year or early next year, the retrofit smart lock development is progressing smoothly. And we would like to handle this as a full B2C business. So we would like to start this business. It's a contribution to society, we are selling surgical masks, which is another B2C business, and we are learning a lot of things through this type of business. And through such efforts, we would like to have a smart start of smart lock business.

So JPY 100 billion of operating profit, that is to us, is not a goal, but that number the probability is high to achieve JPY 100 billion. If the environment becomes positive, for example, mechanical components achieved [ JPY 48 billion ] and conservatively, the business should recover to JPY 40 billion. And electronic parts should be able to achieve JPY 30 billion. It won't be so hard. And MITSUMI, if semiconductor earned JPY 10 billion then JPY 20 billion to JPY 30 billion would be possible. And U-Shin, JPY 10 billion is the target. But if the half amount is earned, like JPY 5 billion, so then overall, JPY 100 billion will be possible.

And the measures for profit improvement, we will keep pushing hard to achieve those targets.

So Item #6, active recruitment of external talents, external human resources. So by injecting a fresh blood, we would like to change our mindset and share knowledge and expertise. So that shall be possible. And therefore, in that sense, we will be changing. We will be transforming going forward.

I don't want to speak much about this slide, but these are the products that we have high expectations for. Other than that, there are 2 [ stellar ] products. And therefore, we shall be able to increase revenues mostly. And EV is one of the hot topics and after electrification, these things will keep selling. So these things, I mean, these Eight Spears products, because of EV, I am sure that the markets will keep expanding.

So this is part of the products. I will not go into detail. I hope you'll take a look at these. And I think you'll understand in 5 years' time, this level of growth can be fully expected.

So in terms of SDGs, there are 2 slides that I have prepared. In December, we are going to host the IR day. And at that day, I would like to explain more thoroughly about what we are doing. But thankfully, so [ dimming] function. Is this week -- this is a road light that can be controlled wirelessly. So about 40,000 worldwide and it's close to 50,000 worldwide. So in Cambodia, 15,000. So there's 5,000. So the 20,000 Cambodia. And Chile, 20,000 of these road lights. So in total, there will be 50,000. We'll be able to reach 50,000 of these road lights as our infrastructure business. And initially, so these road lights is for the future smart cities, and it will be the key. Now I have been very confident about that.

And recently, there has been some interesting inquiries that have started to come to us. For instance, the Japan [ Meteorology] Agency jointly with them, our sensors will be controlled on a wireless basis. And then in terms of the output of the solar cells, they can improve the prediction of the output of the solar power radiation over [ Dakota ] University. So the social demonstration to test the wireless power supply with or with the Osaka prefecture, demonstration of the experiment by using LED street lights with sensors, improving the functionality.

What I have always been saying is that this -- and this is not our first SDG activity. Our products basically will be ultra small to precise products. And these components and cells to be more efficient, to optimize the energy consumption and to minimize the energy-based consumption as a target. So the small ball bearings compared to the other competitors, how their performance is far better. In terms of the electricity consumption by the motors can be reduced considerably. So towards the investors, I want to appeal about those points. And by doing so, I would like to specifically introduce our initiatives in these areas.

So the [ JPY 600 million, ] we've invested that much in [ Bank Pine in Lop Buri ] on the ceiling of these plants. The total installation area is 30,000 square meters. This has the power generation capacity of 5 megawatts. So the solar panels has been installed at these 2 plants. So the direction of the company is how we are going to use renewable energy and at the same time, contribute to a sustainable -- to produce products that can contribute to a sustainable society. That would be the key. So the necessary investment will be continued going forward. However, this -- the scale of the installation, of the solar power generation, so I would like to understand various issues. And then this is one introduction of the actions that we are going to conduct going forward.

So this is the last part that we have in terms of dividends, we are going to maintain the dividend. The reason is that I have been always saying that the payout ratio is 20%. So there have been some special factors, but our earnings capability has not diminished at all. So this seems to be like a coincidence, but there has been a lot of things that has happened. So this year's outlook is JPY 50 billion of operating income. So for us, this is a very disappointing forecast. However, in terms of dividends, we want to offer a stable dividend payment and in terms of financial strength, we have enough strength to pay that amount. So I hope that you feel assured about that.

So this JPY 50 billion of operating income, from our point of view, this is a conservative outlook. This is the minimum level with some ForEx issues, et cetera. So there is some headwinds going against us. However, so all employees will be unified to be able to reach this operating income level of JPY 50 billion. And when things recover at the next fiscal year, we want to achieve the JPY 100 billion operating income target as soon as possible. That's all from me. Thank you for your attention.

[Kenji Yahiro, executive]

[Operator Instructions] The first question is from Goldman Sachs, Mr. Takayama.

[Daiki Takayama, analyst]

I have three questions. So one by one, I would like to ask, first of all, the overall performance. So you set the forecast at JPY 50 billion, which is a lower limit. And you explained about the aircraft and the Huawei, but looking at other part companies, the automotive and gaming console went above the assumption and the Backlight in other than North America should have had the positive results. But you seem to have included only the negative factors, not the positive ones. And other than that, bearing production adjustment and Backlight related risks anticipated in the second half. So as a result of factoring in those factors, did you come up with this JPY 50 billion?

[Katsuhiko Yoshida, executive]

So I can see why you understood it that way, but there are ups and downs. And it is true that automotive business started to rise in July. We thought it would be worse than that. And bearings is renewing a record high. But we are very diversified, the business like machinery for textile business and office automation and the special type of smartphones, such customer. So there are quite a few negative factors.

So looking at the overall picture, the increases are occurring only in a limited area. And as I said, we took a conservative view to decide on JPY 50 billion. But to be quite honest with you, bearing business are feeling every month, it's changing like 2 weeks ago, that strong demand-related information we obtained 2 weeks ago, and it's quite fluctuating. But bearing is shifting towards upside. So we are grateful. But on the other hand, yen is becoming stronger. So to be quite honest with you, right now, it's very difficult to come up with detailed projection. So that is how I feel. So we thought it would be better to take a conservative view. When the presidential election is over, the exchange rate may become JPY 100 to $1. So we thought it would be better for us to explain it this way.

[Daiki Takayama, analyst]

I see. Understood. And my second question is -- this question is also for Mr. Kainuma. The reduced inventory of bearing, preparing for the next term, the intention behind that. So demand is increasing, as you said. And another possibility is to keep the same level of inventory. I don't think it's such a bad idea, but you are adjusting the inventory, and that is because you want to reduce costs for the next term and leveraging to increase the profit.

In other words, is that the reason why you are reducing inventory now, to increase profit going forward? Am I right?

[Katsuhiko Yoshida, executive]

Yes, exactly, as you say. So JPY 1 billion or JPY 2 billion for such amount, keeping inventory because things are so uncertain. This is the age of uncertainties. And therefore, in order to respond to risks, we have been thinking about various strategies to cope with risks. And therefore, bearings we thought that we should reduce inventories whenever we can.

And next year, how things will evolve next year, nobody can predict. There is this U.S.-China issues. So I thought the inclusive of financial discipline, I thought we should normalize the level.

[Daiki Takayama, analyst]

In the slide, you have used the cost reduction quite a few times, not just for U-Shin, but bearings competitiveness, particularly cost competitiveness, is that included?

[Katsuhiko Yoshida, executive]

Yes, exactly. Bearings as a second step, but we will be implementing additional measures, but we are not able to make business trips and therefore, it was rather difficult to implement the measures. But face-to-face and I believe it's very important to speak to people face-to-face in order to convince them, but it was rather difficult because of this COVID-19 calamity.

And using digital tools, to the extent possible, we try to use digital tools in order to communicate with them in order to reduce cost. And ideas that people have been nurturing, we would like to implement this time around.

[Daiki Takayama, analyst]

Understood. And my last question. So North America, the backlight and actuators are the 2 main products. And backlights towards the second half, is it right that the situation is likely to be tougher towards the second half? And actuator, there are new production technologies. And is it proceeding in line with the plan for North America?

[Katsuhiko Yoshida, executive]

Backlight, as you may be aware, there seem to be no model changes. And this morning, I read an article, but we have not been able to grasp the latest situation that we cannot make the latest version and some people -- because of that, some people seem to think that low end products are likely to sell. But we have not grasped the whole situation yet.

And actuators, we have no production-related issues, nothing at all. And therefore, if we receive orders, we will be able to produce them. So the situation is more solid than expected.

[Kenji Yahiro, executive]

Next question, from Morgan Stanley, MUFG Securities, Sato-san, please.

[Shoji Sato, analyst]

This is Sato speaking. I have three questions. First question is that the second wave of COVID, the impact in the second half, how much you have reflected that in second half projections? So I think you have about JPY 100 million or JPY 200 million of COVID-related expenses, I think of the first quarter and second quarter, that is. How much are you expecting for the second half?

[Katsuhiko Yoshida, executive]

So the most recent forecast, we're looking at the - actually looking at that. Based on that, we have an outlook. So COVID-related expenses is included as well. But that said, for example, with the lockdown of Europe and U.S. is happening, but whether the factories are reducing their production, that's not the case. So in the loss coming from the product plants not operating, I think that type of [ cost ] was going to come up in the second half.

So the manufacturing industry, will be able to continue their activity. But in terms of demand, we have to put in some stress for our forecast. So that is the basis of our outlook.

[Shoji Sato, analyst]

So in terms of demand, the stress on demand is what you're looking -- putting on. So in terms of the expenses of cost?

[Katsuhiko Yoshida, executive]

No, that level, of course, is not reflected. Yes, that's correct.

[Shoji Sato, analyst]

Understood. My second question is about the MITSUMI business. So the profit against the first quarter has gone up substantially. So in terms of the [ game console ] sales, from the JPY [ 12.7 ] billion for the first quarter to second quarter, how did it trend? And for the second half? So [ JPY 17.4 billion ] for the second -- [ JPY 104.7 billion ] for the second half, how much this is reflected? So the first quarter and second quarter, the profit has increased. So this was again camera actuator and the. So what has been the biggest contributor? I would like to now about that.

[Katsuhiko Yoshida, executive]

First, for the [ game consignment ] for the second quarter, it's about JPY 40 billion. So about a [ 32 2010 ], I think, basically, that will continue back into the third quarter and fourth quarter. In terms of the profit driver, for the second quarter, the game production is going -- has peaked. That has been the major contribution to our profit. And the next factor is the semiconductor business. So this will be ABLIC and the MITSUMI semiconductor business is both doing well. So that is the second major contributor to our profit. The third contributor is the optical devices as Mr. Kainuma has explained.

In terms of the business for Huawei, there has been a trend. But the North America business has recovered. And the trend will continue into the third quarter. [ Otherwise ] third quarter is going to be the peak for the games. So the third quarter will go down slightly. But the production level will be maintained at a very high level. So that is our outlook.

[Shoji Sato, analyst]

So my third question is -- so about ball bearings external sales volume. So Mr. Kainuma has given us some figures. So how about internal sales and production volume? From July onwards, can you give us the numbers?

[Katsuhiko Yoshida, executive]

So from July onwards, ball bearings. So the external sales 183 million, 188 million, [214 million, ] by millions. And the internal sales -- that was external sales, 55 million, 52 million, 47 million; for internal sales production 240 million, 247 million, 242 million. That is the track record for the second quarter.

[Shoji Sato, analyst]

How about October? Or November onwards?

[Katsuhiko Yoshida, executive]

For October, on average, 210 million, that is on the graph, the most recent number is slightly over that. So 211 million, 211 million. So 217 million, 218 million; December, 207 million. So on average, so 212 million. So external sales. So the internal sales, average 55 million. So production is a level over 250 million. This is the target for the third quarter onwards.

[Shoji Sato, analyst]

So as Mr. Kainuma explained, I have to incorporate the inventory adjustment. How are we going to control the production?

[Katsuhiko Yoshida, executive]

We will consider that due to the inventory adjustment.

[Kenji Yahiro, executive]

Let us move on to the next question. Mitsubishi UFJ Morgan Stanley, Mr. Uchino.

[Akihiko Uchino, analyst]

This is Uchino. So I have two questions. The first one is about actuators. Actuators, the specific customer is affecting and up until the middle of the first half, there was a front-loading of the business. And after that, the business slowed down, am I right in understanding it that way? So the first half and second half, could you explain a little bit more?

And North America, how we should look at share? So you said that you're going to get 50% and what is your outlook? That is my first question.

[Katsuhiko Yoshida, executive]

Regarding share, I would like to withhold making any comments, but we have not changed our view. And actuators for non-North America, Q1 went up a little bit. And Q2, our production was reduced. And Q3 and Q4, the same trend will continue. That is how we think at this point.

[Akihiko Uchino, analyst]

Front loading. Did you -- or did you not experience a front-loading business?

[Yoshihisa Kainuma, executive]

This is Kainuma. Semiconductor, for semiconductor is to, it happened. But actuators, it's high end actuators. And as you may be aware, the models with the functionalities that you may understand that there was no front-loading, and that is one of the reasons why our business became so tough.

[Akihiko Uchino, analyst]

Understood. My second question is analog semiconductors. It's booming, I understand. But overall, the impact of COVID-19 and I think some items in the analog semiconductors are in short. And the Philippines [ serve island], I understand that the production is normal. So the supply side, inclusive of the logistics, is it going as usual? And semiconductors are in shortage, and because of that, are you seeing stronger demand for your products?

[Katsuhiko Yoshida, executive]

Operation is normal. So both the front end and the back end, no problems, and ABLIC has the back end, the processes are conducted in Akita prefecture, and we would like to further upgrade such processes. And there is a strong demand. And therefore, we are enjoying a good business. And this is likely to continue for some time to come. That is how we think. In that sense, this business is quite promising.

[Akihiko Uchino, analyst]

But the demand and supply is rather tight, isn't it? And do you have any concerns about that production capacity related concerns?

[Katsuhiko Yoshida, executive]

Well, we can make only up to certain volume and therefore, so it's like happy cry. But the customers who favored our products, we must make sure we supply the necessary volume. That is the only thing that I can say at this point.

[Kenji Yahiro, executive]

Next question. From UBS Securities, Hirata-san, please.

[Shingo Hirata, analyst]

This is Hirata from UBS Securities. So I have two questions. One, the machine components. So you said that from the first quarter to second quarter, the profit has gone down slightly, and the profitability has declined. But the top line has grown, but the profit has gone down. What is the reason? Is this because the aircraft industry business?

And towards the second half, the outlook for the profitability is going to go down further from the first half. But on the other hand, where the ball bearings shipment is strong and the production is not going to go down from the second quarter to the third quarter. So you have talked about the measures you're going to take looking at the next fiscal year. But the second quarter, how I should think about the margin from the second quarter and the second half? Are you just being conservative? I would like to ask your idea.

[Katsuhiko Yoshida, executive]

Yes, as you have pointed out, the aircraft market for the [ world end ] numbers. If we look at the sales, so the second quarter against the first quarter, it has gone down again. So that has been one of the reasons for the decrease in profit. Within the ball bearings, we have sold aircraft-related business and the profitability -- excuse me, the sales has gone down for the aircraft industry. And with that, the profit has declined. And due to this, the top line has increased, but the operating profit has gone down. That is the reason.

So the existing Minebea business, that is the ball bearings business. So the production volume has been going up and the profitability is the same. That is our outlook. Towards the second half, for the aircraft market, it will be -- stay flat. But on the other hand, so the external sale, the ball bearings external sales is growing. And with that, how are we going to control the production. But the numbers that we are giving, it will be slightly on the conservative side.

[Shingo Hirata, analyst]

So. My second question is about the actuator business. So you talked about the North American new technologies ramp-up in terms of productivity, there has been no issues. But towards next year, the North American business, how is it -- what will be the business opportunities?

And how -- is there a possibility that the new technology is going to expand? And if that is the case, so the profitability will go down because there is a lot of processes, but I think this is the right business for you for the technology change in North America for the next fiscal year, what will be the impact on your actual business?

Another point is about the -- what is your response, major customers when you're shifting in the China business? What other opportunities do you see in the China market?

[Katsuhiko Yoshida, executive]

So as you have pointed out, the -- when the new products are introduced, the unit price is high and the per unit profitability will impact the profit value per unit is going to go up. The [ direct mix] is not going to change. And towards next fiscal year, the change of the product mix will happen. And so there will be -- there will be issues about how many of our components are going to be included.

So from -- compared this year to next year, our business opportunities is -- apparently is going to increase. And for non-North America actuator business, as I have explained, for the flagship makers of non-U.S. North American customers, they are very high on -- they have very high functions, but that market has disappeared.

But on the other hand, so the Chinese smartphone flagship makers besides those makers, the new specs, new technological elements, these type of business opportunities for next fiscal year onwards is going to increase. So putting these together, this fiscal year, because the Huawei has had a negative impact. But next fiscal year, I think we'll be able to grow.

[Shingo Hirata, analyst]

A confirmation. So the North American new product per unit, the profit value is going to increase for you, that is. The profit value, is it going to increase or not?

[Katsuhiko Yoshida, executive]

Is it very difficult to answer your question. I would like to refrain from answering, but the added value per unit is going to increase.

[Kenji Yahiro, executive]

Let us move on to the next question. Nomura Securities, Mr. Akizuki.

[Manabu Akizuki, analyst]

So my first question would be because of the lockdown, people stayed at home. And therefore, the game business went well. What about next year onwards? So if game machines peak out, then actuators, well, how should I say? I do not think that the future is so bright, but the MITSUMI business, in order to realize increased profit and increased sales, what plans do you have? That is my first question.

[Yoshihisa Kainuma, executive]

This is Kainuma. As I said previously, ABLIC is included in MITSUMI business, so semiconductors. are likely to keep growing next year. And although it may not be visible this year, but power supply and connectors, that we worked on, and they are to generate profits next year onwards. So all these things, even if game business drop, whether other businesses can compensate the decline entirely, I don't know, but the basic strategy that we have been working on, Eight Spears strategy, are starting to bloom now. And they will be able to compensate the decline to some extent.

[Manabu Akizuki, analyst]

I see. My second question is about actuators. So some customers have shifted to new methods, and it is likely to grow starting next year. And the in-house production of the parts and increase profit from additional value, are you planning on that? And hypothetically, the Huawei, the major company in China, may not be able to make a chipset themselves. But if they can buy chipset from other companies like Qualcomm, can I assume that the actuator business will be resumed? Or do you think it's going to be very difficult to recover to the original state?

[Katsuhiko Yoshida, executive]

So in-house production, inclusive of whether we are considering it or not, I cannot give you a clear answer. But the profit margin shall improve because of multiple measures we are taking.

And about Huawei, there have been various changes. And if the possibility that you have just mentioned can be realized. I think we will be able to flow with the tide. And therefore, we will keep watching what will happen. But if the company cannot design semiconductors in-house, then I don't think it's likely that actuators will be able to follow the same path.

[Manabu Akizuki, analyst]

But am I right in understanding that you haven't considered that?

[Katsuhiko Yoshida, executive]

We have not considered that possibility yet because our customers are still confused. That is the actual situation because various vendors have to supply various parts and components in order to make -- finish the product. And therefore, things will be worked on going forward, not yet.

[Kenji Yahiro, executive]

[Operator Instructions] Let's go to the next question. This is SMBC Nikko Securities, Watanabe-san, please.

[Hiroharu Watanabe, analyst]

Watanabe from SMBC Nikko Securities. I have three questions. The first question is very simple. You talked about the ball bearings aircraft business related -- so this is confirmation for the special ball bearings because the high profitable business has gone down. So that has had a big impact on the profit. Is that the correct the way to think? I guess profit value, is that what you're saying?

[Katsuhiko Yoshida, executive]

Yes, I guess, it has been [indiscernible] profit value. Yes.

[Hiroharu Watanabe, analyst]

The second point is about the semiconductors. So you talked about the high utilization rate. So how much more can you go towards next year? So you have a high utilization rate right now, it's difficult to increase sales. Are you going to improve the productivity? Or can you still increase utilization ratio?

[Katsuhiko Yoshida, executive]

So for the semi -- when you say that the semiconductor is busy, it's about 85%-plus utilization rate. So I hear that it's difficult to bring it over that. So right now, it's 80% plus. So internally, that's the level. But we have some consignment on production as well. So on their side, this, of course, they have still capacity. It depends on the product mix.

[Hiroharu Watanabe, analyst]

So it's not that you can consign everything. So what are you going to consign? What are you going to produce internally?

[Katsuhiko Yoshida, executive]

We already have a decision on that. So within the product mix, how are we going to produce. And next fiscal year, what type of things are you going to consign for production. We have already the plan in place. So these activities are going to start. I think you should understand it that way.

[Hiroharu Watanabe, analyst]

Understood. So my last question is more like on strategy. So this time, I think this has been the Huawei case. But the custom-made products basically will be influenced by the customers trend. So in terms of the general purpose type of things, you can compete in the market using your competitiveness, whether it be the actuator, assembly of games or backlight. So the custom light products, how are you strategically going to approach these products? I would like to hear your idea about that.

[Katsuhiko Yoshida, executive]

So I have been always saying that from my point of view, we call it as our subcore business. So we are more or less prepared about the technological changes or the various changes that may happen towards our customers, and we can respond to that. Or even if we can respond to that change, we have a high level of profit. So we will be engaged in the business.

On the other hand, in terms of the control of the overall percentage of this business so that we can focus more on the core business, our Eight Spears, we will develop this business. And we have been doing this for some time. So it was very unfortunate that this happened, but this is kind of unprecedented. So suddenly, you see this situation between U.S. and China. But it's not that we don't do this business, but overall, about 20% of our overall business will be the subcore business. We should control that level. At the same time, 80% of our business -- we want to bring our core business to 80% of our total business. So I hope you understand our approach.

It is true this customized products carries these risk. But on the flip side, it has a very high added value. And that is the reason why we are engaged in this business. But if you just focus on this business alone, then that's another issue. That's the reason why we want to develop this Eight Spears business. That's our basic policy.

[Kenji Yahiro, executive]

[Operator Instructions] Let us move on to the next question, SBI Securities, [ Mr. Kasai. ] Sorry, it's Mr. Izumi, right?

[Yoshiharu Izumi, analyst]

Ball bearings, the external sales split, fan and automotive and private sector [ or server] usage, the recent trend, if you could explain because I want to confirm when it hit the bottom.

[Katsuhiko Yoshida, executive]

When it hit the bottom, is that your question?

[Yoshiharu Izumi, analyst]

Yes.

[Katsuhiko Yoshida, executive]

First of all, automotive, May was the bottom. And then in October, had a monthly record high, it recovered to that point. And fan motors, they had a record high in May and then affected by U.S.-China relation and a supply chain of Huawei was -- a part of it was suspended. So it went down. And since then, it's been flat. Other than that, May was the bottom in many cases. September -- towards September and October, various products experienced record highs like [ efficient toggles ] and electric tools because people stayed home, demand for some products increased.

[Yoshiharu Izumi, analyst]

The other question of mine is the bearing. How to look at the profit margin of the machined products. In order to get back to 25%, it would take aircraft business recovery, am I right?

[Katsuhiko Yoshida, executive]

But of course, aircraft business must recover. Otherwise, we will be in big trouble. The 3-digit impact the business has and the bearings external sales are increasing. No question about that, but the pivot sales are decreasing. So internal sales are not growing. And overall, as I said previously, now it's going through a transition period, but external sales are likely to grow our fan motors compared with the peak time, there is a huge room growth. So pivot, hard disk, if it compensates for the decline in pivot, the hard disk business, then we will be able to increase overall production then the profitability will increase. But this term, we are reducing inventory intentionally. But in the middle of Q4, we will increase production, but we will intentionally reduce production for some time. So please look at it that way.

[Kenji Yahiro, executive]

[Operator Instructions] I would like to end the Q&A session at this point. So with this, I would like to end of the presented meeting. [Operator Instructions] Thank you very much for your participation.