Minebea Mitsumi Inc

TSE:6479

Earnings Call Transcript 2019-Q3

[Katsuhiko Yoshida, executive]

This is Yoshida. I would like to explain the consolidated financial results for the third quarter of the fiscal year ending March 31, 2019. And then, Mr. Kainuma, Representative Director, CEO and COO, will give the updates on and present the strategy on machined components, electronics devices and components and MITSUMI business.

Page 2, please. Consolidated net sales for the third quarter totaled JPY 249,570,000,000, up 11.2% year-on-year and up 5.6% quarter-on-quarter. Operating income was up 47.9% year-on-year and 58.6% quarter-on-quarter to total JPY 31,124,000,000. Profit for the period attributable to owners of the parent increased 42.2% year-on-year and 51.4% quarter-on-quarter to total JPY 24,177,000,000.

Both net sales and operating profit hit a record high as a quarter. Currently -- currency fluctuations brought the net sales up an estimated JPY 3.9 billion quarter-on-quarter and JPY 0.7 billion year-on-year. It also brought operating income up JPY 1 billion quarter-on-quarter and JPY 0.5 billion year-on-year. Also, we adopted IFRS instead of JGAAP from the current fiscal year.

Moving on to the next slide. This is the quarterly trend in net sales, operating income and operating margin. The bar graph on the left is -- shows net sales, and the one on the right shows operating income, along with a line chart for the operating margin. The operating margin for the third quarter was 12.5%, up 2.6 percentage points year-on-year and up 4.2 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 page, please. Here shows the difference between forecast as of November and actual results for net sales and operating income by business segment for the third quarter. While our net sales for the machined components segment were almost on a par with the forecast, sales for the electronic devices and components segment, mainly electronic devices, were lower than the forecast. The MITSUMI business sales were lower than projected mainly due to decline in the shipments of smartphone-related parts.

Operating income for the machined components as well as the electronic devices and components segments were about the same as projected. The MITSUMI business beat the previous forecast by JPY 3.9 billion thanks to some special factors, including a one-off revenue gain of JPY 6.7 billion resulting from changes in the personnel system, such as extended retirement age as well as one-off expenses due to nonoperating loss and inventory disposal related to Hokkaido earthquake, and so on. Profit for other business segment and adjustment combined were slightly worse than expected.

Next slide, please. Here shows the difference between actual results for second quarter and the third quarter for net sales and operating income by business segment. Net sales for the machined components segment were almost on a par with second quarter. Sales for the electronic devices and components segment increased mainly thanks to electronic devices, of which the shipment went into full swing. On the down side, the MITSUMI business sales were decreased mainly due to the seasonality of mechanical components.

Operating income for the machined components was steady, and operating income for the electronic devices and components increased thanks to a sales increase. MITSUMI business segment booked some special factors, as explained previously. Profit for other business segment and adjustment combined were slightly down quarter-on-quarter.

Next slide, please. Now let's take a look at the results by segment, starting with machined components segment. On the left is a graph indicating quarterly net sales trends, and on the right is a graph that is a bar chart showing quarterly operating income trends, along with a line chart for operating margins.

Net sales for the third quarter declined JPY 800 million from the previous quarter to JPY 47.4 billion. Sales of ball bearings decreased 3% quarter-on-quarter to JPY 30.3 billion. The average monthly external shipment volume totaling 195 million units in this quarter was up year-on-year for the 25th quarter in a row. Sales of rod-ends and fasteners totaling JPY 9.4 billion were up 4% over the previous quarter. Sales of pivot assemblies dropped 5% quarter-on-quarter to total JPY 7.6 billion. Pivot assemblies steadily contributed to our bottom line as we held on to an 80%-plus market share.

Operating income for this quarter hit a record high of JPY 12.9 billion. That put the operating margin at 27.1%. Operating income was up 3% quarter-on-quarter, while the operating margin was 1.1 percentage points higher than what it was last quarter. Looking at the results by product, we see that quarter-on-quarter profits for ball bearings and rod-end and fasteners rose but fell for pivot assemblies.

Next slide, please. This shows the results for the electronic devices and components segment. Net sales increased 31% quarter-on-quarter to total JPY 114.4 billion. By product, sales of motors dropped 4% quarter-on-quarter at JPY 47.1 billion. Quarter-on-quarter sales of electronic devices doubled to JPY 56.4 billion. This was primarily due to shipments of new LED backlight products to major customers moving into high gear. Sales of sensing devices grew 4% quarter-on-quarter to JPY 9.7 billion.

Operating income was JPY 10.6 billion with operating margin at 9.2%, representing a 2.6-fold quarter-on-quarter increase in operating income, while the operating margin rose 4.6 percentage points. By product, we see a quarter-on-quarter drop in operating income for motors but a quarter-on-quarter profit increase for electronic devices and sensing devices.

Next slide, performance of the MITSUMI business segment. Net sales decreased 13% quarter-on-quarter to total JPY 87.6 billion. While sales of optical devices and semiconductors increased, sales decreased for other products, primarily mechanical components.

Operating income was JPY 13 billion, with the operating margin at 14.8%. Operating income includes some special factors, which were explained in the previous slides. Quarter-on-quarter, operating income rose 74%, and operating margin grew 7.4 percentage points.

Next slide, quarterly inventory trend. At the end of the third quarter, inventories totaled JPY 156.8 billion, which is JPY 20 billion less than 3 months ago. Although some smartphone-related inventory increased, total amount decreased thanks to inventories that had been held for strategic reasons in light of the parts market condition were sold.

Next slide. 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 a line chart indicating free cash flows. At the end of the third quarter, net interest-bearing debt totaling JPY 47 billion was down JPY 5.5 billion from what it was at the end of the previous fiscal year. Despite increasing capital expenditures this fiscal year, we expect free cash flows to increase as profits grow and inventories decrease and net interest-bearing debt to decrease at the end of the fiscal year. Please note that these figures do not include the impact from the TOB.

Next slide, summary of the forecast for the fiscal year ending March 31, 2019. In the fourth quarter, we foresee a slowdown of smartphone and HDD mainly from demand decrease in China in addition to the demand decrease due to the trade friction between the U.S. and China. Given this backdrop, we have revised our forecast downward.

For the full year, net income has been revised downward JPY 40 billion from JPY 940 billion to JPY 900 billion, and operating income has been revised downward JPY 10 billion from JPY 85 billion to JPY 75 billion. Profit for the period has been revised downward JPY 7 billion from JPY 67 billion to JPY 60 billion. The exchange rate assumption was unchanged at JPY 110 to the U.S. dollar.

Next slide, forecast by business segment. Next slide, please, the difference between our fourth quarter forecast and the forecast announced in November, along with the second quarter results for net sales and operating income by business segment. Net sales for the machined components segment will be almost on par with the previous forecast. The electronic devices and components segment will be almost in line with the previous forecast with decrease in motors and slight increase in electronic devices. The MITSUMI business sales will be lower than projected mainly due to declined shipments of mechanical components and smartphone-related parts.

Operating income for the machined components segments will be below previous forecast due to demand slowdown in China. And electronic devices and components segment and MITSUMI business segment will be lower than the projection due to demand slowdown in China in addition to decline in smartphone. And again, especially for the smartphone-related businesses, the sudden reduction of production will cause nonoperating cost at factories related to increase of inventory and delay of personnel adjustments -- result in sudden reduction -- or would result from the sudden reduction of production, causing nonoperating cost at factories. Also please note that the electronic devices and components segment's operating income forecast for the fourth quarter includes JPY 2.4 billion of restructuring cost.

Now I give the floor to Mr. Kainuma.

[Yoshihisa Kainuma, executive]

Good evening. This is Kainuma. First, I would like to explain about today's highlights.

Regarding Q3, JPY 28 billion operating income projection, compared with that, excluding the special factors, I think it is still within the range of errors -- or margin of errors. And at that time, meaning in Q3, we announced results, and at that time, the Q4 outlook regarding LED backlight, we had rather aggressive outlook. However, in Q4, particularly backlight, things dropped significantly. Not just backlights but slowdown in Chinese economy had a major impact. And other than smartphone-related parts, overall, our business was affected.

In usual years, before the Chinese New Year, we are requested to build up inventory. However, it didn't happen this year. So across the board, we are affected, and some parts are going through massive reduction in production. And therefore, the burden of personnel cost became heavier, and the JPY 13 billion of reduction from JPY 85 billion is expected.

And mechanical parts. The volume-wise inventory adjustment took place in Q4, but April onwards, things are expected to normalize. And in China, I hear that North American smartphones are starting to sell once again, according to the rumors I hear. And in April onwards, the current model production will continue, and therefore, it is likely to be different from Q1 of last year.

And HDD-related parts production. The capital investment in China is slowing down, and therefore, we need to keep paying due attention. U-Shin and new product launch as well as a shareholders return are also described in this page, but I would like to give you more details regarding those things later on.

Page 15, please, the ball bearings or machined components. In a nutshell, up until Q3, things were good. However, slowdown in China is affecting our business. Slowdown in China, how long it is to continue is something that we need to carefully watch.

Today, I received an information from sales team about the sales focus for next year, 5 million pieces up from last year, this is monthly number; and internal, minus 5 million units. So it will be a plus/minus 0. If slowdown in China is to continue, then the ball bearings will face a flat period probably. But as I said repeatedly, everything depends upon the economic performance, and therefore, if economy recovers in April, things will normalize.

Rather than that, at a time like this, what we are strong about -- the strength of this company is that we are so diversified. Machined components, it's not just a bearing, but rod-end and fasteners businesses are included. It's mainly for aircraft. And aerospace industry is booming, and strong backlog continues to come in.

Productivity improvement, we started working on last year, and it's an ongoing effort. Rod-end and fastener business operating profit or the ability to earn money is being enhanced. And as I said in the past, now we are going through renewing the long-term contracts, and therefore, we have had the opportunities to increase prices. In addition, C&A and Mach Aero and Sino Precision, those are companies that we have in our group. So by putting together one sales team, we would like to appeal our synergy to our customers more proactively. So machined components, a growth driver will be rod-end and fasteners in the short term, I think I can say that.

Page 16 shows the aircraft demand forecast. Right now, 22,000 is the number. But many of these aircraft will become aged, and 16,000 replacement and 17,000 new aircraft will be made. And in the next 20 years, the CAGR is likely to be around 3%. And our abilities are increasing. In other words, we should be able to expand our share more. So aircraft business, we would like to focus on as another pillar in order to solidify our growth potential.

Moving on to Page 17. This is about electronic devices and components. The motors, as you can see here, hard disk, office automation-related equipment and home appliances, because of slowdown in Chinese economy, these businesses have been affected, as I said previously. LED backlights is in the same situation. But looking at the sunny side, expensive smartphones are not selling. I think it's been proven at various places. So LCD life is likely to be prolonged, extended. And therefore, this quarter went through a sudden production adjustment. However, in the long term, LCD's attractiveness shall remain.

Page 18, the MITSUMI business, which was covered already in the optical devices. I think many of you are saying that we should increase our production, but I think, looking back, it was okay. It was a good thing that we kept at the current capacity.

When we focus in certain areas, we will be at a risk at a situation like this. And in fact, we did feel the risk, but overall, the impact has been minimal.

But going forward, as is described on this slide, the multi-camera and new products will come online, and since we are supplying to all of those, we are not pessimistic about the future. We see no reason to be pessimistic about the future. In fact, we believe that current situation is at the bottom. And as was mentioned earlier for mechanical component, we expect the profit contribution starting from the beginning of the next fiscal year.

Page 19, the progress on business integration with U-Shin. Due diligence continues. We expect it to be over shortly. We have completed the procedure of competition law clearance. So we are now ready for the integration.

In fact, last week, I visited 6 different operations in Europe myself, last week. And added with the videoconferencing, I talked with about 300 middle-management personnel in English so that I could talk to them directly. At the time of the earnings briefing in May, I should be able to give you the details.

But as has been said for quite some time, we will leverage the operating sites of U-Shin for connectors, antenna of automobiles as well as SALIOT, which will be mentioned later. For those products, we will utilize U-Shin's European operations so as to raise their capability as well as to take advantage of their technical capabilities for the expansion into the home equipment sales. And on the part of U-Shin, this integration would mean more support from Minebea for production. And after visiting 6 production sites in Europe last week, I have a stronger feeling that there is good synergy.

So as long as the due diligence process is completed, our experts will be sent to the production sites so as to provide necessary support. We are thinking of sending the appropriate personnel to the appropriate sites. And what was confirmed last week is that they are sourcing quite a bit of Japanese equipment and supplies, so we should be able to have the concentrated purchase leverage advantage of scaling logistics and procurement, but we need to improve the productivity and revisit the yield situation in Europe. There's still room for improvement, including the possible automation, we want to reform the production capability, so while solidifying the foothold, win new orders and, as was mentioned earlier, have new product launches at the production sites. Those are the plans that we have.

Page 20. The new product trio took off, it says. 100 to 200 unit orders for SALIOT per week is where we are today. We only have 8 personnel for sales and marketing, but we do have the lighting companies with whom we have the alliance, and they have started to sell. The museums and galleries, they really appreciate the new SALIOT. So the new products are being well received, and there'll be more interesting products being launched. And by connecting SALIOT to the cloud for various control is currently being pursued together with MITSUMI.

As for Smart City, we have been talking about Cambodia for many times. And a couple of weeks ago, we received orders from Chile for 22,000 nodes and 2,000 gateways. We are told that Chile is considering for the new streetlights, the 6 low band as the basic infrastructure protocol, and this is the protocol that we are using. And since that seems to be the intent on the part of Chile, I think the deployment in Latin America is going to be exciting.

Now as for Bed Sensor Systems, in terms of units sold, we have yet to see an increase, but the sensor system for the sound sensors are proving to be beneficial. And we are receiving the various inquiries, and an increasing number of institutions are using our system on a trial basis. And with the technology being refined, we, again, believe that this will be an interesting area.

And new product development that we have been working on for a long time. When the economy stagnates, there are only 2 things that you can do. One is to increase the market share, and the other is to launch new products. Increasing the market share could hurt with the prices going down, and there could be some backlash. So maybe it's not rewarding. So on our part, what we are thinking is not pursue the increase in market share of the existing products but rather launch new products, as listed on this slide, for significant improvement in results in next fiscal year onward.

There, it says other products not available to the public, and this is because of the NDA agreement with our customers. So while there are many items that are to be launched next year, we can't disclose them. But even when the economy is to stagnate, through the new product launches as well as mergers and acquisitions, by executing this squarely, we would like to ensure growth.

Page 21, you are aware of this already. So this is for your reference.

And with that, I conclude my presentation. Thank you for your kind attention.

[Operator]

First question, Goldman Sachs, Mr. Takayama.

[Daiki Takayama, analyst]

First of all, let me confirm a few things. So the one-off things, the net number, what would be the net number in Q3? I probably missed it. And I heard the JPY 67 billion (sic) [ JPY 6.7 billion ] as a positive impact. So what is the total one-off impact in Q3?

[Unknown Executive]

The positives, for example, by a change in HR system, the reversal of retirement provision, JPY 6.7 billion. And then the negatives, the Hokkaido earthquake and inventory losses, the several billions of yens are included. So those are the special factors included in MITSUMI sector in Q3.

[Daiki Takayama, analyst]

And what was included in Q4 projections?

[Unknown Executive]

Q4 forecast for electronic devices, the restructuring expenses of JPY 2.4 billion, of which -- the expenses for transferring a production site due to the U.S.-China trade friction, those are included.

[Daiki Takayama, analyst]

Electronic devices, is it -- so electronic devices, you are mentioning, are backlights included?

[Unknown Executive]

Relocation is not for backlights, but it's for the measurement devices. And the inventory, it's mostly related to backlights.

[Daiki Takayama, analyst]

Understood. My second question is, Mr. Kainuma spoke about a positive impact about the plants in Europe, U-Shin related. Could you elaborate on the positive factors in that area so that I can have a better understanding? And I understand it's rather time consuming, but in terms of the effectiveness, logistics and manufacturing, when do you think you will be able to start seeing the positive impact?

[Yoshihisa Kainuma, executive]

So the positive factors, more specificity about that. M&A, this may be the very basic things about M&A. By the end of the day, it is humans who do things, the management, the top management and the next layer of the management and middle-management, speaking directly with them, seeing how they look in their eyes and so forth. Those are things I included when I say I got positive reactions. If they are cold and if they are not interested, I understand looking at their faces because it's humans who do things. But I feel that people gave me positive reactions. They seem to be eager to do things with me. And at the first round of due diligence, I think I observed 4 factories, and this time, 6 factories I observed. And the second round, I was accompanied by various people when I visited Europe. And there are many areas that -- where there were rooms for improvement. Well, because TOB is not finished, I didn't take actual data, but we would like to tackle with those things when the time is ready.

[Daiki Takayama, analyst]

In the past, you said that the revenue for the next fiscal year, that U-Shin's portion will be simply added. I think that's what is said, but do you think you can increase the speed of growth?

[Yoshihisa Kainuma, executive]

But of course. The yield -- quite frankly, yield isn't that great in many areas. And as long as we correct them, we can see an improvement. Rather than setting up a stretch goal at the outset, because if we set a stretch goal and miss it, people would criticize us. So that JPY 10 billion in 3 years' time, we always say, but what I want to promise to everyone is we will make sure to achieve JPY 10 billion in 3 years' time. But if it is possible, we will bring about improvement at an earliest possible time, so we will keep working hard.

[Daiki Takayama, analyst]

My third question, again for Mr. Kainuma. Back in November, you said that for next fiscal year, you will take all measures to achieve JPY 1 trillion or JPY 100 billion. Now these changes in demand, maybe that can't be helped, but for next fiscal year, still, would you be targeting the figures that you mentioned? So you'll be taking actions?

[Yoshihisa Kainuma, executive]

Of course. In this business environment, I still am confident that we can do. I will explain in more details why I feel confident in May. In smartphone related business, about 900 million units in North American market alone, and there is a potential replacement demand for sure. And our customers are looking into various possibilities that expensive high-end products will not sell. I think they learned a lesson. And I don't know if they're going to launch similar models. I personally doubt that. Something more affordable with better quality, I think that's where the demand is going to be. So the smartphone era isn't over, rather the new ways for smartphones. The market taught a lesson to the manufacturers is the way I see it. So I'm not pessimistic at all. Now u-Shin, JPY 150 billion associated. So in May, if I could repeat, I will give you the details. JPY 1 trillion 1 year ahead of schedule is what we'd like to achieve. Given the current earning capability, the profit will follow for sure. So the target that has been set. I have no intention of giving it up now.

[Operator]

From Morgan Stanley MUFG Securities, Mr. Sato, please.

[Shoji Sato, analyst]

Sato speaking. I have 3 questions. First, third quarter MITSUMI special factors, without which what would have been the operating income of MITSUMI? Over JPY 20 million -- or JPY 20 billion is what my math says. So for next fiscal year, compared to this year's results, would the profit be maintained? Or could it be even increased is the question. And LED backlight business, would the loss on the part of MITSUMI be made up for by U-Shin for increase? Is that a way to look at it?

[Yoshihisa Kainuma, executive]

Kainuma speaking. For next fiscal year, of course, in May, we will make our projection, but I can share with you what I have in mind right now. We do not expect a big drop because, frankly, for OIS, the business really suffered this year with the volume plummeting. But for next fiscal year onward, as written on one of the slides, the new specifications and multi-camera are certain to come in, and to Chinese customers, we are making entry. We are supplying to Chinese manufacturers as well. So given these factors, I'm not that pessimistic.

How much would the game console sell? Frankly, we don't know. Some say that the software applications this year are more interesting, and some people talk about the third year jinx, that the third year is when the products sell the most. So I don't know which way it's going to go, but even with slight decrease, U-Shin can more than make up for that decline, and I want to make sure that that's what happens. So those are the factors that I have in mind. I hope that helps.

[Shoji Sato, analyst]

What about LED backlights, similar story here?

[Unknown Executive]

This year, not very exciting, it turned out, but we don't know. But generally speaking, the next-generation models should have some mechanism to make it more attractive and more selling, I think.

[Shoji Sato, analyst]

I see. My second question, about ball bearing business. In some applications, it's slowing down, I understand -- signs of slowing down. Still, on quarter-on-quarter basis, unless I'm not calculating right, I think the fourth quarter sales would be higher. So even with slowing down, over JPY 30 billion sales, why is it being maintained? And since December, 2 out of 10 did the orders actually fell, and for next fiscal year for 315 million units and 335 million units beyond the capacity increase. What is your current view on the capacity increase towards that?

[Katsuhiko Yoshida, executive]

The fourth quarter machined components -- or ball bearing business, the breakdown has changed. Conventionally, we have explained to you that primarily in Asia, the main products, the small ball bearings that we supply, the number of units is going down, but the sales aren't declining because, within the segment, New Hampshire Ball Bearings and other sales are included, as you know. And sales from those portions are contributing. And therefore, it makes it appear that, on a quarter-on-quarter basis, sales will grow from third quarter to fourth quarter. And for the machined components segment overall, a slight decline, and there are some ups and downs in the ball bearing business as well. For next fiscal year, as Mr. Kainuma said earlier, at this current point in time, there is impact from China, the economic revamping measures by the government, et cetera, we are not factoring those in, and yet, we are expecting the volume to be about the same. So in the second half of next fiscal year, new facilities will come online. The utilization rate and the details have yet to be worked out.

[Shoji Sato, analyst]

I see. So that would mean that for New Hampshire ball bearing, the increase in sales amount to over JPY 1 billion, or several billions of yen. Am I correct?

[Unknown Executive]

Yes.

[Shoji Sato, analyst]

My last question, about electronics components and devices. The sales in the fourth quarter were JPY 102.4 billion, I think. Compared to the third quarter, the sales would decline, but JPY 2.4 billion costs associated with the restructuring. I still get the impression that the profit is rather sizable. Is this in relation to the LED backlight inventory factor? Or would the production going to go down? So are there any special reasons or factors is my question.

[Unknown Executive]

As you know, in the third quarter, initially, we were really speeding up -- or the market and our customers were really speeding up but came to a sudden halt. That's what happened in the third quarter. We are controlling the overall inventory, but for smartphone-related products, we do see the inventory building up. As for the fourth quarter, we are thinking of maintaining the inventory level to the optimal level. And in doing so, the operating utilization rate is going to go down more than the decline in sales. And because the sudden halt had a really significant impact, as I -- as was mentioned in the presentation, including the personnel cost, there has been some time lag in appropriately responding to the situation.

[Shoji Sato, analyst]

So by the end of March, all those would normalize. Am I correct?

[Unknown Executive]

Yes.

[Operator]

The next is from Mitsubishi UFJ Morgan Stanley Securities, Mr. Uchino.

[Akihiko Uchino, analyst]

This is Uchino. I have 2 questions, one about inventories. At the end of Q3, the total number declined, and strategically, some items were reduced, and some were increased, I would assume. And the inventories, if it is all right, by segment or by product, could you share with me what went up and what went down and how things are likely to be in Q4? That is my first question.

[Unknown Executive]

So the items that went down in inventories is MITSUMI's mechanical parts. And also, overall, there are some ups and downs, but in terms of the inventories, no major changes. And what slightly increased was backlight. Backlight inventories increased a little bit.

[Akihiko Uchino, analyst]

I see. Towards Q4, what is the projection, Q4?

[Unknown Executive]

Regarding game consoles, it will be off season, so it's going to be slow. And smartphone related, the customers are reducing volume -- were reducing volume all of a sudden, but things are likely to be normalized. So probably, the inventories will become normalized, going down, in other words. And other than that, everything else will be as usual. Bearings, as you may know, the external sales and internal sales regarding Q4 will weaken, deteriorate. And manufacturing, we will maintain full utilization. And as I have been explaining, the airfreight reduction and the optimization of utilization or operation, we will take thorough measures to make that happen. So for ball bearings, we will build up strategic inventories in Q4.

[Akihiko Uchino, analyst]

So inventories, I had a feeling that inventories level was a little bit lower than it should be. So is it going to be normalized?

[Unknown Executive]

Yes, that is what we think.

[Akihiko Uchino, analyst]

Understood. My second question is Q4 -- how plan is formulated for Q4. Some markets are going through fluctuations, like game consoles and smartphones. And as for the stance or the thinking behind formulating the plan, are you looking at a current forecast? Or what are the assumptions behind a Q4 plan?

[Unknown Executive]

So already 1 month has passed in Q4, so I think we have a better visibility. And therefore, we are simply looking at the current situation.

[Operator]

Next is from Mizuho Securities, Mr. Goto.

[Fumihide Goto, analyst]

Two basic questions. First, ball bearing. For January-March, I think it's going to be less than 1.9 million external sales. Compared to the peak, it's going to go down by more than 2 million. So on a monthly basis, what's the level -- what is decreasing? And based on that, can you talk about the next transition point, to what extent you expect recovery? That's my first question. I'll stop here.

[Unknown Executive]

First, fourth quarter external shipment, 181 million average and 198 million on average in March and pivot, HDD-related reduction in production in the fourth quarter. So internal, 62 million; total, 244 million; and on production side, 280 million plus, which means quite a bit of inventory to be built.

And the content -- the breakdown of 180 million, what's strong, what's weak was your question. Automotive, last year, in November, that was the peak, over 60 million. In December, because of the operating dates, some decline. And first quarter, we believe that the peak level would be maintained, and therefore, for automotive, we are not assuming weak shipment volume. For air conditioner and cleaner and other home appliances applications, as you know, because of the impact of the economic slowdown, we are projecting that. And fan motor application for the first quarter, a rather significant slowdown is our projection. It is the basis for JPY 180 million. But February, as you know, fewer operating dates on the part of the customers. So for the fourth quarter, from the very beginning, this is the slow season. So with that being factored in, you should be looking at these figures.

[Fumihide Goto, analyst]

So on a monthly basis, looking at the current situation, do you feel that you have hit the bottom? And if the recovery is expected, in what way do you think the recovery would be made?

[Yoshihisa Kainuma, executive]

Kainuma speaking. Specific figures: in January of last year, 209 million; February, 179 million; and 212 million in March. This January, and China is already in the Chinese New Year, so it's not definite yet, 109 million, so -- or rather, 190 million, so maybe 7% to 8% low, not 10%. And so for the fourth quarter, we believe that, that level is going to be maintained and as has been set for quite some time. The investment in China -- investment promotion policy in China and economic revamping measures by the government, how effective they are going to be and what's going to happen to the U.S.-China relations, I don't think it will be resolved squarely, but to what extent that will be alleviated, I think, would be the critical questions. I always say -- when you say, "Is this a risk? Is this a risk?" And I always answer it's a macroscopic, macroeconomic risk. So still, there are uncertainties. But would there be further slowdown? That is not what we anticipate.

[Fumihide Goto, analyst]

Understood. My second question, clarification of figures. Smartphone-related fourth quarter projection, you said that normal situation for electronic devices and components. The revised figure compared to the third quarter, the high-end smartphone reduction is being set. Compared to that, it seems more moderate. So within the electronic devices and components segment sales projection for the fourth quarter, are you factoring in the reduction in smartphone production? I'm sure you do, but yet, the reduction size seems to be small. Why is that?

[Unknown Executive]

As for the backlight portion, the forecast from the customers are the basis for our projection. And so that is what is being reflected. So maybe there are many factors involved. I'm afraid I can't say anything more than that. It's not that we are manipulating the figures, no.

[Fumihide Goto, analyst]

So older models being built and maybe being built more in preparation for end of life. Is that a factor?

[Unknown Executive]

Sorry, could you repeat that?

[Fumihide Goto, analyst]

The older models being increased; and before the end of life, build inventories. Are those one-off, or are temporary factors taking place?

[Unknown Executive]

For Q4, the selling models are different from the original projection. And for that, the older models, we are increasing. For backlight overall, we had been rather conservative in our projection, and we see the actual being more strong than the projection. Those are the factors.

[Operator]

Next is Mr. Akizuki from Nomura Securities.

[Manabu Akizuki, analyst]

First, about bearings, this is sort of a follow-up question to the previous one. The bearings volume, inclusive of ForEx, so it's likely to go down by 10%. So far, the bearings numbers in Q-on-Q, I think you said something -- that something which was not previously included in bearings revenue will be reflected. So the decline in bearing volume, there will be a huge impact. And next quarter onwards, is it going to be sort of a regular factor? I want to confirm, so the changes in revenue of things other than miniature bearings.

[Unknown Executive]

First of all, what we disclosed about ball bearings, what are included are so-called bolt bearings, and New Hampshire Ball Bearings, myonic's work and C&A Tool Engineering, the company we acquired recently, so those are included. In terms of revenue, JPY 30.3 billion would be JPY 30.7 billion. So the bearings volume -- the average unit price remains virtually the same, or rather, there is a small impact of a price hike. And other than that, the reduction in revenue is offset by New Hampshire bearings type of things. In other words, additional products are doing well.

[Manabu Akizuki, analyst]

The ball bearings recovery, as I -- as Mr. Kainuma said, if assumptions remain the same, it's going to be slightly above this term's average, but machined components, their revenue remained the same, but I understand that the pivot revenue has gone down. Is it not a regular factor?

[Unknown Executive]

In terms of machined components, as you may be aware, pivot will go down. And ball bearings -- or other than ball bearings, New Hampshire increased. On rod-end and fastener, our revenue will increase. And they sort of offset each other, and it's going to be JPY 47.3 billion versus JPY 47.2 billion. In other words, the revenue will remain more or less the same. I would like you to understand it that way.

[Unknown Executive]

Please wait for a second. As I have said repeatedly, our strength is that, even if miniatures, small-diameter product go down, other sectors can compensate for that. Aircraft business is doing extremely well, and the bearings in U.S. market, HPV, miniature, small diameter made in Chatsworth are doing very well. So that is the overall situation.

[Manabu Akizuki, analyst]

I see. And my second question is about how to understand this. So JPY 2.4 billion is restructuring expenses and provision for inventories. Are you talking about restructuring in order to improve business restructuring? Or is this JPY 2.4 billion, is it for onetime expenses to change, of course, the structure? Can you share with me more details about this?

[Unknown Executive]

Simply, dispose of all the stocks by intentionally slashing inventories. I mean, we are not manipulating things by slashing our inventory of certain models. It's not that, and I cannot give you details unfortunately because of confidentiality. But it is something -- it is an appropriate thing that our accountant, or the CPA, would agree. So that is how we would like you to understand.

[Manabu Akizuki, analyst]

Understood. And just briefly, could you give me the bearings growth rate per application?

[Unknown Executive]

The growth rate, right? Or proportion. The Q3 bearings proportion: automotive, 19%; aerospace, 31%; home appliances, 5%; office automation, 5%; PC, 2%; motor, 16%; others, 20%.

[Manabu Akizuki, analyst]

And the growth rate as well, if you could, please.

[Unknown Executive]

Q-on-Q, automotive, the same; aircraft, the same; home appliances, minus 10%; office automation, plus 1%; PC, minus 1%; motors, minus 6%; amusement, plus 10%, well, the absolute number is very limited to begin with; and others, plus 3%.

[Operator]

From UBS Securities, Mr. Hirata.

[Shingo Hirata, analyst]

Hirata from UBS Securities. About ball bearing, I have a question. And I have one question on MITSUMI segment. First, on ball bearing, the external sales, the monthly movement, in December, I suppose there was a big drop. Can you confirm that? And you said that inventories will be built, and therefore, the capacity utilization rate is not going to go down much in the fourth quarter. For how long do you expect that to continue, to build the inventory? Is it going to be until April-June period, July-September quarter of next fiscal year?

[Unknown Executive]

The figures, external shipments, from October, over 1 million -- 199 million, 204 million and 183 million in December. In January, it was 198 million, so it has gone up again. So 199 million, 204 million, 183 million in October November and December and 190 million in January. Regarding the inventory, until March, we expect the current level, about 2 months' inventory. At one point in time, it was very tight, and it threatened the line operation of the customers, and we want to ship the ball bearings, not airlift, and therefore, 2 months' inventory is the benchmark that we are using.

[Shingo Hirata, analyst]

So by the end of March, 2 months, correct?

[Unknown Executive]

Yes.

[Shingo Hirata, analyst]

About ball bearing, can you talk about the external (sic) [ internal ] shipment as well for October, November and December?

[Unknown Executive]

External shipment -- or internal shipment, 81 million, 76 million, 74 million and 65 million in January. 81 million, 76 million, 74 million, 65 million, that is.

[Shingo Hirata, analyst]

And in the MITSUMI segment, you said that they are special factors?

[Unknown Executive]

26 -- or maybe revised downward by -- somewhat, and JPY 26 billion downward revision for sales. And I think that the factors are game consoles and smartphone.

[Shingo Hirata, analyst]

Can you give us the breakdown of those 2 different businesses?

[Unknown Executive]

The biggest factor is, as you know, OIS, optical device. Our major share was in the LCD model, and a big reduction in volume there affected us. From the second half of third quarter to fourth quarter, that had a major impact. The next biggest factor is -- it's much smaller. But game console slowdown in the fourth quarter, that is the mechanical components in the fourth quarter. Switches and other smartphone-related parts had an impact. So overall, they accounted for the decline in profit.

[Shingo Hirata, analyst]

I see. So in other words, the majority is OIS or smartphone related?

[Unknown Executive]

Yes.

[Operator]

With this, we conclude the Q&A session. I would like to invite Mr. Kainuma for the closing remarks.

[Yoshihisa Kainuma, executive]

Thank you for your participation, ladies and gentlemen. The macroeconomic situation is what it is. On our part, we'll do our best so that we will not be affected by the situation in the macro economy through new product launch, and we would ensure the success of U-Shin. So I ask for your continued support and understanding. Thank you.