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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
This is Yoshida speaking. I would go over the consolidated financial results for the first quarter of the fiscal year ending March 31, 2019. And then Mr. Kainuma, Representative Director, CEO and COO, will give the updates on machine components, electronics and devices and the Mitsumi business. Please note that starting this quarter, some information such as changes in inventory and SG&A expenses have been attached as reference pages and will not be included in the explanation.
The consolidated results for the first quarter were net sales were up 9.2% year-on-year and down 5% quarter-on-quarter at JPY 213.038 billion.
Operating income was down 14.4% year-on-year and up 2.2x quarter-on-quarter at JPY 14.291 billion. Profit for the period attributable to the owners of the parent was down 13.6% year-on-year and up 6x quarter-on-quarter at JPY 10.886 billion.
Net sales were the highest ever for a first quarter in addition to steady performance in the ball bearing motor and other businesses. A contract change in the fourth quarter of the previous fiscal year pushed up the sales of the Mitsumi business.
Currency fluctuations brought net sales down an estimated JPY 2.4 billion quarter-on-quarter and JPY 2.5 billion year-on-year and brought operating income down JPY 0.7 billion quarter-on-quarter and JPY 2.6 billion year-on-year.
We adopted International Financial Reporting Standards or IFRS instead of Japanese standard JGAAP from the current fiscal year. The differences between the JGAAP and IFRS for the full year and the first quarter of the last fiscal year are shown on Pages 16 and 17 respectively. If we apply IFRS for the full year of the last fiscal year, the operating income would be JPY 68.9 billion down by about JPY 10 billion from JPY 79.2 billion, mainly due to such temporary factors as shift from extraordinary loss. On the other hand, non-temporary factors include JPY 1.2 billion increase due to reversal of goodwill amortization, which is included in SG&A and JPY 0.3 billion increase due to shift from nonoperating profit and so on. If we apply the JGAAP to this first quarter, operating income would be JPY 0.3 billion less due mainly to the difference in accounting treatment for goodwill amortization that is up JPY 0.3 billion due to IFRS adoption.
Please move to the next Slide. Here you can see the quarterly trend in net sales operating income and operating margin. The bar graph on the left is net sales and the one on the right is operating income and the line chart is the operating margin which for the first quarter, was down 2.1 percentage point year-on-year but up 0.1 percentage point quarter-on-quarter at 6.7%. Compared to 2 years ago, net sales and operating income have almost doubled while the operating margin improved roughly 1 percentage point, reflecting a huge contribution from the integration with Mitsumi.
Please note that figures of the fiscal year ended March 2018 and before are based on JGAAP and are provided for your reference. The same applies hereafter.
Next slide. Here you can see the results by segment starting with machined components business segment. On the left, quarterly net sales trends and on the right, a bar graph showing quarterly operating income trends and a line chart for operating margins. Net sales for the first quarter remained at the same level quarter-on-quarter at JPY 47.3 billion. Ball bearing sales rose 9% quarter-on-quarter to total JPY 30.4 billion. The average monthly external shipment volume hit an all-time high of 203 million units marking a year-on-year increase for the 23rd quarter in a row. The monthly production volume for May hit an all-time high of 296 million units. Sales of rod-ends and fasteners totaling JPY 8.9 billion were up 2% quarter-on-quarter. Sales of pivot assemblies increased 5% at JPY 7.9 billion, 5% increase quarter-on-quarter. Our ability to hold on to over 80% market share has generated stable earnings. Previously, we quoted under other, C&A tool engineering has been included in ball bearings and Mach Aero has been included in rod-ends and fasteners and Fasteners beginning this fiscal year. Operating income for this quarter hit a quarterly record high of JPY 11.7 billion, bringing the operating margin at 24.8%. Operating income rose 12% quarter-on-quarter and the operating margin was 2.7 percentage points higher quarter-on-quarter.
By product, profits were higher for ball bearings rod-ends fasteners and pivot assemblies in all.
Next slide. In electronic devices and components segment, net sales declined 10% quarter-on-quarter at JPY 91.7 billion. By product, steady sales mainly in the automobile market kept motor sales at the same level quarter-on-quarter at JPY 47 billion. Sales of electronic devices were down 24% quarter-on-quarter at JPY 34.5 billion, mainly due to the witness of the smartphone market. Sales of sensing devices grew 5% quarter-on-quarter to hit JPY 9.1 billion. Operating income was JPY 1.9 billion bringing the operating margin at 2.1%. Operating income decreased 75% quarter-on-quarter and the operating margin declined 5.2 percentage points.
By product, motors and sensing devices remained steady while electronic -- electric -- electronic devices, operating income decreased due to an inventory adjustment in the smartphone market and one-time cost increase for the new production launch.
Next slide. Finally, let's look at the performance of the MITSUMI business segment. Net sales was JPY 73.9 billion which remained roughly the same previous quarter. This was a result of net sales of mechanical parts declining slightly while net sales and camera actuators increased. The impact of the sales increase due to contract change with customers was JPY 24.2 billion in the previous quarter and JPY 23.9 billion this quarter.
Operating income was JPY 3 billion, putting the operating margin at 4.1%. That means operating income increased 2.2x compared to the previous quarter while the operating margin grew 2.3 percentage points.
Next slide please. This is a summary of the forecast for the fiscal year ending March 31, 2019, the full year profit forecast has been revised upward to partly reflect the better than expected profit in the first quarter. Operating income for the full year has been revised upward by JPY 2 billion from JPY 83 billion to JPY 85 billion and net income has been revised upwards by JPY 1 billion from JPY 65 billion to JPY 66 billion. Due to many uncertainties of the foreign exchange and the smartphone markets, conservative estimates has been used in the forecast. Exchange rate is assumed to be JPY 105 to the U.S. dollar.
Moving to the next slide. This slide shows the forecast by business segment.
Next slide. Next, let me explain about the shareholder return policy. The dividend per share was increased significantly last year to JPY 26, but this year, we plan to set the dividend at a payout ratio of around 20%.
Next slide please. I'd like to talk about 2 recent topics concerning our ESG initiatives. The first is that beginning in June 2018, we have been included in the MSCI Japan Empowering Women Index. We believe that this is an indication of how our promotion of diversity and proactive disclosure of information has been recognized as being good. The second is that we plan to publish an integrated report aiming to provide a clear explanation of our mid- to long-term growth strategy and value creation story. We hope that it will help you understand our strengths and our ideas and how to achieve sustainable growth. We'll provide a separate notice when it's published so we hope that we'll be able to read this. That's all from my explanation from Yoshida. I would like to hand over the microphone to Mr. Kainuma.
Good afternoon. My name is Kainuma. So from today, for the first quarter and the -- excuse me, for the second quarter to fourth quarter telephone conference, I will participate, so maybe there has been some speculations about that but there's no special announcement that I want to make. If you look at Page 11 of our presentation, so overall, it seems that we have been able to have a much better than expected start. So what's difference from last year is that this year, we are more focused- skewed on the second half. The -- last year, I think in the first half, we were able to show good performance with the LED backlights and the game console business is different from this year to last year. So I think basically, our performance is more or less focused on the second half of this year. The first quarter, operating profit JPY 10 billion was the assumption, but I think basically, we have been able to achieve JPY 14 billion. And going forward, we have 3 quarters left for this year. There's some uncertainty going forward, so about, out of the JPY 4 billion, we allocate the JPY 2 billion for the upward revision of our forecast. I'm going to mention it later, but the mechanical components is showing a very good performance and this is in line with our expectation. So LED backlights, in terms of the manufacturing technology related issues, we've been able to overcome. We have had a little concern about this but I think basically, we have been able to see a good outcome and this goes to Page 12.
This is about the ball bearing business. As I -- as mentioned in the presentation, the first quarter for the 23rd consecutive quarter on a year-on-year basis, we saw an increase of external shipments. So I don't think that we see this kind of products and this growth is not stopping actually. In July, so 215 million external shipments has been able to be achieved and basically, this is another record broken. In terms of the ball bearing production, we thought that in August and September, we will be able to reach 300 million units, but we have been able to exceed the 300 million, 301 million units were achieved in July. That was record high level.
So JPY 294 million included, we have some internal business as well. So this is the actual external shipment in terms of ball bearing, in terms of July.
So in terms of demand and supply, we've been able to expand both. So in July next year -- excuse me, we're going to achieve 315 million in July next year, but the investment that we made for the previous equipment is going to start operation in next fiscal year. So going forward, the demand-supply balance remains a concern but according to our forecast, maybe the recent plateau around that period of time. However, every time I say I think that there will be a plateau in this quarter but for instance, we think -- we have been saying that we'll be able to reduce the air freight cost. But we have not been able to reduce that as last month, we have spent about JPY 100 million of air freight. So I think this plateau has to continue or else it's difficult for us to reduce the air freight cost, but on the other hand, there has been some impact of increasing prices. Gradually, we've been able to reflect that to our performance. From October onwards, I think basically JPY 100 million and more of the impact coming from the price increase will start to show. And what has been strong out of our expectations is the C&A that which we had acquired. So the New Hampshire ball bearing group maybe I should call it by that name. So the profitability of this company has been improving dramatically. The major reason behind that is that LTA long-term agreement in the, I think -- well depending on the customer, probably, it will run for 2 to 3 year, but the LTA was concluded in the -- under the conditions, but it has started to transit to a better LTA in the conditions. And the market is becoming better and the selling price has started to improve. So the LTA renewal by progressing the LTA, the progress of the LTA renewal, meaning that at NHBB, the high level of the margins will be achieved in their aircraft related business. And Mach Aero at the center, the India -- also business at India. There has been a lot of good reports coming from that business, and the acquisition that we conducted last year for the following couple of years, there will be, I think there will be a good supplement to a strong profitability that we can expect. For the fastener business, [indiscernible], I am saying it to -- each month. And the profitability has started to improve when it's completely in the black right now. And -- but basically, this is in line with our expectations. So in terms of machine components segment, it has shown strong results. So JPY 49.5 billion operating profit is our forecast for this fiscal year. I think, we'll be able to achieve this with machined components business. If they're able to achieve JPY 50 billion of profit, that meets our profitability will improve furthermore.
Next, going to Page 13. So the LED backlight, I think a lot of people are concerned about this business and the share price has reflected that concern and so it was moving down, but thankfully, this LED backlights in terms of the technical difficulties, I think, we'll be able to overcome this difficulty. So we were expecting this to be delayed more or less, but it is moving faster than we expected and we are launching lines every week. So I don't know how many new products are going to be sold but this LED backlight business -- the launch of this business, I don't think we have to worry about this anymore.
So the motor business. This continues to perform well. So beginning of June, we had a groundbreaking of a sort of operation of the Slovakia factory. A lot of European manufacturers are putting a lot of expectations on this factory. So the Slovakia factory will certainly within these 2 to 3 years will become a good weapon for our expansion of business.
Going to page 14. This is a Mitsumi business. As explained earlier, compared to what we have expected, the performance was higher than our expectations. So the optical devices business has started to contribute to the performance, among which for the Chinese smartphones, there are high specs required. That trend has started, meaning that a lot of inquiries are coming to us. In the other Mitsumi business, there has been a lot of improvement. So analog semiconductors, they are performing strongly and these various businesses, profitability improvement has started to contribute. And I think that I can say surely, but that said, the pillar of Mitsumi business is the optical devices and the game business that is the source of their profit. So we have to look at what's going to happen going forward. But for the game business, maybe we have started to see some delay, but in terms of the customers outlook, it is still strong so we will continue to manufacture the volume that the customers are requiring and so that we can hope the good business to happen in the second half of this year. So this has been a very brief presentation. But that's all from me. Thank you. We will now take questions.[Operator Instructions]
First question from Goldman Sachs, Mr. Takayama.
My first question. Electronic devices, you did explain the LED backlight business, but in terms of price -- selling price. I know this is a sensitive matter, but are you already finalizing the selling price and what you said Mr. Kainuma, I think you do get the feeling, or at least my impression was that your projections have been satisfied. Am I hearing you correctly.
Yes, I think so. Of course, our selling prices have been determined because we started the operation. So with that, the electronic devices, I think you do have the expectation for the second quarter with increased protection for the first half. While earlier than projection, the ramp-up has begun, well, be it just slightly, but that is being reflected.
My second question about your Mitsumi business on the full year basis, the operating income projection has not been changed. But for the first quarter, there was sizable upside and same for the second quarter. Are you just being conservative, you did talk about the gaming console business indicating that there is some delay. So towards the second quarter, do you get the feeling that it's going to be lower than your projection?
I guess, we are making a conservative projection.
Got it. My last question, technical question, about the adjustment. First quarter was rather small, limited. Maybe that was the reason for the upside whereas for the second quarter onward, again, there is going to be a quite sizable amount. What are the factors, why is it that the adjustment was small in the first quarter and why is it that you did not change the second quarter?
First quarter, IFRS adoption makes the difference. So the goodwill amortization reversal as was explained earlier. In addition, the changes following the adoption of IFRS. Things that were previously recognized elsewhere, is now assigned to different business. Previously they were the corporate expense. And although is really hard to say, but usually, mergers and acquisitions and other things are being considered and associated expenses were not incurred during the first quarter. That's another reason. And during the first quarter, the bonus payments to the executives were made, so there was a change in reserves as well as the actual payment. There was a gap between the two resulting in the first quarter of adjustment are now being smaller. So there are some special factors. So in the full year forecast, JPY 16 billion is being projected. And we believe that this is the adequate level assuming ordinary operation. So in that sense, we have not changed the production.
For the second quarter, minus JPY 4.9 billion in your revised forecast, are you already seeing this adjustment amount being visible? Or again are you being conservative?
Again, very difficult to explain, but generally speaking, the expenses in the second quarter, many things are being visible.
I would like to go to the next question Morgan Stanley Securities, MUFG Securities, Sato-san.
I have 2 questions. First, is the Mitsumi camera actuator first quarter situation, the sales has increased you say, but what is the background of this. What is this change in each of the markets and the second quarter Mitsumi operating profit, [ JPY 2.3 billion ] was the first quarter and second quarter is going to increase substantially to JPY 8 billion. So if you break it down between games and camera actuators, so which is the biggest contributor -- bigger contributor? So could you please explain as far as you can?
Well, for the camera actuator business, sales has increased, but it's not a substantial increase in doing so if you look at the numbers. So if you are pressed to say whether it has increased or decreased, it has increased. So that's the range of sales increase that we're looking at, in terms of the change. So the fourth quarter over the last fiscal year, the operation has been at a low level. The first quarter basically, we haven't been able to see a more operation. So for the camera actuators exactly, we have been talking about the camera actuators, that's the biggest difference. So beside major clients, we have started to see more utilization of our alliance, and I think that some of the contribution coming to the sales increase. And first quarter and the second quarter operating profit JPY 3 billion, in the first quarter increasing going to the second quarter, going to your question about that. So I cannot specifically say what it's coming from, whether it be games or not, but in terms of the machine parts, I think basically, that's what's the contribution. So first quarter against the second quarter. What's going to drive this growth, will be more or less the mechanical parts.
Understood. Well my second question is that so the LED backlight for the new smartphones. The production startup you said that it has been earlier than planned. If you look at the utilization, first quarter, second quarter the third quarter, what will be the trend that we should be looking at? Would you can give some hints. So when will be the peak of the utilization? And in terms of the LED backlights, and the Mitsumi's optical device business or that will be the camera actuator business. In terms of the ramp up of the operation, is there any difference in terms of how the peak would be in each of the start.
In terms of the LED backlights. Currently the start has -- now we are starting this. The third quarter will be the peak for LED backlights. So in terms of the -- what level that you're talking about, they are very sensitive matters that are involved, but I think basically, we're assuming that the peak will come in the third quarter and based on that, we are announcing our guidance. And so the -- in terms of the launch of the optical devices compared to the LED backlights, maybe it will be slightly earlier and that's the overall preparation that we are making and with discussions with our clients. We are trying to correlate the latest startup schedule. As a major trend, I don't think that there is no difference. It's slightly earlier than the LED backlights, but I think basically peak will be coming in the second and the third quarter.
So if that is the case for the Mitsumi business, so the increase of profit in the second quarter is coming from the mechanical parts business. I think that has been the explanation, but in terms of the optical devices, you mean that from the second quarter, the sales will start to be booked? If I'm not mistaken to make the assumption.
Yes, that's correct.
[Operator Instructions] Next person from SMBC Nikko Securities, Watanabe-san.
Slide 13, shows the organic LED, OLED. So to the extent possible, can you talk about the things that you're working on now? That's my first question.
This is Kainuma speaking. We have already given you the information to the extent possible. The consumed power, power consumption and durability, OLED we're confident is better, but the different things that we have not yet touched up is a contrast. That is how you show the bad part being black. So if we can improve, that performance to the comparable level, LED backlights, we believe will continue to be used for quite some time. And therefore, initially when we worked with the supply chain partners, the innovation in terms of design to be realized with LCD was what we worked on, but now, we're focusing on the black performance. So happens that yesterday, I did see the work in progress and I have noticed that it's really very good in terms of the black representing performance. So I think we are doing a very good job.
My second question is on ball bearing. You said that may be it is going to plateau soon. Still, you are seeing an upside in terms of volume due to the efforts made by the field. Now this JPY 300 million to JPY 313 million, is that still possible do you think? Or do you think there is room for upside or is it hitting the limit?
Well, I don't think there's much margin left, meaning that should there be more going forward, the price is going to go up. And therefore, we are hoping that plateau will come -- it's not magic. The number of manufacturing units is limited. We have worked on the productivity improvement. So new machines. Well in July -- we are in the beginning of August. By the end of this month, all of the new machines will be installed and the operation will start. So even with the upside, we're just talking about millions of units. I think it's safe to say that's just about the size of the upside. It depends on the number of operating days, of course.
So for the industry, the small ball bearing utilization rate, I think, is the high. So the bottleneck -- it could become the bottleneck of the manufacturing overall. Or maybe you, again, make a compromise in terms of having the lower priority of products pushed back. So how are you going to satisfy your supply responsibility?
Well, we want to satisfy -- fulfill our responsibility of supply as much as possible. But it's really hard to foresee. So for now, we are showing this is our capacity. This is the maximum capacity that we have. So I don't think it makes much sense to talk on the hypothetical basis. Currently, we feel that the plateau is going to come sooner or later. That's with the sales and marketing people say, because of the bitcoin situation being where it is today.
Nomura Securities, Mr. Akizuki.
I have some simple questions. First of all, for the motor business, I would like to ask questions about that. For the full year compared to the full year plan, the first quarter sales, I'm questioning that how much the progress is going? So I think basically assumption is, the sales is going to grow more in the second half and the first quarter progress, maybe that's appropriate based on the assumption, but you referred to Bitcoin, though these fan motors or ball bearings, maybe it's slightly impacted by that? So I would like to ask about how much the progress is going for this business.
Well the motor business in terms of sales. At the beginning of this fiscal year, compared to that number maybe the sales had slight shortfall against our initial forecast, but if you look at the most recent situation, I -- basically, I don't think there is a major concern about this business. For the second quarter, there are various motors will start to generate sales. And I think basically for the full year, I think, we will be able to see the sales to be online with our assumption. So in terms of your question about the Bitcoin, while the ball bearings business basically, we have high market share and for the bitcoin business, we are engaged in those type of businesses. But the other businesses like fan motors, for instance, whether the impact of the bitcoin is coming or not, we do not disclose those type of information, but the bitcoin slowed down. Does it have a big impact on the motor sales but basically, our numbers actually have already reflected that impact and we have disclosed the numbers reflecting that impact.
Understood. My second question is about the inventory quarter-on-quarter. It has increased by JPY 10.9 billion. So for instance because you have to pile up or increase the manufacturing for the game business because before the summer season. So In terms of utilization, does it have any impact. So can you give us the information about impact on the first quarter?
So in terms of inventory where it is increasing, I think towards the second quarter, there are some seasonality products that we are producing beforehand. So inventory -- strategically, in some cases, we hold inventory.
So in terms of the second -- for the first quarter, how much that the operation gains are coming.
If you look at the Mitsumi's quarter-on-quarter performance, I think basically you will be able to understand that. Some -- at the fourth quarter, some were not be utilized, but actually we've started to see the utilization go up, some of the utilization gains has been reflected in the first quarter. I think that's all I can say about that.
So my third question is that maybe, you're suffering from some reputational adverse impacts, but for the new models for the smartphones will be OLED, it's a rumor, I think, in Taiwan, there are some reports about that. I think that's kind of rumors recurs constantly. So the new model for next year, will LCD still be used? That's the basic understanding.
Well I cannot go into detail but this, but as you have mentioned, although this is basically, we are with kind of a negative impact coming from rumors. So that's all I can say. We have to do something about this. I would like to sue them. This is rumor and we are being negatively impacted by that.
[Operator Instructions] The next person from UBS Securities, Hirata-san.
Hirata from UBS. I have 2 questions. First on Mitsumi business. Earlier, in your response to one of the earlier questions, you said that for the first quarter, it was better than your projection, but for the second quarter, you do have conservative view. Can you elaborate for the mechanical components, is that where you're being conservative or is it optical device on which you have the conservative projection. So can you elaborate?
Again, as you know this is the B2B business, and so it's hard to give you the details. Guidance wise, in both areas, we have somewhat conservative projections. So it's not a question of which, it's really for both.
Understood. Related question for optical device. You have conservative forecast. Is it because of rather sluggish smartphone or is it the market share, or that yield factors?
Market share, yield. So far, we don't see much changes especially regarding the market share. And for yield, looking at the current ramp up, it's going very smoothly.
My second question. This is a really general question I apologize. Looking at the U.S.-China trade friction, since you are operating in many different regions, do you see any impact and what countermeasures are you envisioning?
Well, as you know, in China, we do have major plant operations and in North America as well, especially for the space and air, in ball bearing we do have our operations. The products in China being shipped to North America, U.S. and our North American operations do have the supplies from China. But there is no direct impact of the friction. I wouldn't say there is 0 impact, but the impact is quite limited. Of course, we are the parts manufacturers. So our customers might be affected by this trade friction between the 2 countries. But we don't know the extent of that effect. Our strength is that in areas other than China, we do have operations doing manufacturing so we'll leverage that diversity in our regional operations, so that we can flexibly respond to the current environment.
[Operator Instructions] Because time is limited, we'd like to declare the next question to be the last. Going to the next question from Mizuho Securities, Goto-san would you please ask your question.
So this is Mizuho Securities Goto speaking. Related to the question about risk. So in terms of the FA Industrial equipment Mitsumi business, there are some manufacturers that are saying that the order is declining. For the ball bearings and the motors business, so robotics for the industrial machinery business, is there any impact coming from deceleration of this market or in terms of the potential deceleration. Do you have any view on this? That's my first question. And another question, but I would like you to ask this question first.
Of course, in terms of what we can see is that the -- after the customers changes the manufacturing plans or adjust the inventory. So in terms of the numbers that we have seen, it's not the case that we are seeing a plateau in this overall business. In these type of businesses, we will continue to observe what's happening and then decide what we'll do going forward.
Another question I have is that you talked about the China smartphone high spec. We're going to more high spec. And that's a positive impact on your business. So you have this double, triple cameras. They are more high function cameras, meaning -- what's your opportunity? How does your opportunity change with this high specs? So in terms of the triple cameras, the North American customer and the major brand customers, what will be the opportunities. Can you comment on this?
So I cannot comment on specific customers and specific models but basically, this very precise OIS or VCM, it will be necessary. In this kind of trend, we consider this a positive development. If there are more and more models going to this more high spec, there'd be more business opportunities for us and I think basically what you have pointed out is true. Please hold on, actually, there has been a more increase inquiries and we started to see inquiries coming and this trend for us is not bad at all.
[Operator Instructions] Looks like there are no further questions. So we're going to complete the Q&A session. I'm going to ask Mr. Kainuma for the closing remarks.
Well ladies and gentlemen, thank you for your participation. We're going to do our best for this fiscal year as well. So I ask for your continued support. Thank you.