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Nidec Corp
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Good day, ladies and gentlemen, and welcome to today's Nidec's conference call hosted by Mitsubishi UFJ Morgan Stanley Securities.
Today's conference is being recorded.
At this time, I would like to turn the conference to [ Mr. Abe ] Of Mitsubishi UFJ Morgan Stanley Securities for the opening remarks. [ Mr. Abe ], please go ahead, sir.
Thank you. Ladies and gentlemen, thank you very much for joining this conference call. This is [ Abe ], General Manager, [ Institutional Sales ] Department, of Mitsubishi UFJ Securities Tokyo.
Before the meeting starts, please make sure all the materials have been distributed. If not, please download the files from Nidec's homepage right now.
Now may I introduce Mr. Akira Sato, Executive Vice President and Chief Financial Officer, who will be speaking to you shortly. First, Mr. Sato will make a presentation. After his presentation, we will move to a Q&A session.
Mr. Sato will now discuss Nidec's first quarter fiscal 2018 results, future outlook and management strategy. Mr. Sato, please go ahead.
Thank you, very much, [ Mr. Abe ]. Good day and -- ladies and gentlemen, and welcome to today's conference call.
My name is Akira Sato, Chief Financial Officer of Nidec. And I will be your main speaker for today. Joining me is Mr. Masahiro Nagayasu, general manager of Nidec's IR team.
For the forward-looking statement, please see Slide #2 of our presentation material for details.
Now I will review the key figures. Please see the Slide #3 for our first quarter results. As shown on Slide #4, we achieved record-high quarterly operating profit, profit before income taxes and profit attributable to owners of the parent. On the fiscal year, we have decided to disclose automotive and appliance, commercial and industrial as 2 separate product groups. The quarterly operating profit of both automotive and appliance, commercial and industrial or ACI were the highest in our history. And both achieved double-digit operating profit ratio.
On the Slide #5 and 6, you have [ a picture ] showing our net sales and operating profit year-on-year and quarter-on-quarter.
For Slide #5. The sales of all product groups increased year-on-year, respectively. Especially, the sales of ACI increased most significantly, reflecting the integration of LGB Elettropompe and Secop in the second quarter of fiscal year 2017. As you can see on Slide #6, quarterly operating profits increased in all product groups. As Slide #7 shows, we achieved a record-high first quarter operating profit and had a good start for FY 2018.
On the Slide #8, you're seeing the history of quarterly net sales and operating profit of automotive and ACI, the key growth areas. We have achieved record-high quarterly operating profits in both product groups. Operating profit ratio of automotive was 14.1%, the highest ever in our history. And that of ACI was 10.1%, the highest since the second quarter of fiscal year 2016, when the ratio was 11%.
Based on these good results of the first quarter of fiscal year 2018, we have made an upward revision for the first half and full year of fiscal year 2018 forecasts, as Slide #9 shows.
Our mid-term strategy Vision 2020 targets on Slide #11 remain unchanged from April 2015, when they were set. The short-term trend for the hard disk drive market is illustrated on Slide #12. We have revised upward slightly fiscal year 2018 forecasts for the hard disk drive unit and our hard disk drive motor shipments based on the current situation.
Please see the Slide #13. We are currently experiencing the unprecedented big -- 4 big waves, which are automotive, robotics, energy-saving home appliances and drones. In the automotive area, we are seeing electrification of cars and the introduction of EVs and the PHEVs under considerable scale, backed by the decarbonization trends in many countries. In the appliance area, energy-efficient, brushless DC motors are being applied to wider areas for lower CO2 emissions. In robotics, the decline of the global work age population is creating a huge demand coming not only from manufacturing industries but also from food, logistics and service industries. And the market is expected to grow quite rapidly. In drones area, we have seen acceleration of wider varieties of applications on the back of serious labor shortage in the agriculture and of Industry 4.0 trends. For our previously mentioned 4 big waves, we are going to make investments aggressively and expand our businesses.
Please see Slide #14. On the back of full-fledged introduction of EVs and PHEVs, which is 1 of the 4 big waves, we are currently building a dedicated factory for traction motors in Pinghu, China which play a key role in EV and the PHEV business in China. Also, as illustrated on Slide #15, we are planning to boost the production of motors for next-generation electric brakes and electric-power steerings or EPS in China, Germany, Poland and Mexico. As you see on Slide #16, our global production networks were ready to respond proactively to the customers' needs in each region of the globe.
Please see Slide #17. The market of speed reducers for compact collaborative robots, which are also 1 of the 4 big waves, is expected to grow very rapidly. And our subsidiary Nidec-Shimpo is aiming to increase their production capacity by 40x in fiscal year 2020 compared to fiscal year 2016 by boosting the production of Nagaokakyo in Kyoto area and Ueda in Nagano Prefecture and Subic factories in Philippines.
Slide #18 touches on the motors for air conditioners, which is representative application of the third big wave of power-efficient, brushless DC motors on the back of rapid iteration of inverter air conditioners driven by environmentally-friendly regulations. We are going to quickly boost our production capacities of brushless DC motors in China, Thailand, Vietnam and India.
Please see Slide #19. We acquired an Italian commercial motor manufacturer, CIMA, this month. We can expect to expand our product portfolio through this acquisition, as their main products are motors for agricultural and industrial fans and ventilations, which complements Nidec group's products. CIMA can also expect to improve their profitability by utilizing Nidec group's supply chain and facilities, thus generating both procurement and a cost-reduction strategy. With this acquisition, we are ready to strengthen our commercial motor businesses in Europe and improve their profitability even further.
On Slide #20 are listed all the M&A transactions since the beginning of fiscal year 2015. During this period, 19 transactions, large and small, have been completed, mainly including the ACI and auto areas.
Please see Slide #21. Nidec has been included in FTSE4Good Index Series and FTSE Blossom Japan Index for the first time. Those indexes were created by the global index and data provider FTSE Russell. And the businesses included in the FTSE4Good Index Series and the FTSE Blossom Japan Index meet a variety of environmental, social and governance criteria. We are fully aware of the importance of our actions and information disclosure in ESG-related fields and intended to improve the quality even further.
Lastly, on behalf of the entire management team, I'd like to thank our customers, partners, suppliers for their support and commitment; and as well as our shareholders.
At this time, we'd like to open up the call for questions. Thank you very much for your attention.
Thank you very much, Mr. Sato.
Now we would like to come to the Q&A session. Mr. Sato will be pleased to answer any questions.
[Operator Instructions] We will take our first question from Aaron Rakers from Wells Fargo.
It looks like you continue to kind of have a little bit more of a positive view on the hard disk drive industry demand dynamics. I'm curious, number one, if you could give us a breakdown of your shipments in this most recent quarter between the various different segments, 3.5-inch desktop and 2.5-inch mobile, mission-critical enterprise and then also near line. And then also if you could provide the similar breakdown looking into the current September quarter would be great.
Okay, Aaron. This is Nagayasu. And we shipped 81.0 million spindle motor for hard disk drive, 81.0 million. Among that 81.0 million, we say 2.5 inch, high end, 3.3 million; near line, 12.7 million, 1-2-point-7 million; and 3.5 inch ATA, 29.2 million; and 2.5 inch, 35.8 million. The overall ASP is $5.52. Among the near line 12.7 million, we shipped around 7.4 million in helium, okay? So those are the numbers in the June quarter. For the current quarter, September quarter, we are expecting to ship 83.0 million. Among that 83.0 million, we say 2.5 inch, high end, 2.7 million; near line, 14.1 million. And within that near line 14.1 million, we are expecting around 9 million helium. And 3.5 inch, 26.2 million; and 2.5 inch, 40.0 million. The overall ASP will be somewhere around $5.60. Do you have any other question regarding those numbers?
Yes, just curious on the helium and I guess particularly the near line business. That demand profile continues to look extremely robust. I -- so I guess, number one, do you still believe that you're the only player in the helium market? Do you have 100% market share? Or are you seeing competition start to emerge in that category?
So as you see, overall market, the helium number is almost the half of the total near line because we say we are looking at the total near line number is 14.3 million. Then the helium is, as I mentioned, at 7.4 million. So when the situation comes like the helium occupies over the half of the near line, then we understand the -- a competitor might be coming in with some of the customers.
Okay. And relative to that 13.3 million and, I guess, your expectation of 14.1 million in the current quarter, what's the hard disk drive demand underpinning that? So what's 13.3 million? What is that comparable number looking at your third quarter expectation?
13.3 million...
Yes. You meant -- I'm sorry. How many total -- I mean, how many hard disk drives in near line, relative to your motor shipments, were there in this most recent quarter?
[indiscernible] total market number -- okay, Aaron, total market number, we say [ this out first ]: June quarter, we say 94.0 million total HDD, where enterprise, 5.7 million; near line, 14.3 million; 3.5-inch ATA, 30.6 million, okay; and the 2.5 inch, 43.4 million. Then this September quarter, we are expecting total 97 million hard disk drive shipment in the market: 5.0 million enterprise, 16.4 million near line and the 27.8 million 3.5. And 2.5 inch will be a 47.8 million.
Okay. Final quick question. As we look forward and we start to see the hard disk drive industry move to next-generational technologies beyond 16 terabyte and even beyond that and you start to look at things like heat-assisted magnetic recording or microwave-assisted magnetic recording, do you -- is there any change to your motor business as it relates to those technology transitions?
We understand that most of these technologies is concerning with the health and media. So the situation that one motor per one hard disk drive will no -- not change. So basically we don't think there will be any big change in the HDD business the way forward.
You -- our next question comes from Mehdi Hosseini from Susquehanna Financial Group.
This is David Ryzhik, for Mehdi. Just some quick follow-ups on the HDD business. Regarding the September quarter estimates for 2.5 mobile, did I hear correctly 47.8 million is your estimate? I think that's a 39% Q-over-Q increase from June Q that you're estimating. Is that correct?
Yes, 47.8 million 2.5 inch in September quarter over 43.4 million in June quarter, so...
43.4 million, okay, yes, that's 10%, yes.
Yes, 43.4 million, yes. Basically we understand the demand is coming from gaming consoles, as you may understand.
Right, understood. And the mission critical is declining. Can you remind us, is that typical of seasonality for mission critical? Or is September quarter typically up Q-over-Q? Believe it's typically up...
Well actually we understand the enterprise number in June quarter last year was 5.6, September quarter 5.2. So in that sense, it's coming down, but basically you understand the SSD is coming in this area. So that's going to be a long-term downward trend. That's what we see for the enterprise hard disk drive trends at this point.
Great. And then I guess, on the latest-generation near line, are all 3 customers shipping 14-terabyte helium?
At this moment, we believe just 2.
Okay, understood. When do you think the third would begin shipping, in your estimate?
No, we don't know.
Our next question comes from James Pulsford from Eikoh Research.
Can I ask, first of all, in appliance, commercial and industrial, the margin improvement compared to the second half of last year? Basically acquisitions you've made is very dramatic this Q1. Can you comment, perhaps break that down a bit between companies in the area or just give us a bit more explanation of what caused that very sharp increase compared to half 2 last year?
[Audio Gap]
[ this period or month ]. OP margin improvement [indiscernible].
Yes. Actually the SEI areas, as you know, we acquired European operation from Emerson last year. And it was very low profit margin. For instance, Q4 last fiscal year, that was about 6%. And this first quarter, it has been improved to 10.9%, in the European operation of previous Emerson. And the main reason why we could improve that profitability is maybe 2 reason. One is procurement cost has been reduced. Of course, it depends on the scale of the procurement. And we introduced some kind of a joint procurement system together with those European operation so we could reduce their procurement costs by 10% to 20%. That's the first reason. And the second reason is the G&A cost, which has been as high compared to Nidec standard. So that we have been reducing the headcount in sales area and integrate the sales network into the appropriate number of the sales network. So that's a cost factor, contributes to improved profit margin. And the other one is increase of the sales. In a hard motor area for robotics has been increased, as you know. So it's contributes to improving the operating profit margin in European operation in this year. That's a kind of the base factor in the sharp improvement in OPM, operating profit margin.
Good. And can I ask? In Q1, you were at 10.9%. Is this level sustainable, do you think? Or in fact, would you hope to build to make further improvements? And where are you in terms of reaping the benefits of what you've done?
Yes. I think it's kind of sustainable improvement because we have more opportunity to improve the cost side and increase the sales side. And so of course, it's not kind of a easy thing, but I think it is the sustainable one. Because our target of the OP margin in this area is 15%, 1-5 percent.
Good, okay. Can I ask a sort of -- separate question on a different area? In your small precision motors, I note the sales of other precision motors were a little bit dull. And in your sort of comments in your [indiscernible], you talk about EC motor sales being depressed. And I wonder, could you explain why the DC motor sales were dull? And is that a short-term thing? Or are you still -- I think this is an area where you expect medium-term growth. Could you comment on that, please?
Okay. So the DC motor sales is somewhat front in terms of the year number. Then regarding taking into the account of somewhat the yen depreciation over the dollar, like only 0.7% quarter-on-quarter, so we say the volume is somewhat lower. Number one reason is seasonality. This season, especially a June quarter, is a little bit too early to produce a product for a smartphone, which going to be announced and will be start to be sold in September and October. So again, even compared with the March quarter, this June quarter is somewhat very slow to make some sales for a smartphone products. That's number one. Number two, we -- if you're looking at the reason for a fan motor, the fan motor volume was front. Then what we have seen is currently the fan motor volume is clearly affected by the demand for so-called cryptocurrency. So cryptocurrency, if you're looking at the market, the market of cryptocurrency, bitcoin or whatever, you mentioned that, cryptocurrency, the market is coming down, thereby trimming the demand for the mining. And as you understand, especially in Q1, the March quarter, then the cryptocurrency demand for the mining is affecting total DRAM demand as well as fan motor demand. But based on those -- slow or sluggishness of the cryptocurrency demand, then we don't see so much of the fan motor volume is coming up. So those are the major reasons why we say the DC motor fan as well as the vibration motor for smartphones -- and both were somewhat slow in terms of the sales for the June quarter.
Great, okay. That's great. Can I just -- lastly on this area, is it possible to tell me roughly what the profit level was in HDD motors? And then also make -- I wonder whether -- the slight decline in margins in that area, whether that was the HDD motor side or whether it was the other precision motors that you've just -- we've just discussed where the profit -- the margin slipped there?
So we say the official number of the margin for hard disk drives in the motor is 23.0%, but again, like last quarter -- the March quarter, we mentioned that hard disk drive spindle motor is now on the so-called restructuring. The volume is coming down. The sales is front or coming up, but clearly we have seen a different demand. So as you understand, we are now almost closing our Pinghu factory for spindle motor. And also, we are switching our Subic Philippine factory from spindle motor factory into the -- a reducers, compact reducers, a factory for robotics, as you may understand. Based on these and the restructuring efforts, we have to pay some of the restructuring costs. So taking into -- these restructuring costs we paid during this June quarter, the official number is 23.0% -- but after adjusting those numbers, we say 24.4% was a -- should be a margin for a spindle motor for hard disk drive for June quarter, okay?
And I guess it could be underlying, yes? Okay, in which case, the other precision motors, maybe the margin was down a little bit, but not really much change in that area of business, yes?
Yes. In official part, we say the most problematic thing is the vibration motor was -- become in the red. We say JPY 1 billion OP in the March quarter, but we say 0.4 billion negative OP for the vibration motor, which will have been reducing non-HDD motor margin entire. So if you're looking into these non-HDD motor in the small precision motor area, that can be divided into 2 areas: DC motor fan and the vibration. And the vibration is negative means the DC motor fan is also matched. So we say roughly around 12% is the margin for DC motor fan but a -- something like a minus 4% for a vibration motor for smartphones.
Great. Sorry, very last question. So vibration motors sales were around 10 billion. How much were the level of sales, please?
So the sales within this June quarter was a -- something like a 10 billion.
About 10 billion, yes, all right, okay.
So we were expecting 11 billion, but it ended with 10 billion. So because of that, we are trimming our guidance, which was 60 billion. Now we say 55 billion for the year.
Okay, got you, okay. And the reason that it was in a small loss, it's basically just low -- weak volumes was the problem rather than pricing. Is that correct?
We are restructuring the -- a so-called lineup. Then we are not going to make a -- some of the -- more of that we have [ served ]. So that's going to be the reason that we are reshuffling the product lineup, and because of that, we dropped one line. And that's going to be effecting the change for a -- for the 1-year guidance from 60 billion sales to 55 billion sales.
Our next question comes from Patrick Lau from Cumberland Private Wealth.
I -- just if I can just clarify one thing first. Regarding the -- how big is the contribution of cryptocurrency in terms of revenue and operating income? If you can do that, that will be great. But the main question is really on the appliances and industrial and commercial. Now your current revenue run rate is already fairly close to the figure you have on Slide 24, JPY 600 billion target in fiscal '20. So whereas the other 2 main segments you have a lot of headroom to grow, this area seems to be a strong growth area as well. What is the growth plan from -- for this segment going forward?
Okay, number one question is -- again, would you just repeat the first question?
It's just the contribution of cryptocurrency, revenue and operating...
[indiscernible], yes. So in terms of the volume, maybe the highest quarter would have something like 5 million to 6 million fans. Then today is maybe less than half, okay? Second, your question regarding ACI run rate, okay?
Yes.
Okay. So clearly we believe that the -- after 1 year, we are expecting a new acquisition, okay? We already announced the acquisition of Embraco from Whirlpool. That is a very big number, right, but it's -- we are expecting that to come sometime April, the first quarter next year, okay? So thereby including all of that, clearly at this moment we think that the total revenue from ACI, including those already announced new acquisition, could come over JPY 600 billion, as we mentioned. Because that JPY 600 billion, we are keeping that number over the past 3 -- 2, 3 years. Then we announced a lot of acquisitions. Then including all those acquisition, with some so-called the -- [ a over-growth ] of the current business, clearly we can go over a JPY 600 billion. So we have -- we do not intend to limit ourselves on to the JPY 600 billion. That's the idea, okay?
Okay. So on a organic growth basis then, what should we expect in the next 2 to 3 years in terms of revenue in this segment, and also operating margin?
The April 25, we showed what is our current outlook for a -- each segment, small precision motor, auto, ACI, up to 2020. Maybe you were not looking at that, but if you come back to our website and checking the presentation we made on April 25, you can get that number. But maybe before that, I just try to give you something, like those chart is based on the idea ACI revenue 2020 would be something like 881 billion , 8-81, okay? Is that fine?
Yes.
[Operator Instructions] We will now take our next question from [ Leon Chung ] from [ Baring ].
I got one question -- well, I got a couple of question. The first one is what is your amortization charge current-quarter running rate? And the second question is could you give us some update about the -- within the automotive division. The traction motor related to an update, could you give some updates on that?
[Audio Gap]
Of a so-called CapEx. We do have 2 different things, right, because when we do the acquisition, we have -- we are going to be posting total goodwill. That goodwill we usually will -- we will not amortize, but we have tangible assets and intangible assets that should be amortized. And also you are looking at the CapEx, and we do have tangible assets in our own business and that we have to amortize. So your question is regarding the merger and acquisitions. Or overall what is...
Sorry. No, I thought you had some amortization, although you have IFRS. I thought you had some amortization...
[indiscernible]. Okay.
The amortization of -- in Q1 are JPY 1.3 billion. And the biggest one is about the JPY 8.4 billion, in the ACI. And the JPY 3.4 billion is from automotive and the others. That's a amortization cost in M&A.
Sorry. JPY 1.3 billion was the total amortization cost?
Yes, yes. It is [indiscernible].
Yes, yes, JPY 8.4 billion in the ACI and then JPY 3.4 billion in automotive? You're referring to the quarter goodwill size. Is that what you're referring to?
Okay, those are the amortization cost or tangible and intangible asset we posted when we acquired a operation or company in these auto area and ACI area, okay? Then when we are talking about the OP, operating profit is everything is after the amortization of the number Mr. Sato mentioned, okay?
Okay, okay. Sorry. Just come back to the second question. Could you give us update on the automotive winning more traction motor projects with regards to EV?
Well, as we -- when you are talking about how we are going to compare with the current setup versus 3 months ago or 6 months ago: Clearly we are getting more inquiry. And overall, we see a -- we are seeing more traction business. We are receiving the order in the traction motor business, but the key thing is we are not producing those. The first product in the real traction motor for the EV, we are going to be starting the production in May 2019 in Pinghu. Then you see the picture and the explanation of that factory in...
14.
Slide #14, okay?
Okay. Can...
[indiscernible] we are currently constructing the factory and constructing the lines. Then once we -- it's done, we are going to start the production in May 2019.
Okay. Can I just ask a final question? So although it will be quite difficult to sort of classify your end market, what would you say your exposure to semiconductor-related CapEx and then automation CapEx?
Very, very limited. You mean, what is the -- our shipment in the end market of SPE, semiconductor production equipment, right?
Yes, semiconductor and then automation in general. So I guess robotics, I will say.
That's not -- we will provide a very small number but some -- a so-called wafer-handling robot by Sankyo. But that is going to be something like less than 10% of global sales this time -- at this point. Then other areas, we don't see so much. Because we are making a lot of different components, but the SPE exposure overall, we believe, is very, very limited; and our global sales, okay?
Okay, all right.
Our next question comes from [ Jay Soy ] from [ Point72 ].
Could you please talk about or provide your [indiscernible]? How is the speed reducer market as well as sort of the level of competition given that you're increasing your production capacity quite meaningfully at the moment?
Which market?
Speed reducers.
Reducer, okay. So reducers market, we mentioned in Slide #17. So fiscal year 2016, our monthly production capacity was a very, very small, something like a 5,000 per month. Then we are going to make 200,000 per month by the end of December 2019. That's our plan, okay? So thereby we say the total is something like a 40x on the -- a title of the -- Slide #17 shows. And at this moment, we understand our competitors are going to increase their capacity, but recently they announced the reduction of the order received. So at this moment, we don't know how -- what is the current capacity increase plan for our competitor. But maybe something -- we say, if you're going to be achieving a 200,000 -- no, sorry, 20,000 per month -- sorry, yes, 28,000...
200,000.
200,000, yes, 200,000 per month capacity could be achieved by the end of December 2019. Our expectation is we will become #1 supplier in this market, okay? That's how we can mention the competitive landscape of the speed reducer for robotics, okay?
But sorry, quick follow-up. So given what your competitors are saying, does that concerns you that maybe the industry may say oversupply and may affect your margins?
Okay, the key is the demand is clearly based or depends on the price. So if you're going to reduce the price, we will see the demand is coming up. That's number one point. Number two, even though you may have some concerns of oversupply sometime like a 2018, '19, '20 period, in the long run, we don't care -- we do not have any concern about the -- a oversupply because clearly, Japan, China or overall the global market, what you will see is the shortage of human labor in next 2, 3 years or over 5 years, 10 years. Because that's the -- those so-called production age population is clearly decided by the age. And if you're going to looking at that, that number is coming down, down, down into the future; for example, in Japan, 76 million production age population in 2015. Production age population is defined as the population between age 15 to 65. That population was 76 million in 2015. By 2050, that will be down to only 50 million, 5-0 million, from 76 million. In China, that was 1 billion in 2015. But 2050, 2-0-5-0, the production population in China will be down to 770 million, so 230 million production age population will be lost. Who is going to make up that loss? Clearly, we believe, robots. Then robot requires reduction gear. That's why we are very bullish about our reduction gear business. Did you get that?
Yes.
[ Mr. Abe ], there are no further questions today, so at this time, I would like to turn the conference back over to you for any additional or closing remarks.
Thank you. Then we would like to conclude this conference call. Thank you very much for your participation today. Should you have any inquiries, please do not hesitate to contact Nidec Corporation or your sales representatives at Mitsubishi UFJ Securities.
Thank you, and have a good day.
Thank you. That concludes today's conference. Thank you for your participation, and you may now disconnect.