Nidec Corp

TSE:6594

Earnings Call Transcript 2019-Q3

[Operator]

Good day, everyone, and welcome to today's Nidec's conference call hosted by Mitsubishi UFJ Morgan Stanley Securities. Today's call is being recorded.

At this time, I'd like to pass this conference to Mr. [ Abe ] at Mitsubishi UFJ Morgan Stanley Securities for the opening remarks. Mr. [ Abe ], please go ahead, sir.

[Unknown Analyst]

Thank you very much. Ladies and gentlemen, thank you very much for joining this conference call. This is [ Abe ], General Manager, Institutional Sales Department, Mitsubishi UFJ Securities, Tokyo. Before the meeting starts, please make sure all materials have been distributed. If not, please download the files on 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 third quarter fiscal year 2018 (sic) [ 2019 ] results, future outlook and management strategy.

Mr. Sato, please go ahead.

[Akira Sato, executive]

Thank you very much, Mr. [ Abe ]. Good day, ladies and gentlemen, and welcome to today's conference call. My name is Akira Sato, Chief Financial Officer of Nidec, and I'll be your main speaker for today. Joining me is Mr. Masahiro Nagayasu, General Manager of Nidec's IR team.

For the forward-looking statements, please see Slide #2 of our presentation material for details.

Now I will review the key figures. Please see Slide #3 for the fiscal year 2018 accumulative 9-month results. As mentioned on Slide #4, we have revised down our annual guidance on the back of decline in customer demand beyond our prior expectations and resulting large-scale inventory adjustments, starting from last November. However, besides these turbulent circumstances, we have achieved the goal of high net sales, operating profit, profit before income taxes and profit attributable to owners of the parent for the accumulated 9 month. In order to achieve the revised target, we will make the utmost effort to reduce purchase cost and expenses across Nidec Group companies in order to improve our cost competitiveness.

Slide #5 and 6 are showing the downward revisions announced on 17th this month. On Slide #6, we have made comparative analysis on the figures before and after the revisions, and, as you see below, the operating profit has declined by JPY 50 billion, to JPY 145 billion, which includes each segment decline as well as structural reform expenses of minus JPY 24 billion and the cost reduction of plus JPY 14 billion.

The structures on Slide #7 and 8 are showing our sales and operating profit year-on-year and quarter-on-quarter separately by product groups and exchange rate effect. As you see on Slide #8, the quarterly operating profit has declined by JPY 20 billion, to JPY 31.1 billion, as a result of decline in all the segments and structural reform expenses of JPY 9.4 billion.

Please turn to Slide #9. The hard disk drive shipments in December quarter went lower than the forecast made last October, mainly on the back of decline in the data center demand in China. We continue to see a weak demand in the March quarter, and we have revised down the annual shipment forecast, as you see on the right side of this slide.

Please see Slide #11. We have been repeatedly saying that we are currently experiencing 4 big waves, which are automotive, robotics, energy-efficient home appliances and drones. In addition to these 4 big waves, the next-generation technologies coming from 5G communications are expected to bring us huge business opportunities as the fifth wave. 100x faster data speed gives rise to hardware innovations, which will require new business areas such as thermal management. We will elaborate on the thermal management later as well.

Please see Slide #12. We have started mass production of pop-up camera mechanism. There are 2 types of mechanisms, which are pop-up type and slide-up types, and in both of them, cameras are built in the body instead of the surface of the smartphone to fully utilize the display, and the cameras come out only when they are used. We have already received orders from this mechanism from 2 smartphone manufacturers, and we are currently in negotiations with other major players as well.

Please see Slide #13. We have completed the tender offer for 48% of the outstanding shares of Taiwanese-listed company CCI. The demand for thermal module products, where CCI has strong expertise, is growing quite rapidly, not only in the communications and the IT areas, but also outside of that.

In the communications and IT areas, we have made full fresh entry along -- and along to module products such as heat sink, heat pipe and vapor chamber on the back of the increasing thermal management demand arising from 5G communications.

In addition to these, thermal management is becoming more and more important in other areas such as automotive and home appliance market, where demand for ECU cooling solutions for EVs and water cooling needs for wide groups are very strong, and also in the drone and the robotics market, where solutions for motor heat disposal are required. We will aim to improve thermal management technology and our product development capability through collaboration with CCI and to propose a thermal solution by combining our motor products with CCI's thermal module to customers in a wide range of markets.

Please see Slide #14. The new electric car brand, Aion S, recently unveiled by GAC NE, which is the new energy vehicle arm of Chinese automaker, GAC Motors, will be the first line of the cars to adopt Nidec's fully integrated traction motor system, or E-Axle. And this is our first order received for mass production passenger cars. Weighting only 87 kilograms, our compact and light-weighted E-Axle integrates our traction motor and inverter and gearbox, achieving a power output of 150 kilowatts and maximum torque output of 3,900 newton meters. As is illustrated on the right side of this slide, we are expecting our traction motor-related sales of JPY 100 billion in fiscal year 2022 and JPY 200 billion in fiscal year 2025. And if you simply add up all the inquiries, which are in the final stage of renegotiations with our customers, expected sales could be -- reach close to JPY 500 billion in fiscal year 2025.

Please see Slide #15. As Nidec Group's product lineup has been expanding substantially in recent years, we have unveiled a plan to build buildings for the second quarters of the parent company, the headquarters for Group companies, and a integrated research and development center, in order to accelerate intergroup cooperation and to achieve group-wide sales target of JPY 10 trillion in fiscal year 2030. Certain functions and Nidec-Read's head office are expected to be relocated to this site. Nidec-Shimpo's new research and development center constructed as a part of Phase 1 construction and 500 (sic) [ 5,000 ] employees expected to work at this site eventually. Lastly, on behalf of the entire management team, I would like to thank our customers, partners, suppliers for their support and the commitment as well as our shareholders.

At this time, we would like to open up the call for questions. Thank you for your attention.

[Unknown Analyst]

Thank you very much, Mr. Sato. And now we would like to move to Q&A session. Mr. Sato will be very pleased to answer any questions.

[Operator]

[Operator Instructions] We'll now take our first question from Mehdi Hosseini from Susquehanna Financial Group.

[David Ryzhik, analyst]

This is David Ryzhik for Mehdi. A few if I could. So can you elaborate on what segments of Nidec's business saw the most significant inventory adjustments? And perhaps can you share your thoughts on China demand today? Is it fair to say that you won't have a good read until after the Chinese New Year? And I have a few follow-ups.

[Masahiro Nagayasu, executive]

So in terms of sales, clearly, we were affected in the small precision motor area and the -- also the auto area and the AC area. So those are the very big 3 segments that we -- are affected by a slowing down by Chinese economy. So as you understand that China is the biggest market for the auto, being around the 30% of the global market, then as you may know that the sales, auto sales, in China have been stagnant, especially from July up to December last year, so that's going to be a -- having some impact on that. Also, we have some inventory buildup in the room air conditioner in China. So if you are looking at the global room air conditioner market, China is roughly a 45% of the market. And that market is stagnant, and that's going to impacting us. The small precision motor area, as you understand that we are supplying our motor to the IT product such as the PC, smartphones and others. And there, as you understand that the smartphone market, the China is roughly 30%, 40% of that total market. Thereby, if China demand or China consumption coming down, that's going to be impacting us in the -- in a various manner. So that's our answer for your first question.

[David Ryzhik, analyst]

And as far as the HDD market, would love any estimates around December quarter; industry units by segment and what trends you're seeing into the March quarter by segment? That would be really helpful.

[Masahiro Nagayasu, executive]

So if you are looking at the Slide #9, so we say we revised down our forecast for the record because the record has not been finalized until Seagate or Western Digital, those suppliers, announce the shipment number. But at this moment, we say 87 million was the number for December quarter, and 78 million is the number for a March quarter. Then that 87 million, we say, can be divided into 4 form factors: enterprise, 5.0 million; near line, 11.3 million; 3.5-inch, a 28.7 million; and 2.5-inch, 42.1 million. For -- our forecast for a March quarter, which is 78 million, we say: enterprise, 4.7 million; and the near line, 11.7 million; 3.5-inch, 24.5 million; and 2.5-inch mobile, 37.2 million.

[David Ryzhik, analyst]

Understood. And any sense on what percentage of units are helium for December and March quarter?

[Masahiro Nagayasu, executive]

So helium -- yes, the helium, we say, we do have our own numbers, but using our own numbers, 53% in December quarter -- 53% of near lines were helium in December quarter. March quarter, that might be coming down to 46.7%.

[David Ryzhik, analyst]

Great. And then, last question. Any sense on inventory levels in the HDD supply chain? Any color around that? And was that also a big factor in your change in forecast?

[Masahiro Nagayasu, executive]

Our forecast is based on the number we are given by our customers. So at this point, we do not know what is the reason, but there are several factors. One of our customers is considering a closing down the factory. So thereby, they are making more than the real demand. Then also, as we saw it, the customer's number has been coming down sharply at the end of December. So that means the inventory was there, so that they would cut the new order for components.

[Operator]

We'll now take our next question from Takashi Ito from ARGA Investment.

[Takashi Ito, analyst]

I just had a few questions. One is just -- can I confirm your overall exposure to China? And also update us on how's business outside China -- so Europe, U.S., et cetera? Is that seeing similar order declines, or are those markets okay? And also, just quickly on how long you think the channel inventory will take to normalize, if you think that China has 2 months or 3 months excess inventory? Something like that would be helpful. And lastly, sorry, if you could just elaborate on your structural reform expenses. Just want to understand what kind of restructuring you are doing now because I always think that Nidec is already a pretty lean and well-managed company. So I know that orders are down, but what kind of costs are you able to restructure at this point in time?

[Masahiro Nagayasu, executive]

Okay. First question, China exposure. So overall, if you count China as end demand, we say roughly 40% of our sales are going into China. So as we are looking at China is 40%, if China's demand is coming down, that's going to be impacting us a lot. That's going to be through the auto business as we are selling our motor components to the cars sold in China. And also the home appliances such as the room air conditioner. As I mentioned already, the global market of air conditioner is something like a JPY 14 million, but 45% of that is in China. Then if you're adding up any Chinese room air conditioner makers' shares, that's going to be over 50% of the global market. So thereby, China presence is very large there. And when they're just going down, as you mentioned, then we do have some big impact. Then we mentioned about some of the inventory number, where we say, at the end of September, 40 million inventory, where we believe that 30 million is the appropriate amount. So that means the excess inventory at the end of September was something 10 million and that should be coming down by the -- when the real demand is there. But the real demand itself, we saw that demand is coming down in the December quarter. Thereby, it would take a little bit more time to liquidate all the excess inventory. That is the current situation. So we say, it will take another 2, maybe 3 quarters, but at minimum, 2 quarters, meaning a March quarter and June quarter. Then the final question is structural reform, and Mr. Sato will answer those numbers.

[Akira Sato, executive]

Yes. That is -- we plan the JPY 24 billion of structural reform expenses in the second half. And out of JPY 24 billion, we have 4 factors. First one is the impairment loss by integrating our factories. That is JPY 10 billion. And our write down inventories and the materials, that is JPY 8 billion. And some loss of startup of the new factories, that is JPY 3 billion. And we are going to recognize the [ 8 ] expenses by JPY 3 billion in the second half. So that's a total of JPY 24 billion. So -- and certainly, we should be able to the -- integrate or shift the current factory to other areas. So for instance, the hard disk drive factory, such as Philippines, we are going to shift that factory to reduction gear production. And in that case, we are going to recognize impairment loss of the equipment or machines for heavy slide production. And another one is the European operation. We have many, many factories in the European countries. That's why we are going to integrate the factories into few number of factories. So in that case, we have to recognize impairment loss by integrating factories. So that is structural reform expense.

[Takashi Ito, analyst]

I'm sorry, I missed the first few minutes of the call because I had trouble dialing in. But just to confirm, outside of China, like Europe, for example, is it mostly in line with expectations? Or things are also worse than expectations in markets like Europe, generally speaking?

[Masahiro Nagayasu, executive]

So Europe, we say, it's -- the European situation is a little bit worse than our expectation, but not as much as China. Especially the latter part of December quarter, we saw the European demand is coming down.

[Operator]

We will now take our next question from Aaron Rakers from Wells Fargo.

[Aaron Rakers, analyst]

Just to build on a prior question, I know you mentioned the breakdown of hard disk drive units by your expected shipment levels for the quarter. For the total industry, I was wondering, just to understand, if there's any kind of share shifts going on, could you give a similar breakdown of your motor shipments by those segments for Q4 and Q1 expectation?

[Masahiro Nagayasu, executive]

Okay. So as you understand, also, hard disk drive industry is going through the inventory adjustment. So thereby, shipment number and the production number will be different. So for December quarter, we already mentioned the shipment number seems to be 87 million, as we mentioned, but the real production number will be something like 85 million. And the March quarter, we say 78 million will be shipment number, but because of the inventory buildup, that our forecast for production is something like a 73 million. Then, as we have given our own number in Slide #9, when you calculate, the share is very stable at 85%.

[Aaron Rakers, analyst]

And could you -- would you be able to give the shipments -- your expectation of shipments by, of that 72 million and 62 million motor shipments that you expect in Q4 and Q1, your shipments by 3.5 inches a segment?

[Masahiro Nagayasu, executive]

Yes. What I said is, across the form factor, if you calculate 72 million December quarter, our results, divided by 85 million production, rather than shipment number 87 million, then you can get 85%. So what you need is the breakdown of our motor by form factors?

[Aaron Rakers, analyst]

Yes, please.

[Masahiro Nagayasu, executive]

Okay. So the third quarter, 72 million is something like a 2.5-inch high end, 2.6 million; and near line, 9.2 million; and the 3.5-inch, 26.4 million; and the 2.5-inch, 33.1 million. So that's going to be something like a 71.5 million or 71.6 million, which we rounded up to 72 million.

[Aaron Rakers, analyst]

And how would you expect that to break down in the March quarter?

[Masahiro Nagayasu, executive]

March quarter, we say 62 million, which is, we say in exact number, 61.6 million, where a 2.5-inch high end is 2.0 million; near line, 9.5 million; 3.5-inch, 21.1 million; and the 2.5-inch, 29.0 million.

[Aaron Rakers, analyst]

Okay. I'm just curious, as you look at your forecast and you kind of look at what was previously talked about last quarter, it looks like the most severe reduction that you're seeing is like a 25% or so reduction in your near line expectations. As you look at the near line business and you kind of think about one of your larger customers going through a facility closure, thinking about the end demand, possibly China data center, I'm just curious of how you think -- how you see that potentially rebounding as we look through calendar '19? I think, previously, you were talking about 15 million near line drive shipments, now you're at roughly 12 million in this quarter. Do you think we see a rebound as 2019 progresses? Or is this a new level that we should be thinking about for a while?

[Masahiro Nagayasu, executive]

Okay. So as I clearly mentioned that we are not forecasting using some rules, but rather our number is based on the real number that we are given by our customer. And based on that number, we're going to produce the motor components and we ship, that's number one. Then, if you're going to be talking about the huge difference of the number, which we mentioned, as of October and as of today, so those are clearly the change in the market and then change in the customers' production plan, that's number one. Then, as you may know that, clearly, you look at those number, then the near line is in the midst of the inventory adjustment. So if you're looking back all those quarters, back up 2 years, a year ago, those numbers were something like a 8 million or 9 million. The market number is also 11 million to 12 million. So we are coming back to that level here for the third quarter, the fourth quarter, because of the inventory adjustment. So in that sense, clearly the number in the March quarter last year or June quarter last year; March quarter last year was 14.0 million for a market and the June quarter, 13.6 million in the market. Really, those market was a little bit over the real demand. Thereby, that's going to create the excess inventory then we are in the midst of the inventory adjustment for this December quarter, then the March quarter. Then, probably, we're going to be finishing that by June quarter, because one of our customers said that it may take 2 to 3 quarters in there, and as we announced on the telephone conference, 2 to 3 quarters, and the number is validating that statement, okay?

[Operator]

We'll now take our next question from Barbara Heap from British Airways Pension.

[Barbara Heap, analyst]

I think some of my questions were actually answered in the previous questions, but just very quickly on the 8 billion for the inventory write-downs, could you just explain, on an accounting basis, how you treat those? So is there any possibility, as conditions pick up, that they get written back? So if you could just explain that. And the other thing is, on your traction motor, I'm just wondering if you could just clarify if this is the -- if you have 1 model and this is going into a particular size of car? So will this be used -- with the targets that you've given, will it be used in a particular range of cars? Could you maybe provide more clarity in terms of where you think it's going into the market?

[Akira Sato, executive]

Okay. First question, the write down inventories, our policy is, accounting policy is, we are going to write down the 100% if we have those inventories for 1 year. And for 6 months, 50% should be written down. That's our accounting policy. And we see the current inventory level and probably mainly due to the kind of slowing down -- the sales. That's why we expect the inventory, it would be the -- exist maybe longer than 1 year, we expect. And that's why we decide to write down the current inventory in a particular product. That's -- we are going to do.

[Barbara Heap, analyst]

Are you able to disclose which product, specifically?

[Akira Sato, executive]

In any area, such as auto and ACI, we have very carefully reviewed the inventory level and then we decided that write down inventory in various areas.

[Barbara Heap, analyst]

I'm just wondering, can you tell us what product specifically it is for you? Is it small motors, as an example, or is it a different product?

[Akira Sato, executive]

Yes, for instance, the very old motors for auto. So that's -- we laid off, and also some motors for air conditioners. So that's part of the write down of the inventory.

[Masahiro Nagayasu, executive]

So your next -- your second question is the traction motor, right?

[Barbara Heap, analyst]

Yes.

[Masahiro Nagayasu, executive]

So as you saw in Slide #14, so we are just talking about the Guangzhou Auto and that is the -- first customer, and we are going to start shipping of this E-Axle May this year, so another 4 months. Then, if you're looking at the chart on the right, we are talking about -- we do have inquiries from the -- across the group. So at this moment, we are counting 13 promising customers' inquiry to come up with these numbers, as you can see on the right side. So of the total 13 customer, 8 customers are requesting the system and 5 customers requesting just a motor -- so system and the motor have a different price tag, as you understand. Then that 8 customer who are asking the system shipment, then we say 3 customers are China, 3 customers are Europe and U.S. and 2 customers are Korea or Japan. And the motor customer -- I say 5 customers -- 1 China, 3 American or European and 1 Japan or Korea. So that situation, we have been [ anticipating ] from the October end. So maybe the next time we are going to talk about this, in April, we may follow up and update the situation. Is that fine?

[Barbara Heap, analyst]

Yes, but I'm just wondering, in terms of the -- can you give me some idea of what size of cars these are normally used in?

[Masahiro Nagayasu, executive]

Okay. So we say 150 kilowatt is from something like a middle-sized car up to the middle-sized SUV. So the other EV in China is something like 100 kilowatt and much smaller size. So basically, we understand that most of the passenger cars are somewhere between the 100 kilowatt level or 150. That's going to cover most of those passenger cars. But if you're going to be looking at the larger car, then clearly, you need a much higher output, okay?

[Operator]

We'll now take our next question from Matt Breidert from Ecofin.

[Matthew Breidert, analyst]

I wanted to ask a little bit about what kind of changes you're making in this temporary slowdown period around your manufacturing production activity if you expect to produce significantly less? And if so, what kind of a run rate of production across your different product lines you would expect to see in -- into the final quarter, maybe even into Q1? And then the second part of that question is, do you expect any temporary headcount reduction associated with the slowdown in production?

[Akira Sato, executive]

[Foreign Language] First of all, the production utilization ratio. So as you already know, our inventory level, the ramping up by JPY 49 billion in our inventory by -- as of the end of December. So that we are going to adjust our production volume in March quarter. December, maybe the sales -- our sales having dropped very significantly the last minute of December. That's why we did not adjust our sales in terms of the production volume. That's why the inventory level is coming up. That's why we are going to adjust for the production volume in March quarter. And so related to that reduction of production volume, we are going to -- not going to the -- hire the new employees, probably, in China and the Taiwan and the Philippines, mainly due to the decline of [ planned ] number of shipments. We are going to not hire the new employees in those [ half-utilized ] factories.

[Matthew Breidert, analyst]

As a follow-up to that question, I understand from your accounting treatment of the 50% and 100% treatment of inventories. But could you give us a sense, during this period of decline in orders and demand from your customers, what type of pricing reduction you've seen on a unit basis during this short-term period? Has it been modest, or significant, relative to the decline in volume demand?

[Akira Sato, executive]

For instance, in auto area, maybe shipments to China -- Chinese customers -- that have been down by 30% compared to first half. And ACI area, we have been down by around JPY 40 billion of sales flow -- sales to China. So most of the decline of the sales are coming from China. So maybe we will -- maybe very carefully, it's coming back to a normal level. So currently, the inventory adjustment is picking off, so that probably we should carefully optimize that production level.

[Operator]

We'll now take our next question from Kuni Kanno from BAM.

[Kunihiko Kanno, analyst]

This is Kanno from Balyasny. So regarding the restructuring cost of JPY 24 billion, could you give us the split between the divisions? Also, the effect of JPY 14 billion, could you split them to the division? That's my first question, please.

[Akira Sato, executive]

Breakdown of the 2 division of business units of structural reform expenses, that's your question, right?

[Kunihiko Kanno, analyst]

Yes.

[Akira Sato, executive]

Just a moment.

[Masahiro Nagayasu, executive]

So the total of JPY 24 billion, we say a small precision motor, JPY 10.2 billion; auto business, JPY 6.3 billion; ACI, JPY 5.3 billion; machinery, JPY 0.4 billion; and the electric and optical component, JPY 2 billion. That's going to be making a JPY 24 billion where that we say it's a structural reform cost. So in terms of the JPY 14 billion so called the -- cost cut, we -- as we say that we are now soliciting the ideas and that's going to be making some changes. But the [ misses ] have to be of some idea by segments of JPY 14 billion WP3 impact.

[Akira Sato, executive]

At this point, I have no idea of that.

[Masahiro Nagayasu, executive]

Yes, because it's not really a calculation thing, but rather, as we say, we were doing the whole consolidated basis. Then at this moment, we are soliciting the idea from the all employees, around 100,000 employees in the group to come up with how to cut the cost. So depending on the situation, the number would fluctuate, okay?

[Kunihiko Kanno, analyst]

Okay. Well understood. Should we -- out of from this JPY 24 billion restructuring, should we expect some effect outside of this JPY 14 billion, some effect will materialize into March '20?

[Masahiro Nagayasu, executive]

March [Foreign Language]

[Kunihiko Kanno, analyst]

[Foreign Language]

[Masahiro Nagayasu, executive]

March '20.

[Akira Sato, executive]

Yes, structural reform expenses, of course, this is a onetime. And -- but I don't expect that, that JPY 24 billion restructure reform expenses in March of 2020, as you said. So -- but very small amount to be recognized. We also -- we will continue to structural reform, particularly in the European countries, so that maybe we are going to recognize some small number of the structural reform in fiscal year 2019.

[Kunihiko Kanno, analyst]

Understood. And just wanted to confirm so -- about the definition of the WPR 3. So this JPY 24 million is the whole WPR3? Or is there anything specific other than what you just explained about this JPY 24 billion?

[Masahiro Nagayasu, executive]

Okay. So WPR 3 is the idea of the cost cut, okay? So the cost cut is widespread, maybe starting from the procurement cost, then we are going to reduce the procurement cost and the -- all the other costs to come up with a JPY 140 million, that's number one. Then WPR means that how much we have to cut the cost, then we had to cut the cost to the level where if the sales is back to 75% of the peak then the OP margin should come back. That's what we did in the WPR 1 and 2. Then, when the sales is back to the peak, then the margin should come up to a double. So if you -- by setting those targets, you can calculate how much fixed cost you have to cut and how much variable cost you have to cut at whatever the stage of the rebounding. So the 3 -- I mean, the common thing to the 3 is, all the situation, we say, is the inventory adjustment. That means the sales will be back eventually. We do not know how long will it take, but we say, we believe that the sales will be back. Then when the sales be back, then we have to improve our profitability. As I mentioned, when the sales be back to 75% of the peak, that should be an original OP margin, but if the sales back to 100%, that's be double. Then, based on that assumption that we calculate how much fixed cost should be cut, how much variable cost would be cut, then we're going to solicit all those items to cut the cost from across the all employees, then try to materialize that. So all the cost cut type of endeavor will be included in this WPR 3.

[Kunihiko Kanno, analyst]

Great. And is it fair to say this WPR 3 is more difficult than 1 and 2 just because you are so lean? Or is it going to be the same because your company size has gotten a little bigger?

[Masahiro Nagayasu, executive]

[Foreign Language]

[Akira Sato, executive]

It might be simpler in WPR 3 compared to WPR 1 and 2 because we've got a lot of companies we acquired in the last couple of years, so that maybe we're very much focused on how to reduce the costs of newly acquired companies. That's very much simple and it's going to be contributing the improving our profitability or OP margin in Nidec total.

[Kunihiko Kanno, analyst]

Understood.

[Masahiro Nagayasu, executive]

You're good?

[Kunihiko Kanno, analyst]

Yes.

[Masahiro Nagayasu, executive]

Okay. The 1 was the -- a March quarter 2009. The WPR 2, March quarter 2013. Then this WPR 3, March quarter 2019, okay? So clearly, if you're looking at those years and date, our company are all different -- not all different, but many of the companies are new. And also, we do a lot of different business.

[Operator]

We will now take our next question from Dong Zheng from Ariel Investments.

[Dong Zheng, analyst]

I have a few questions on the E-Axle and then one on Shimpo. On the E-Axle, just curious to understand, in terms of -- is it your systems capability in terms of integrating the inverters, motors, et cetera, as to your key competitive edge? Or is it the motor as the key component within that system? And then the second part of the question is, when you look at the long-term durable competitive advantage in E-Axles, is it the design side that's more durable, or the manufacturing side? And then lastly, just if you could verify if it's like IPM motor? And then if it's in-house permanent magnet technology or a third party? And then I may have 1 or 2 follow-ups.

[Masahiro Nagayasu, executive]

Number one. Okay, this the system combines the motor, inverter and gear. So for these 3 key components of this E-Axle, the system, we are going to make everything in-house. Maybe the very first batch that we are going to ship to the Guangzhou Auto, then we may use some of the outside supplier for an inverter and a gear. But eventually, we have plan to make everything in-house. That is the answer for your first question, okay? The second question, where our competitiveness lies? Our competitiveness lies with the very small and compact and powerful motor system. So by integrating a motor, inverter, gear to one, then we -- our system is the lightest among the -- all these so-called E-Axle or traction motor system in EV or PHEV. That's going to be making we are little bit different from the other suppliers. Then the third, we were talking about the motor systems, clearly, we said this is the IPM. Is that fine?

[Dong Zheng, analyst]

Yes. And then, 2 follow-ups, if I may. Just in terms of -- some customers may want to purchase the system versus the motor, just curious in terms of the economic difference between motor versus system to the company? And then, what do you see as potential substitutes for the -- to the IPM motor in the near future or distant future?

[Masahiro Nagayasu, executive]

Okay. Number one, every auto car maker is thinking that the EV or PHEV market will expand very, very fast. So thereby, no car maker can afford to make everything in-house. Then also, if you're looking at this market -- EV market, PHEV market -- it will become 10x in next 7 years or 8 years; no car makers can afford to make all that in-house, because that's very risky, right? So thereby, they need some partners outside. So we'll try to become the partner. So we do not care whether those system or our business is our own designed ones or customer-designed ones, we don't care. And that's where we clearly we say our [ strengths ] will be in the production side. So as we do have today over 220 factories in 43 different countries, wherever our customer designate, we can make the system in any country they want. That's the key strength that we have. So it could be our designed system, as I mentioned or it could be our customer design, that's fine. Does this answer your question?

[Dong Zheng, analyst]

Just -- I guess, just coming back to your earlier comments that having all 3 key components -- the motor, inverter and gear, largely to achieve the lightest weight possible for the same power output. But if customers sort of just integrate your motor into their own design, doesn't seem like it would offer that light advantage -- weight advantage, and it seems like a pretty significant weight advantage that you're offering here in 3 in 1. So just, I guess, are there cases today, where, as you are talking to customers, whether they want to just incorporate motor or do mass majority of them want the systems?

[Masahiro Nagayasu, executive]

So as we answered that there are 13 customers; 8 customer wants system, 5 customer want the motor. So there are lots and lots of different customer want different part. So we're not just offering this E-Axle the system. And also the system can be this system or any other system, right? So we're offering the solution to the car makers what they want. So our product, we're going to sell under this traction motor or motor system may be different by customer by customer. That's something we just try to make clear. So if the customer design those motor or system, that's so called a built to print. And we are going to take that type of business also, okay?

[Dong Zheng, analyst]

Understood. And then two small ones on that topic...

[Masahiro Nagayasu, executive]

But the key thing is, this kind of traction motor system could become a standard product, then the key is volume. If you have the volume, then you can offer more lower cost. Then lower cost -- more volume and lower cost would making a standard, and that any manufacturer of that standard with a large volume as wherever the customer wants, any country or region, that's going to win this competition. And your question regarding the pop-up?

[Dong Zheng, analyst]

And the -- is it -- you have the in-house permanent magnet technology. And then whether if you were to move beyond 150 kilowatts, would that -- would this capability of lightest product be different or...

[Masahiro Nagayasu, executive]

So basically, we buy magnets from outside. We are not making magnets, okay? But those are the components. So if we -- if you are looking at the any key component, which is comprising the motor, that's going to be steel, copper, aluminum and magnet. Then we buy those 4 key components or 4 key materials like a low material base, okay? Then we are making all those components out of those materials then put into the motor. Then we have a inverter, and we have gear and we set everything and then we can come up to this system, E-Axle. Okay?

[Dong Zheng, analyst]

Okay. And then just quick one on Shimpo. Originally, you have ambitious plan to reduce your capacity in addition, is that still on track? And if you feel the need to maybe lower that or maybe postpone some of the further additions, how easy or difficult can that be achieved?

[Masahiro Nagayasu, executive]

Okay. Number one, the market is coming down very sharply from the last year. That is, like March quarter, it was great, but now June quarter, it become half. September quarter, it again became half of that, then it became now half. So if you're looking at the market of the industrial robot market, the reduction gear demand is coming down by 85% from the quarter last year. Those are the order level today, okay? So with that situation, we are not really -- we cannot escape from this low demand in the industrial robot market as of today, okay? So thereby, in the long run, we believe that it's coming. But in the short term, it's in the worse situation as of this quarter. But in the long run, as we say, we are -- we're believing the demand is coming up. So as far as we can, we can keep our CapEx plan. That'd be our current thinking, okay?

[Dong Zheng, analyst]

Got it. Just if you would feel the need to postpone or lower that number, how easy can it be done?

[Masahiro Nagayasu, executive]

Well, the difference -- no, no, we have some financial resources and all the other resources. So if you -- maybe we aren't going to hire the workers, because we -- there is no product that we make, right? But if we will be ordering the machine, then we may take those machines, because we cannot cancel it, for example, or if we cancel, the next time we will not know when we can buy those machines. So for some of the contracts that we have already make, we just try to honor those contracts, but clearly, we are not going to be starting the production because the order level is very low. But still, we are waiting. Whenever the order comes up, we were the first to catch up that demand. That's the idea.

[Operator]

We will now take our next question from Jon Greenhill from Baring.

[Jon Greenhill, analyst]

Hopefully, 2 quick questions. Firstly, on Slide 12, the ramp of the camera mechanism. Firstly, your ramping sort of for now into next year and beyond, what can you say about margins during that ramp and the ultimate margin that you think you can get on the camera mechanisms? And my second question is just on HDD, there's obviously a lot of technical change coming in the HDD market and more powerful kind of technologies. Are you a bit more hopeful that, that will help drive some order recovery as we go through this year and next in the HDD market?

[Akira Sato, executive]

Margin for pop-up, it depends on the volume, but we are going to start the mass production from this month. And it's going to be coming out to get [indiscernible] of the production [ room ] by March this year. And in that case, maybe, margin for pop-up -- pop-up mechanism -- would be around 15% to 20%. And we're expecting more customers from the other smartphone manufacturers in the Korea or China, so in that case, probably we will be able to achieve around 20% of the margin, with very high volume of production.

[Masahiro Nagayasu, executive]

Okay. Your next question was the hard disk drive and look at Slide #9. Clearly, we revised down our forecast for the market as well as our own spindle motor. Okay? But if you're looking at the current market, maybe December quarter results, so if you're looking at that, the total market is down, but there are 2 different things, okay? The near line and the enterprise server, still there is an opportunity for the growth in the future. Clearly, the near line, as we mentioned, that we see this as inventory adjustment. But the 2.5 and 3.5 might be a little bit different, because SSD penetration is a little bit more than expected and that's going to reduce the hard disk drive demand. So in the long run, while we say maybe 2.5-inch may not be viable, but 3.5-inch would remain, but near line is coming up. So to see that, clearly, we have to see the ASP up, because the mix is going to change. So we have to say a total revenue might be down, but not as much as this time because it's more gradual down than the growth of near line and also a high ASP on the near line would be compensating some loss of the 2.5 and 3.5. That's how we see the future. And at this moment, it's sort of difficult to say how much would be for next year, but clearly, we say the 5G situation would require more so high-capacity hard disk drive. The more high-capacity hard disk drive requires the helium hard disk drive, where those helium hard disk drive will give us more value on our current spindle motors. That's how we see this market. Does this answer your question?

[Jon Greenhill, analyst]

Yes. That's great.

[Operator]

We'll now take our next question from Hiroshi Kamide from RoboCap.

[Hiroshi Kamide, analyst]

With respect to the restructuring cost of JPY 24 billion, you've given us the details of what they are for and for what divisions; could you please give me an idea of, by geography, where a lot of impairment costs have gone in with regard to your factories? I understand you have lots of factories worldwide, and I was told that a lot of the heavy lifting for restructuring would be done mainly in Europe. Has that been done? Or is there still much to do?

[Akira Sato, executive]

Geographically, location. First of all, the spindle motor or small precision motor area, that's mainly in Philippines. That's because hard disk drive has been down and then we have to shift our factory for hard disk drive to reduction gear. So -- or maybe we are going to integrate that Philippines operation to [ hydel ] operation, that's we have to do in order to incorporate that decline of the shipment volume or production volume in the hard disk drive, so that in small precision motor area, we are going to spend the restructuring reform expenses in Southeast Asia. And ACI, I'm saying, in European countries, maybe we acquired the European operation for Emerson last year -- early last year. And we're going to integrate some factories to other factories in European countries. So maybe we are going to spend the structural reform or impairment loss in European operations.

[Hiroshi Kamide, analyst]

So do you think you would have to do more activity such as restructuring in Europe? And do you think you would like to shift more production to outside China, for instance, like to Mexico?

[Akira Sato, executive]

Yes, actually -- maybe, we are going to add the production capacity in Mexico on top of current production capacity in China. That's our plan because maybe China is kind of biggest market in the global market. So that maybe we have to keep the production capability or capacity in China even though, right now, in digital, kind of, demand has been down. So that any shift to Mexico means maybe we're going to add production capacity in Mexico on top of current capacity -- production capacity in China.

[Hiroshi Kamide, analyst]

Understood. And so just overall, sorry, for sort of the CapEx plans going forwards for March 2020, with additional capacity plans such as Mexico, do you think CapEx will be flat going forwards? Or slightly up? Slightly down?

[Akira Sato, executive]

I'm saying, it's going to be flat, maybe the JPY 150 billion in fiscal year 2019.

[Operator]

We'll now take our next question from James Pulsford from Eikoh Research.

[James Pulsford, analyst]

I've got one follow-up question, if I may, just on the HDD area. And I think the overall average ASP there fell in dollar terms quite sharply, Q -- sort of Q3 relative to Q2, was that mix or price? Is it possible to sort of break that, give the total and then break it down by area, so you can understand what's changing and why?

[Masahiro Nagayasu, executive]

Okay. That change clearly by mix. So usually, when you are looking at the revenue share of the server, that means a 2.5-inch high end and near line, okay? So among the total revenue, those 2.5-inch high end and near line share was something like a 44% in September quarter, but down to 38% -- 38.3% in the December quarter. So that means the mix deteriorate, then ASP is coming down. So ASP for second quarter, $5.49, and December, $5.21. So clearly, which I said was those are inventory adjustment. The near line number came down, especially the helium number also came down, that's going to be making the ASP down, and thereby, the margin down, okay?

[James Pulsford, analyst]

Okay. Do -- you don't, by any chance, have the average ASP by area -- near line, 2.5 -- just for the comparison view, or not?

[Masahiro Nagayasu, executive]

So when we are looking at those ASP of the each form factor, like a 2.5-inch high end is $7.73, which is higher than the September quarter. The near line, $13.20, which is lower than $13.36 in September, then 3.5-inch is a little bit higher by $0.03 and 2.5-inch is something also $0.03 higher. But overall, if you're looking at the same form factor quarter by quarter, most of those numbers up, only a near line ASP down. But the most important thing is, not the form factor by form factor, but the mix is changing. That's going to be lowering entire average selling price from $5.49 down to $5.21.

[James Pulsford, analyst]

And the decline in the last couple of quarters in the helium percentage, that's just inventory adjustment rather than any change in trend mostly?

[Masahiro Nagayasu, executive]

Yes, as we understand that helium would be a majority already, but almost the entire hard disk drive will be using helium because the new technology coming, like MAMR or HAMR, the microwave magnetic recording or heat assisted magnetic recording. For both those recording, the helium would be better to be used rather than the normal air. So thereby, entire hard disk drive could going down to the helium drive in the future. So that's going to be another technological change. It may cost, but still that's going to be giving us a higher ASP. That's what I'm saying. Okay?

[James Pulsford, analyst]

Okay. And lastly, is it possible, for Q3, to give me the hard disk drive motor margin? And also, perhaps, a pre-restructuring margin, the underlying one, that would be very helpful.

[Masahiro Nagayasu, executive]

So we -- as we said, as we do take a so-called structural reform cost. So on a nominal basis, the hard disk drive for -- a spindle motor for a hard disk drive is something like a 20.8%. But adjusting the onetime factor, that's going to be 22.9%.

[Operator]

We will now take our next question from [indiscernible] from JPMorgan Asset Management.

[Unknown Analyst]

First question I have is, I understand that you plan to take JPY 24 billion of restructuring costs for the second half of fiscal '18. Do you expect that some of these will recur in fiscal '19?

[Masahiro Nagayasu, executive]

[Foreign Language]

[Akira Sato, executive]

As I already mentioned, I don't expect the JPY 24 billion that big amount of the reforming, structural reforming expenses will be occurred in fiscal year 2019. But on the other hand, we have to continue some restructure the European operation. So that maybe you -- we will see some amount of that restructuring reforming expenses. For instance, in Q1, June quarter or September quarter last year, around JPY 2 billion of the restructuring reform expenses. So that maybe I expect that level of the expenses would be occurred in fiscal year 2019. But I don't expect JPY 24 billion of the -- that big amount of the expense is going to be occurred.

[Unknown Analyst]

My second question is in regards to the plan to reduce costs by JPY 14 billion in fourth quarter of fiscal '18. So if we assume that the weak condition persists in fiscal 2019, will there be any scope for further cost reduction in addition of the JPY 14 billion?

[Masahiro Nagayasu, executive]

Okay. So we are always trying to reduce our costs as always, that's number one. But the current situation is a little bit serious, so that we are going to set a very clear, so-called, numerical target, right, and how to achieve it. Then everybody has to think about how to achieve it and everybody will contribute some idea how to do it. Then we are going to achieve whatever the targets are. So those are so-called WPR. So we're going to -- we're not -- it's not only this quarter and next, but it's going to be a more day-by-day or day-to-day type of effort to reduce our costs. But for -- at this moment, we just try to say this is a little bit new, so-called approach, involving every employee and soliciting the idea to cut the costs from every employees, then maybe checking the cost reduction situation by those new WPR target. Those are a little bit different from the day-by-day or day-to-day cost cuts. You understand what I'm saying?

[Unknown Analyst]

Yes. My next question is in terms of -- based on the expectation that you see right now for fiscal '18, does it have any impact yet on what you have for midterm plan through fiscal '20?

[Masahiro Nagayasu, executive]

So we are keeping our commitment to deliver JPY 2,300,000,000,000 OP. So saying that, clearly, we have to admit the current number -- or fiscal year 2018 number is going to be short to our original expectation. So thereby, in the long run, we have to, maybe, accelerate the growth more into '19 and '20, only 2 years. Then some of the measure we can take is, as you understand that, that we have been using this measure in a long -- for a long time, M&A. So clearly, we were looking at 7%, 8% of volume growth for '18, '19, '20, every year. Then the difference between our target 15% and 7%, 8% volume growth should be done by M&A. Now we say this 7%, 8% volume growth is coming down to, say, for example, 4% to 5%. So thereby, we have to fill the gap by maybe raising our M&A target. That's one way that we could keep our promise to give you JPY 2,300,000,000,000. But the reality, fiscal year '18 number might be a little bit short of original expectation. Did you hear that?

[Unknown Analyst]

Yes. My last question is -- if I may, my last question is, in regards to the plan that you said you want to keep the fiscal '20 midterm plan, and you may need to pursue more M&A to keep the target. In terms of your financial metrics, credit metrics -- and you also, I think, in the midterm plan, you mentioned you want to maintain financial soundness and your rating right now is A3 by Moody's. What's your thought on the rating? Do you intend to keep this rating?

[Akira Sato, executive]

Yes, sure. Maybe we're going to improve that rating. And probably, if we make some more M&A, we don't need that to make JPY 150 billion of capital expenditure anyhow. That's why we will keep the our financial position very healthy. That's our plan. That's why we'll be able to keep or improve the -- our rating, even by Moody's.

[Operator]

We'll now take our final question from Mehdi Hosseini from Susquehanna Financial Group.

[David Ryzhik, analyst]

David Ryzhik for Mehdi, again. Just 2 if I could. Regarding the HDD factory closure of one of your customers, was that impacting the near line inventory, or the client HD inventory? And I had a quick follow-up.

[Masahiro Nagayasu, executive]

Client.

[David Ryzhik, analyst]

Client, okay. And just broadly speaking, on overall China demand across your segments, in your conversations with customers, is the expectation for demand to rebound after Chinese New Year? Are they seeing any signs of benefit from some stimulus measures from the Chinese government? I'd just love your thoughts on what you're seeing from customers in your conversations with customers.

[Masahiro Nagayasu, executive]

Okay. So still the overall situation is not so clear and it's not so much transparent. But what we can say is maybe some signs are there that some of our customer is, maybe, starting to order some products more than we expect. So that could mean that they might have some idea that the government -- Chinese government may take some action. Then, expecting that, they might be starting to build up inventory or starting up some higher production level, we don't know. But still, those are very small signs, but still not there. Okay? Does that answer your question?

[David Ryzhik, analyst]

Yes, it did.

[Operator]

Mr. [ Abe ], there are no further question today. So at this time, I'd like to turn the conference back to you for any additional or closing remarks.

[Unknown Analyst]

Thank you. 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 very much, and have a good day.

[Operator]

Thank you. This concludes today's conference. Thank you for your participation, and you may now disconnect.