Nidec Corp

TSE:6594

Earnings Call Transcript 2020-Q3

[Operator]

[Audio Gap] [ conference ] call, hosted by Mitsubishi UFJ Morgan Stanley Securities. Today's call is being recorded. At this time, I'd like to pass the conference to Mr. Kiyomi at Mitsubishi UFJ Morgan Stanley Securities for opening remarks.

[Akihiro Kiyomi; Mitsubishi UFJ Morgan Stanley Securities;Deputy Head-Equity Group, analyst]

[Audio Gap]

[Unknown Executive]

[Audio Gap]

General Manager, Institutional Sales Department, Mitsubishi UFJ Securities. Before the meeting starts, please make sure all materials have been distributed. If not, please download the files on Nidec's home page right now.

Now may I introduce Mr. Akira Sato, Executive Vice President and Chief Performance 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 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 Performance Officer of Nidec and the -- your main speaker today. And 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 2019 accumulated 9-month results. As shown on Slide #4, the sales of both accumulated 9 months and December quarter have achieved record high. The accumulated 9-month operating profit went down by 24% year-on-year due to the additional R&D and start-up costs for traction motors, which are in high demand, and to the additional acquisition-related expenses and we have revised down our annual forecast.

On Slide #5 and 6, you have pictures showing the net sales and operating profit year-on-year and quarter-on-quarter, respectively, by product groups with exchange rate effect, eliminations and structural reform expenses.

As you see, upper chart on Slide #6, the net sales went up mainly due to an increase in automotive segment. And whereas, the lower chart of the operating profit is showing a decline principally due to the decrease in automotive and appliance, commercial and industrial, or ACI.

Despite this operating profit decline, as illustrated on Slide #7, operating cash flow has increased Q-on-Q and remains quite strong.

As you see, Slide #8, the annual guidance has been revised down. The net sales in the March quarter is expected to be lower Q-on-Q and operating profit higher Q-on-Q.

Please see Slide #11. We have decided to build a new facility in Hanoi, Vietnam in addition to Chongqing and Kunshan in China in order to meet 5G-driven cooling demand. This factory will be located in Hoa Lac Hi-tech Park in Vietnam and is expected to start production from April 2021. We are aiming to achieve JPY 100 billion sales in fiscal year 2022 in the thermal solution business by aggressively tackling the cooling demand in the automotive, smartphone and IT-related areas.

Please see Slide #12. We forecast that as electrification of automotive progresses, in 2030 internal combustion costs will be reduced to half of the entire market and the remaining half replaced with mild hybrid, electric vehicle, plug-in hybrid and hybrid vehicles. As all of those non-internal combustion cars require electric motors and [ presently ] a large market is expected to be created in favor of us going forward.

Please see #13. While Chinese EV market, electric vehicle market, is slowing down mainly due to the government subsidy cut, Chinese automaker GAC's electric vehicle Aion series, which is incorporating Nidec's E-Axel, is increasing itself quite rapidly. And the accumulated sales volume has already exceeded 33,000 units, with December sales approaching 9,000 units.

Please see Slide #14. We formed a joint venture for traction motors with French automaker PSA Group in May 2018. And PSA announced last November that this joint venture's plant in Trémery, France, will start production of electric powertrain. This plant is expected to have production capacity of 120,000 units in 2020; 180,000 in 2021; and eventually, able to have 900,000 annual production.

Currently, there are only 4 electric vehicle models available from PSA Group. However, all of their models will be available in all electric or plug-in hybrid version by 2025.

Please see Slide #16. OMRON Automotive Electronics that we acquired last October, has been renamed as Nidec Mobility and the full-scale post-merger integration, or PMI, is underway. Nidec Mobility can offer 4 product areas, which are: active safety, electric power steering, power-supply control and body control. And we can combine them with Nidec's automotive motors and our subsidiary Nidec Elesys' ADAS products to create new businesses through modularized and system products.

Please see Slide #16. We have renamed [Audio Gap] the Brazilian compressor maker, which we acquired last July, to Nidec's Global Appliance Compressores e Soluções em Refrigeração. Our U.S. subsidiary Nidec Motor Corporation is leading its PMI, which is making steady progress as we are already seeing improvement in their operating profit.

Please see Slide #17. Last December, we completed the acquisition of 90% of ownership of Roboteq from its owners through Nidec Motor Corporation, like in the case of [ in Laco ]. We are always trying to strengthen our presence in some key future growth drivers, including robotization. To become a global leader too in these markets, we are focusing on expanding our ability to provide packaged solutions to all our served markets as demand continues to increase for convenient, modular operations.

Roboteq is a leading designer of ultra low voltage drives for the rapidly growing automated guided vehicle or AGV market. Roboteq's products are used in AGVs for warehouses, security and greening agricultural use. Through the acquisition of Roboteq, we will be able to act as a single vendor that can offer full motor control system support to AGV customers.

Additionally, the integration of Roboteq's engineering team into the existing Nidec motion control and engineering will further strengthen our R&D capability.

Please see Slide #18. Our strategy for a decarbonized work focuses on design and manufacture of environmentally superior motor drive products that enable [ endless of ] applications to outperform the most stringent energy efficiency and carbon emission standards in any industry we serve.

One such example is the development of E-Axel, a traction motor system designed to help electric and plug-in hybrid vehicles run with near-0 direct emissions. In addition, our [ home ] -developed cooling system gives E-Axel extra compactness, allowing automakers to design lighter and less resource-reliant vehicles. We expect this issuance of green bonds, whose proceeds will be used to invest in R&D activities and capacity building associated with electric vehicle traction motors, to generate an increasingly bigger source of funding necessary to diversify our investor bases. And we hope to become part of a thriving bond market and sustainable society.

Lastly, on behalf of entire management team, I would like to thank our customers, partners, suppliers for their effort and commitment as well as our shareholders.

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

[Masahiro Nagayasu, executive]

Thank you very much, Mr. Sato. Now we'd like to turn to the Q&A session. Mr. Sato will be pleased to answer any questions.

[Operator]

[Operator Instructions] We now have one question from Aaron Rakers, Wells Fargo.

[Aaron Rakers, analyst]

I know you guys don't -- over the last several quarters, you haven't provided any kind of outlook commentary on the hard disk drive market. But given we're still talking about 10% of the business, I'm just curious of -- given the continued declines that we've seen in that business, I'm just curious of how you're thinking about the hard disk drive business going forward, what are you -- what's the current demand profile look like. And I guess in particular, as hard disk drives continue to mix, what you're seeing in terms of high-capacity nearline hard disk drive demand in the market currently.

[Akira Sato, executive]

Okay. So the total volume is coming down, as you see in our shipment number. We are not really putting on our shipment number on this slide, but our shipment ended for this December quarter, 61.8 million.

So if we're going to be looking at the form factor by form factor, December versus September quarter, a 2.5-inch high-end increase and the nearline increase, but 3.5-inch is also increased but 2.5-inch is down. So that's how we are looking at the volume. And especially, we thought the gaming console demand is clearly coming down in December quarter, because the next year or this year the major game console makers are planning to update their gaming consoles. And as you understand that they will be using the SSD, not the HDD.

But not just that, but because of the more change is expected for this year, the total sales of the game console was really down for this December quarter. And that will be pushing down somewhere like a 6, 7, maybe -- oh, sorry, around JPY 5 million out of a total of JPY 7 million down in the market. So clearly, we saw the number in 3.5- and 2.5-inch is something down in the December quarter, and especially in the March quarter and onward, we are looking at a slightly slower -- I mean the lower number for 2.5 and 3.5.

So instead, the nearline that we are looking at very high growth and where Mr. Nagamori mentioned in today's meeting was something like a 30% increase from a December quarter to the March quarter. Then at this moment, that we are looking at maybe that 30% growth in March quarter would continue into April quarter, not the 30%, but the 30% higher range may be kept into a June quarter. So this is the -- basically, something that we can say about the trends on the HDD.

[Operator]

[Operator Instructions] We can now take our next question from Yoko Sakai from Harding.

[Yoko Sakai, analyst]

I have 3 questions. Could you give us an update on your progress in the appliance, commercial and industrial motors? I know that Mr. [ Yoshimoto ] is working on it. I know it's only been a quarter since you last talked about it, but if you could share a little bit more there, please?

[Masahiro Nagayasu, executive]

Update on traction motor?

[Yoko Sakai, analyst]

No. The appliance, commercial and industrial.

[Masahiro Nagayasu, executive]

Commercial, ACI. Okay. So overall review of the ACI situation, right? Am I right?

[Yoko Sakai, analyst]

Yes, please.

[Masahiro Nagayasu, executive]

Yes.

[Akira Sato, executive]

Yes. Actually, maybe let me explain first the operating profit margin in the ACI. December quarter, it was around 5.6% to 5.9%. It's coming down from 8.8% in the September quarter. So one biggest factor is decline of the sales in industrial area, which as you know, the industrial area, that market has been declining anyway. And that's why we decreased the kind of the top line sales number to robotics maker with [ farbo ] motor and also some industrial manufacturer with a motor [ core ] or compressor. That's kind of the biggest one. And in the March quarter, it's going to be up, to around 8% to 9%. [ What ] is, of course, the sales that we would want because we have the -- receiving the more -- the order intake in December quarter than last quarter. That's why it's going to be connected to our system.

And on the other hand, we are now restructuring there in the [Audio Gap] fixed costs. And then we are now spending our money to -- for restructuring -- reforming in the ACI area. So that's a reduction of fixed cost that will materialize March quarter. That's why the operating profit margin will be up around 8% to 9% March quarter. That's the current situation.

[Yoko Sakai, analyst]

Okay. Then also on the power division. What was the -- where did you -- where did things come in below expectation?

[Masahiro Nagayasu, executive]

Okay. What is the biggest reason we made a downward revision?

[Yoko Sakai, analyst]

For the second time, yes, please.

[Masahiro Nagayasu, executive]

[Foreign Language]

[Akira Sato, executive]

Yes. The biggest -- the reason is we are now spending a lot of money for R&D costs and also start-up costs for traction motors. We are getting a lot of order intake from the -- our customers for the traction motor. That's why we are spending more buildup costs to accept this kind of order intake.

[Yoko Sakai, analyst]

Which is the same as the reason at the second quarter. So you're saying that you didn't expect -- I mean you had already changed your assumption 3 months ago, but you're saying that this is a lot more than then, or that you didn't foresee this?

[Masahiro Nagayasu, executive]

It [ depends ].

[Akira Sato, executive]

Yes. We are getting more and more orders than we expected at [ sim auto ]. And then as you already know, the -- we have now accumulated backlog. That is 10 million traction motor by 2025.

[Masahiro Nagayasu, executive]

Did you get that? So we said 4.4 million -- 4.45 million the last time that we mentioned the order -- total order backlog. This time, we said the total order backlog amounts up to 10 million and over. So clearly, total order level is increasing even the market is weakening in everywhere in the EV. So everybody is very bullish for the future of the EV. But the current market is something down, as you understand. So as the order delivery is coming up, then we have to spend more money for a future R&D and start-up.

[Operator]

Next question comes from [ June Kokao ] from MUFG.

[Unknown Analyst]

Can you explain about the China situation? Is it improving? Or are you still having the difficulty? And then another question is OMRON acquisition. How long would that take on amortization? It's such a large acquisition. Will it take longer?

[Akira Sato, executive]

China situation, it's still continuing, very much so, market but on the other hand made a new market for electric vehicle or those kind of changes is bottom-up -- or bottom out. That's the situation. So it varies from market to market even in China. But overall, maybe average market trend is very much slowing. Yes, that's the current situation.

And OMRON, really at this point, the OP margin is around 3%, which is lower than we expected. But our -- we are expecting that OP margin will be up to be around 10% March quarter, mainly due to the joint procurement of electrical component or the other component we -- they procure. That's -- it will take maybe 6 months or 1 year to come up with expected OP margin even in OMRON -- Nidec Mobility. Is that fine with your question?

[Unknown Analyst]

Yes. May I ask one more question? [ Zic-san ] is joining. Can you give us what's going on, an update on the news on [ Zic-san ]?

[Akira Sato, executive]

[ Zic-san ], he actually joined Nidec already. But still, he is an adviser, but his expertise is aircraft engineering, as you may know. And maybe we are now the increasing production capacity even for traction motors or the other new product, which means we have to reorganize that increasing production capacity and then we have to produce the -- those new products with timely manner and also high quality so that maybe we will get the big weapon to improve ourselves in the production engineering area.

[Operator]

[Operator Instructions] We can now take our next question from Brad Snyder from Egerton.

[Brad Snyder, analyst]

Congratulations on the order book improvement. I was wondering if you could give an update on the phasing of the CapEx to implement that. And then I had a follow-up question on OMRON, please.

[Masahiro Nagayasu, executive]

The #1 question is how we're going to be looking at our CapEx in the next several years, right? And the second one is what, to do with the OMRON?

[Brad Snyder, analyst]

Well, for OMRON, I was wondering on -- in the auto segment, you had a sales growth of about JPY 20 billion. So I was wondering how much of that was from OMRON.

[Masahiro Nagayasu, executive]

So the second quarter is -- I mean the third quarter results, okay?

[Akira Sato, executive]

The CapEx this fiscal year, fiscal year '19, we are expecting JPY 150 billion. And probably, we will continue that kind of level of capital expansion maybe in a couple of years because we are going to increase the production capacity, for instance, for traction motors and the reduction gears and also the motors for automotive. Those CapEx is planned only. So that JPY 150 billion of capital expenditure will be there in a couple of years.

[Masahiro Nagayasu, executive]

So you'd like to know more about the CapEx we did into the traction motor? Or just the CapEx overall?

[Brad Snyder, analyst]

Both actually.

[Masahiro Nagayasu, executive]

Can you say it again?

[Brad Snyder, analyst]

I was just wondering about both, more longer term.

[Masahiro Nagayasu, executive]

Oh, more long term. So today, Mr. Nagamori mentioned something like JPY 500 billion for next 7 years after 2025. Then as we mentioned that we are budgeting for this fiscal year at, like, JPY 150 billion. Roughly the 40% of that is used by the auto. Then 80% of that auto budget will be now used by traction. So roughly 32% of the entire budget is used by the traction.

So if you calculate how much of the JPY 150 billion times 32% is something like a -- JPY 48 billion. And roughly JPY 40 billion, JPY 50 billion is used for traction at this point.

And if you're looking at the -- assuming we are using roughly JPY 50 billion per year for traction motor, then Mr. Nagamori mentioned in the next 7 years, the total will be something like JPY 500 billion. So if you say JPY 50 billion times 7 is JPY 350 billion. But clearly, we are looking at the larger CapEx in the future years. So thereby, 7 years for, not the JPY 50 billion each is JPY 350 billion, but rather we say JPY 500 billion. Those are the numbers that Mr. Nagamori mentioned as his plan to expand the CapEx in this traction or EV-related area. Is that fine?

[Brad Snyder, analyst]

Yes. And I was just wondering, I think you said 3% margin. What was the sales contribution from OMRON for December quarter?

[Masahiro Nagayasu, executive]

OMRON. Okay. So OMRON is, what is the sales number and what the OP, right? So roughly, for the December quarter which we just finished, OMRON was something like a 20 -- no, JPY 18.1 billion because it's just going to be counting 2 months, because OMRON joined at the end of October. So November and December, 2 months' portion, is counted. And those number was JPY 18.1 billion. And roughly, as Mr. Sato mentioned, the OP margin was 3%. Okay?

[Operator]

[Operator Instructions] 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.

[Unknown Executive]

Thank you. We would like to conclude this conference call. Thank you very much for your participation today. Should you have any questions, please do not hesitate to contact Nidec Corporation or your sales representatives at Mitsubishi UFJ Securities. Have a good day. Thank you very much.

[Masahiro Nagayasu, executive]

Thank you.

[Akira Sato, executive]

Thank you.

[Unknown Attendee]

Thank you very much.

[Operator]

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