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Nidec Corp
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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.
Thank you. Ladies and gentlemen, thank you very much for joining this conference call. This is [ Abe ], General Manager of Institutional Sales Department of 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 fourth quarter fiscal 2017 results, future outlook and management strategy.
Mr. Sato, please go ahead.
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 will 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. Our fiscal year 2017 results are illustrated on Slide #3. As summarized on Slide #4, we have achieved the highest net sales, operating profit, profit before income taxes and profit attributable to owners of the [ parent ] for 4 consecutive years. The operating profit of Auto, Appliance, Commercial and the Industrial or ACI, the driver for the business portfolio transformation has exceeded that of small precision motors for the first time on a full year basis.
Slide #5 is showing the 3 major actions in order to achieve fiscal year 2020's operating profit target of JPY 300 billion. The first action is to strengthen management, including Mr. Yoshimoto, new Chief Operating Officer taking hands-on management on overseas operations and replacing the local management of ACI. Secondly, as structural reforms for business portfolio transformation, we are reshuffling production sites and shifting to products in growth areas under One Nidec umbrella.
Thirdly, we will aggressively invest in those areas in order to capture the 4 big rigs, which I will elaborate later. Altogether, we will make capital expenditure of JPY 500 billion over the coming 3 years for traction motors, speed reducers for robots and home appliances, where brushless DC motors are gaining momentum.
Now on Slide #6 and #7, you have [ structures ] showing the net sales and operating profit year-on-year and quarter-on-quarter, respectively. By product groups, we [ have ] exchange rate effect elimination and structural reform expenses. As you see on Slide #6, the net sales and operating profit of all products groups have achieved increase from the previous fiscal year. The operating profit has been negatively impacted by structural reform expenses and possibly by exchange rate gain.
The fourth quarter's operating profit on Slide #7 was lower than previous quarter, mainly due to the structural reform related one-off expenses of JPY 5.3 billion. However, it could actually be higher if you added back the exchange rate of one-off expenses.
Please turn to Slide #8. We have exceeded the net sales and operating profit of the previous fiscal year for 5 consecutive years since the structural reform in fiscal year 2012 and achieved the highest net sales and operating profit.
As you see on Slide #9, the business portfolio transformation is continuing to be successful and steadily improving the company's earning power.
Slide #10 is showing the cash flows over the past 10 [ years ]. The operating cash flow for fiscal year 2017 remains above JPY 100 billion. Actual figure is JPY 175.6 billion.
Slide #11 is showing dividends and EPS. You will see that the dividend payout are steadily increasing, supported by EPS growth.
Please see Slide #13. We forecast the fiscal year 2018 net sales of JPY 1,575,000,000,000. The operating profit of JPY 190 billion and operating profit ratio of 12.1%. The exchange rate assumption for FY -- fiscal year 2018 is JPY 100 to the U.S. dollar and JPY 125 to the euro.
Our midterm strategy, our vision 2020's target on Slide #15 and the 16 remain unchanged from April 2015, when they were set.
As you see on Slide 17, the current total amounts of the 4 product groups are expected to exceed net sales of JPY 323 billion, and to reach operating profit of JPY 300 billion.
Please see Slide #18. We are aiming for gross profit ratio of 31% or higher and operating profit ratio of 15% or higher for fiscal year 2020. As concrete measures to achieve this gross profit ratio target, as shown on Slide #19, we will aim to reduce the cost of outsourced materials and the components and the cost of direct labor. This will be mainly done by increasing further joint procurement and in-house production for cost reduction in outsourced materials and the components, and by accelerating further factory automation and the introduction of IoT technologies or cost reduction in direct labor.
Please see Slide #20. We are currently experiencing unprecedented 4 big waves, which are Automotive, robotics, energy-saving home appliances and the drones. In the Automotive area, we are seeing electrification of cars and the introduction of EVs and PHEVs on a considerable scale, backed by 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 global working age population decline is creating 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 the drone area, we have seen acceleration of wider varieties of applications on the back of serious labor shortage in agriculture and of Industry 4.0 trends.
Now please see Slide #21. We have made minor revisions to hard disk drive midterm shipment forecast based on calendar year 2017's results from the previous conservative -- for the short-term trend on Slide #22, the fiscal year 2017 hard disk drive market shipments were lower by 3% than the original forecast. For the fiscal year 2018 market shipment, we are making a conservative forecast of 375 million units. However, our market share is expected to be quite stable and sales to be flattish due to the ASP increase.
Please see Slide #23. The demand of thermal management are becoming more and more diversified in the areas requiring IoT and ICT, large data [indiscernible] capacity and the CPU installed intelligence, and they are generating higher demand for cooling fans. As illustrated on Slide #24, in the drone area, which is one of the 4 big waves, we have codeveloped with Yamaha Motor, compact, light-weighted and high-performance industrial motors for the -- their industrial multirotor.
Please see Slide #25. Orders for Automotive motors have been accumulating over the past 1 year. And the shipment are expected to exceed 100 million units in fiscal year 2020. As illustrated on Slide #26, component production in the Automotive industry tends to focus in or near the market, and we are able to quickly respond to the customers' deployment along our global production sites in the same region.
Regarding traction motors for EVs and PHEVs on Slide #27, now we have materialized our compact and light-weighted traction motor system to oil cooling technology, which is contributing to steady order intake. As you see on Slide #28, we are participating in Beijing International Automotive Exhibition for the first time. And the traction motor system is also exhibited there. It is already decided that we are starting mass production of this traction motor in China [ along ] 2019, and is expected to be spread globally onwards.
Please see Slide #29. In order to cope with the rapidly increasing demand for brushless DC motors in Chinese air conditioner market, which is becoming more energy efficient, our subsidiary Nidec Techno Motor is planning production increase and is expected to exceed net sales of JPY 100 billion in fiscal year 2018.
Slide #30. This is showing our modularization strategy for appliance areas as you already know, where we announced an acquisition of compressor maker yesterday in order to meet this strategy, [ modularization ] strategy in appliance area.
Slide #31 is illustrating our subsidiary Nidec-Shimpo's production plans for speed reducers, which are divided into 2 areas. One for machine and the other for robots. Regarding speed reducers for robots, we are aiming to win cost competition against emerging market players by [ utilizing ] our Subic factory in the Philippines, which is currently one of our hard disk drive motor factories with skilled engineers and cost competitiveness. And we are expecting to secure monthly production of 2,000 (sic) [ 100,000 ] units by the end of December 2019.
Please see Slide #32. The objective of Nidec Center for Industrial Science, whose first building was completed this January, is to provide solutions to group-wide production technology issues, and it will contribute to the cost reduction in outsourced materials by selecting the [ light ] materials and to the cost reduction in direct labor by promoting automation based on production engineering.
Please see Slide #33, as we grow larger and aim for net sales of JPY 2 trillion in fiscal year 2020 and JPY 10 trillion in fiscal year 2030. So there's our corporate social responsibility or CSR, as CSR related information is becoming more and more important from industrialists' point of view as well. We are currently strengthening the group-wide CSR framework and providing more ESG-related information.
Lastly, on behalf of the entire management team, I like to thank our customers, partners, suppliers for their support 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.
Thank you very much, Mr. Sato. Now we'd like to turn to the Q&A session. Mr. Sato will be very pleased to answer any questions.
[Operator Instructions] We will take now our first question from James Pulsford from Eikoh Research.
Can I ask first of all about the deal, the acquisition of Embraco, and I'd be interested if you could comment on the valuation that you did, you paid for that business? If you can comment on prospects within the Group and particularly the scope for synergy benefits? And how you'll run that, whether that perhaps the degree to which the operation will be integrated with your other operations within the Group?
Okay. As we explained in the Embraco acquisition, the key thing is, we already started this compressor business for Secop, who we acquired 2nd July last year. Bearing Secop with this Embraco, well, the Secop is maybe something like a 1 out of 3.7x, so the Embraco is 3.7x larger than Secop. So we started to looking at the compressor market just acquiring Secop. Then after almost 9 months, we decided to get into the -- more of this compressor business acquiring another larger compressor business for refrigerator. So what we are talking about is, as this business is a very -- we understand the cost will be determined by the economy of the scale, as we are going to increase the presence in this market by acquiring another compressor business. Fairly, we can get the -- a higher market presence, number one. Then also, we could get the more volume, thereby we could get the -- a more cost reduction by doing ATM procurement. In terms of geographical as well as the application, the Secop and Embraco is somewhat complementary. There we do see that will be a perfect match. In the meantime, what we are looking at is, we are going to achieve a 10% OP margin of the entire compressor business after 3 years of operation and 15% OP margin after 5 years of operation. Does this answer your question?
What share roughly will you have in this market post acquisition?
At this moment, we are not inclined to comment on the share situation as this is a touchy situation. We have to clear the antitrust authority of the each country to make this deal possible.
Okay. And you will -- do you -- assuming the deal goes through, do you expect to fully integrate Secop and Embraco in terms of production sales?
Yes, the production sales, they are in the same business. So we are just going to fully integrate those 2 business. But as I mentioned, at this moment, [indiscernible] we do have a complementary situation. So at this moment, we are not really thinking about changing restructuring of the current business.
And can I ask you a sort of follow-up question on a different area of ACI? You highlight in your presentation that demand for DC brushless motors in China has accelerated sharply and sort of ahead of your estimates. I know you are planning to invest a lot to expand production capacity but could you comment on your production capacity at the moment? And to what degree that maybe limiting sales or not? And I think in the short term, the ramp-up of your Vietnamese production is what's planned. Could you comment on how quickly that's going to happen? And if you do have a shortage, how quickly that will be covered?
Yes, in China, we have the -- some kind of shortage of production capacity for motors or air conditioner. That's why we decided to increase our production capacity in Thailand and also the Hanoi, Vietnam because the demand has been increasing rapidly -- demand for DC brushless motors has been increasing very rapidly. And that's why, we have to invest a lot of money to increase our production capacity in any country, such as the Thailand or Vietnam. That's kind of situation.
Also will sales in the fourth quarter or will sales in the first quarter, are they running below the levels of demand? Because you can't meet demand or you're managing to -- by working extra over time or outsourcing, you're managing to satisfy demand? Or is it remaining unfulfilled?
Yes. Of course, we satisfy the demand in first quarter, but demand has been increasing from Q1 to -- [ all over ], that's why we decided to increased production capacity [indiscernible].
We will now take our next question from Mehdi Hosseini from Susquehanna Financial Group.
This is David Ryzhik for Mehdi. Just wanted to dive into the HDD market estimate, would love to get your estimate by segment of HDD.
You mean by quarter-over-quarter or for year?
For the recent 4Q, 94 million, would love to get that by segment and for your June quarter as well.
Yes, we estimated -- okay, for estimated -- for this -- for the March quarter, we say a 94.4 million is our estimate, where the enterprise 2.5-inch is 5.3 million; near line, 13.1 million; and 3.5-inch ATA, 31.5 million; and 2.5-inch, 44.5 million. That could be making 94.4 million for the market.
Great. And I would love to get your initial estimates for the June quarter as well.
Okay. June quarter, we say 93 million, where we say, a enterprise, 5.2 million; near line, 14 million; 3.5, 29 million; 2.5-inch, 44.8 million.
And in the March quarter, what percent of your near line shipments were helium?
In the March quarter, we say 54.3%.
Understood. And how do you see that trending into the June quarter?
Well, June, somewhere a little bit lower than 60%, something like 59%. Maybe we are looking -- we're expecting that percentage will exceed 60% level by September quarter.
Understood. Very helpful. And just curious, your HDD customers, any sense on how overall [ market ] inventories are trending?
At this point, we don't see so much of the inventory buildup. So we are looking at the -- there is going to be a some production and sales number almost in line. If there is any huge inventory buildup or inventory correction, there might be some difference between the production number and shipment number. But for a -- this June quarter and September quarter, at this moment, we're expecting those will be in line, almost the production number and the shipment number will be in line. So there won't be any big volatility of the inventory.
Understood. And last one, just a competitive question. For the helium segment of the near line, you currently do not have any competitors, is that correct?
For a -- as I say, the helium ratio for our shipment is something like over 50%. So that means, in the very near future, the helium ratio of the market, near line will be over 50%, you understand that? So when that comes, how does that [ make we're going to have the second source ]. Then we understand it might be coming in within this year. So our competitor may come in to the helium area within this year.
[Operator Instructions] And we'd take now a question from Aaron Rakers from Wells Fargo.
This is Joe Quatrochi on for Aaron. Just a follow-up on those questions on the hard disk drive space, could you give us a breakdown of the shipments for the industry? I think the shipment's breakdown you just gave was for Nidec only, correct?
No, no, no. The number which I answered in the previous question, 94.4 million and the breakdown, that number is of market, not Nidec.
That's the whole market, okay. Can you give your own breakdown of the segments?
Our number for a March quarter?
Yes, and the June.
Okay. The March quarter, we shipped 80.6, 8-0-point-6 million; where the 2.5-inch higher, 3.0 million; near line, 11.5 million; and 3.5-inch is 30.0 million; and the 2.5-inch, 36.0 million, okay? And the June quarter, we are looking at 80 million, as you can see on the slide. That 80 million could be breaking down as follows: 2.5-inch higher, 2.9 million; near line, 12.6 million, 1-2-point-6; 3.5-inch, 29.6 million; and the 2.5-inch, 3-4-point-9, 34.9 million, okay?
And I think, last quarter, you talked about what you're seeing in the 12-terabyte near line and 14-terabyte near line, just wondering if you can give any update on kind of how you're seeing that market progress?
At this moment, clearly, the market is moving on the 14. At this moment, we do not want to comment on the volume because we do not know.
We will now take our next question from David [indiscernible] from MUFG London.
You spoke earlier about the potential for agricultural logistics. Could you talk a little bit more about how you could see your company investing more, including potentially M&A in the [ logistics-related robots ]? I mean, could you add more products in this area? I'm thinking along the lines of Nidec being a total warehouse solution company in the future.
Talking about the speed of reducers for robotics, that's our main business at this time. And it's the one competitor dominating the market at this point, but demand has been increasing very rapidly. That's why [ we tied ] up, when you look at production capacity, by 200,000 units per month by 2019, December. That's our current plan, and in that case, maybe we will exceed our competitor's capacity, which means, maybe we are going to gain the above 50% market share in this area, because there a called walking robots which humanly processed in the logistics or food or the other areas, that demand has been very much increasing at this point. So that [ we are going to supply our reduced -- speed reducer ] to robot makers, [indiscernible] robot makers. That's current situation we have now.
[Operator Instructions] And we now take a question from [indiscernible] from Indo Swiss.
I just have 2 questions. The first one is margin in the AACI segment. We see some sequential margin decline in the latest call for the third quarter. You said that the decline was temporary but the decline continued and you can [indiscernible] [such that it] was slightly [indiscernible] U.S. But can you comment on the declining margin in the AACI segment? And my second question is on the margins of [indiscernible] Emerson [Foreign Language]. You target -- you had a target, I think, of 8% for this quarter, and I see you were a bit below the 8% target. I would be also interested to have your comments on this point.
First of all, as -- I would like to answer to second question about the operating profit margin in newly acquired company such as [indiscernible]. Actual OP margin was the 6.8%. So as you said, the -- our target was 8% in Q4. So a little bit lower than our expectation. So that's why we have changed the management of those companies and we are going to make further -- more counter measures in the joint procurement and reduction of the SG&A cost. So our target for FY '18, fiscal year 2018 is still 10%. So maybe we will be able to achieve that kind of target of 10% in that newly acquired company.
So your first question is, number one, as you understand, we acquired Emerson Europe, as of February last year and we acquired Secop, July last year. So as you understand, those acquired operations generate much lower OP margin, then overall ACI margin is coming down. So we have to look at the organic, excluding those newly acquired Emerson or Secop, then look at the margin -- look at the OP margin on the each quarter. So if you're looking at that, [ vary ] by quarter-by-quarter, [indiscernible] that's going to be somewhere lower than 10% and the fourth quarter, which was lower than 10%. But comparing with the total ACI number, which is the only 7.7% for a Q4, fairly adjusting the -- a onetime loss and also excluding those things, that's going to be much high. So overall, a mix of separation, we do see some of the challenges in this margin situation, thereby, we have taken the steps, okay? Does this answer to your question?
Yes. And I think also in your medium-term plan, you have a JPY 2 trillion target, of which JPY 1 trillion come from 1 segment which we include M&A activity, is it possible to know how much would be the medium-term target for that business line without the M&A?
Without means there is no M&A in the future?
Yes, the organic. Yes.
Okay. Then, if you are going to say all that we announced as of today, that to be included, right?
Yes.
Right? So already we announced 2 deals today. We announced 2 deals for today. So is it okay to include those 2 into our [indiscernible]?
Of course, yes.
So maybe that's the something you can look at the Slide #17. Those are somewhat more realistic forecast of the each segment, small precision motors, Automotive, ACI and the other, right? And that's going to be all organic, right? Because we are not including any future unknown deals. We have included all deals, which we have already announced. So now you understand how much will be the sales for the each segment. And how much will be the OP margin of that. So the basic thing we are saying is, in the ACI there, we are saying, even in 2020, we may not be able to achieve 15% on the ACI, but ACI sales is much, much larger than JPY 600 billion, our original target. Did you see that?
Yes.
So that's somewhat the idea that we are looking at especially in ACI, according to the original plan, there was supposed to be JPY 600 billion and 15%, that means a JPY 90 billion, right? The current OP number will be going over JPY 90 billion, but because the sales is growing much faster than the margin may not be over 15%, that's what we think. Did you understand?
Yes. [Foreign Language]
[Operator Instructions] We will now move on and take our next question from Reiko Mito from SGAM.
I have a very quick question. Can you comment on the margin on your HDD business for this quarter, for March quarter? And also I missed the one in December quarter.
The margin for the hard disk drive spindle motor for a fiscal year 2017 is: June quarter, 24.7%; September quarter, 24.5%; then December quarter, 24.5%; and the March quarter, 21.4%. Then we mention there is a onetime loss. So adjusting the onetime loss, then that should have been 25.3%. Is that fine?
Yes.
We now take a follow-up question from James Pulsford from Eikoh Research.
Could you comment briefly on your -- the sales performance and also profit performance of your vibration motors, please? And what the outlook is for those in the new fiscal year?
Okay. The 2017, we finished the vibration and haptic motor of a 60.1 billion sales, 6.5%. And for the fiscal year 2018, at this point, we are guiding the same, 60 billion, but a little bit higher margin guidance, which is something like a
[Audio Gap]
Something like 8%, yes?
Yes, around, 9%. Correct. Okay?
Sorry, could you repeat that? Sorry, I interrupted you.
So 60 billion with 9%.
9%.
[ We see it at ] 9.2%.
Okay. And sort of jump back to different area. In terms of your HDD motors, is it possible to comment on what happened to ASP in the different areas in Q4, please?
Okay. In the -- our ASP for a 2.5-inch is improving from $7.61 in December to $7.90, but near line is down $14.15 down to $13.61. And 3.5-inch...
So $14.15 down to $13.51?
$14.15 down to $13.61; and the 3.5-inch, $3.87 up to $3.91; and the 2.5-inch, $3.74 up to $3.77. So overall ASP, $5.21 in December, then March, $5.38.
Right. Okay. And the -- okay. And then near line decline just reflects the fact that it is becoming more mainstream or helium is becoming more mainstream, is that correct?
Yes. The last quarter was a little bit exceptional because previous, we were $13.65, then jumping up to $14.15. So we have not yet examining the impact but maybe the current near line is somewhere there, $13 to $14. It's not [ really the bit ], so called the OP from the previous, right?
Excellent. Good. And could I just ask -- so I'm jumping around a bit here for some, in the ACI area, do you have a split for Q4 in terms of breaking it down to Automotive -- the profit margin for Automotive and also the ACI element, please?
Yes, for the fourth quarter number, right?
Yes.
For the fourth quarter, Auto was 12.8%, a JPY 78.4 billion with 12.8% margin, and ACI is JPY 137.3 billion with 7.7% OP margin.
Right. Okay. And the ACI -- right. The ACI area was -- that was depressed by one-off cost, is that right? Or was the -- it was just acquisition?
Yes. Adjusting those one-off on the Auto and ACI, okay? Auto was 12.8%, 1-2-point-8 percent. After onetime gross adjustment, 1-3-point-2, 13.2%. Then ACI, 7.7%. After the one-off cost, 8.0%.
So 7.7%, but before one-off cost is 8%, is that right?
Yes. After the one-off cost, 7.7%, before 8.0%.
8.0%. Okay. Tremendous. And can I just ask -- sorry, on the speed reducer area, the ramp-up to 200,000 units by December '19, monthly units by December '19 is a little quicker than before. And I wonder how much -- and you've put in the sort of ramp-up by different area, how much is the planned ramp-up so far is covered by orders received already, could I ask you that please?
So we were talking about the December 2019, so that's going to be something like 20 months from now. So those orders for the 20 months from now [ not are covered ], because usually we have to deliver our product at maximum 6 months. So -- but if you're going to be looking at the order for which -- if we get some order from the current -- [ from the customer and that customer are supposed to give us the order for ] depending on that customer's volume, right, then based on that type of the calculation, we find that even 200,000 per month capacity [ could be filled if the ] sales was the clearly a demand by those customers.
Okay. So on a projection basis used but not, obviously, a hard order. Yes. Okay.
Yes, it's not like the Auto. Auto covers -- Auto, we got the order for 3 years from now, 4 years from now, 5 years from now. But [ not the ] reduction here. It's 1 year, maximum, okay?
[Operator Instructions] Mr. [ Abe ], as 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. So we just concluded the 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 representative at Mitsubishi UFJ Securities. Thank you very much, and have a good day.
Thank you. That concludes today's conference. Thank you for your participation, and you may now disconnect.