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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 would 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, 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 from Nidec's homepage right now.
Now may I introduce Mr. Akira Sato, Executive Vice President and Chief Financial Officer, who will be speaking to you shortly. First, Mr. Sato will make a presentation. After his presentation, we will move to a Q&A session.
Mr. Sato will now discuss Nidec's Second Quarter Fiscal 2018 results, future outlook and management strategy. Mr. Sato, please go ahead.
Thank you very much Mr. Abe. Good day, everyone, 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. Please see Slide #3 for our first half results of fiscal year 2018. As mentioned on Slide #4, we have achieved record-high net sales operating profit, profit before income taxes and profit attributable to owners of the parent for both first half and quarterly results. Based on these results, we have made an upward revision to fiscal year 2018 year-end dividend projection. The pictures on Slide #5 and 6, are showing our sales and operating profit year-on-year and quarter-on-quarter separately by product groups and exchange rate effect.
On Slide #5. The sales of all product groups have increased and operating profit of all product groups increased year-on-year, except for electric and optical components.
Please turn to Slide #7. We have achieved record high in both quarterly net sales and operating profit. The quarterly operating profit exceeded JPY 50 billion level for the first time. Slide #8 is showing the cash flow from fiscal year 2016, we will continuously endeavor to improve cash conversion cycle and create higher operating cash flows to support our midterm growth. Our midterm strategy Vision 2020's target on Slide #11 remain unchanged from April, 2015, when they were first set. The achievement of the topline target is already in sight. As illustrated on Slide #12, the midterm shift in the unit trend for the hard disk drive market is expected to be a gradual decline, for the short-term. As shown on Slide #13, we have made a slight download revision of the figures for the hard disk drive market TAM and our shipment volume for fiscal year '18 from a conservative perspective.
As you see on Slide #14. We are seeing a significant growth of near line drive against a backlog of strong demand for data storage as well newly emerging cloud service providers. And our market share as well as the average selling prices are rising.
Please see Slide #15. The steady progress of the IoT and ICT trends are driving further development of big data and increasing cooling fan demands. With these as a background, as shown on Slide #16, we have resolved to acquire 48% shares of common stock after funding of a Taiwanese Chaun-Choung Technology Corporation or CCI, by way of tender offer. CCI has strong expertise in the development, manufacturing and the sales of thermal management products. And through this tender offer, we are aiming to improve thermal management technology and our product development capability through collaboration with CCI, and to propose a thermal solution by combining motor products with CCI's thermal module to customers in a wide range of markets.
Please see Slide #17, both automotive and appliance, commercial and industrial or ACI have achieved record high quarterly operating profit in the second quarter -- September quarter. As illustrated on Slide 18, trade tensions in the U.S. and the China are accelerating the leading market trend, and we are receiving increasing orders as we own factories both in the U.S. and Mexico. We are currently operating more than 200 factories in 43 countries and are responding quickly to our customer's needs for local production.
Please see Slide #19. Order trend for electric vehicles is becoming more solid. The ratio of powertrain systems, including traction motors for EVs and PHEVs in our auto portfolio, is expected to increase steadily going forward.
As shown on Slide 20 inquiries are surging from emerging countries; Europe and Japan for traction motors and E-Axles, which is a module consisting of traction motors and inverter and gearbox. Please see Slide #21. In order to cope with the additional demands for air conditioners for emerging countries, we are planning to increase production for brushless DC motors for air conditioners in Hanoi, Vietnam from next March. As illustrated on Slide #22, ACI is evolving from motor-alone to module-based businesses using M&A in the main home appliance products such as air conditioners, freezers and refrigerators and washers. Please see Slide #23. We have acquired 100% ownership of MS-Graessner or simply Graessner and its group companies, a privately owned German company group along its owners through our subsidiary Nidec-Shimpo. This acquisition will allow Nidec-Shimpo to obtain brushless right-angle precision gearboxes, in addition to its own linear type planetary reducers and to be able to offer more comprehensive precision gearbox solutions in Europe, which offer a large market for planetary gearboxes. Simultaneously, Nidec-Shimpo plans to manufacture its newly developed strain wave gearboxes for robotic application in Graessner's German factory. And offers its products, along with after sales services to Graessner's customers in the robotic industry.
Nidec-Shimpo and Graessner have strong brands, high technological capabilities and solid customer base. We firmly believe that our financial strength and global presence will support this advantage and will help us achieve the future growth. We will continue to serve customers who desire to achieve highest standards of productivity. 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 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] Our first question today comes from Mehdi Hosseini with Susquehanna Financial Group.
Hi, this is David Ryzhik for Mehdi. So we see on for your forecast for the HDD industry for the fiscal year, it seems like it down ticked, and most of the lower revision is for the March quarter. Just wanted to get a sense of what you're -- what you've seen, what led to the lower forecast? Then I have a follow-up.
Okay. Number 1, every year, the March quarter have been reporting a lower number compared with the other quarters. And then we understand the major reason for that is the Chinese New Year, and the production for that quarter will be cutting down by the Chinese New Year holidays. At the same time, usually those production needed will be done by December this quarter, so that's going to be making some of the seasonality down on the March quarter.
Okay. So no particular segment within HDD that would be softer than others as per your forecast for March quarter? It's mostly related to Chinese New Year?
Well, in terms of the different form factors, we say near line are supposed to be keeping somewhat high range, and also, 2.5-inch mission-critical would be somewhat still keeping the high range. Then the most of the down might be achieved by the 2.5-inch, where that we see a replacement from HDD to SSD might be a little bit faster in the March quarter. And also, the news in the market that the PC number might be coming down because of the shortage of the CPU.
Right. And if you don't mind, I would love to get the segment, the HDD industry segment breakdown for the September quarter and perhaps for the December quarter?
Okay. So what we understand today, as we showed you in the Slide #13. Okay? We say this -- I mean, the previous quarter, September quarter, the market number say 97 million, where mission-critical 2.5-inch 5.3 million, near line 14.7 million, and 3.5-inch 28.3 million; and 2.5-inch 48.7 million. Then from there, we do have a forecast for 95 million in December quarter where 2.5-inch mission-critical 5.0 million, then near line 15.0 million, and 3.5-inch 30.6 million, and the 2.5-inch mobile 44.4 million. Okay.
Great. That's really helpful. No forecast yet for the March quarter?
March quarter 85 million, we say 4.5-inch mission-critical 15.5 million near line, 29.0 million 3.5 inch, 36.0 million for 2.5 inch.
Great. And just last one from me. Do you expect any increased competition in the components business, motors base plates, given the pending acquisition of one of your competitors MMI?
Well, at this point, the total market is coming down. So that is a major reason for the consolidation of the components supplier of hard disk drive. So in that sense, usually the competition will be -- maybe the same general level here at this point, as far as we are majorly in the motor area that we do have only one competitor there, okay?
Next question please.
Our next question is from Joe Quatrochi from Wells Fargo.
Just wanted to follow up on that last one. Was the breakout of shipments that was for the industry or for Nidec itself?
The number which I mentioned was the industry.
Okay. Can you give your breakdown.
If you check on our slide number, Page 13, in your handout or you can access to website to see our presentation material, we presented this morning. The 96 million in June quarter, 97 million September, 95 million December, 85 million March quarter is number for the market, the industry.
Right. I think in the past you've given the breakdown for your shipment by those segments as well?
Okay. So we say 84 million in September, this 84 million to say exact 83.9 million were 2.5-inch high-end mission-critical 2.9 million, near line 13.6 million and the 3.5-inch 27.6 million and 2.5-inch 39.8 million. Then, we are forecasting 81 million in December quarter, where mission-critical 2.5-inch is 2.4 million, near line 13.3 million and the 3.5 inch 28.8 million; and 2.5 inch 36.5 million. That makes 81 million. Then March quarter, we say 73 million if you look at the chart, that's going to be a 2.5 inch mission-critical 2.1 million, near line 14.3 million; 3.5-inch 26.6 million and 2.5-inch 30.0 million. Is that okay?
Yes, that's perfect. And then I think in the past, you kind of given some color around the helium mix within the near line business. I was just kind of curious what that was in the September quarter, and how you expect that in the December or March quarters?
Our shipments, 55% of near line on the September quarter 30.6 million will be helium. Then December quarter, we say that ratio will be up to 58%. But down in the first quarter, the March quarter by -- to 55%, okay?
Okay. That's great. And then just one last question, I noticed that in your forecast for the calendar years that you kind of -- from your forecast in April, uptick to your near line expectations, I was kind of curious, maybe you can double click on what you're seeing from demand perspective there? And kind of how do you think about the linearity throughout the year for 2019?
So near line demand is clearly coming up as you show -- as you see in Slide #14. So there, at this moment we are not making any new forecast of the ASP. So the volume is as you see is coming up, but maybe the later of this year, as I say, still the total market number and our number is coming up slightly from September quarter to December and December quarter to March quarter. That is based on the very -- it's over the vigorous demand from mainly the U.S. CSP, the cloud service provider and also the Chinese CSPs. But if you compare the Chinese and the American CSPs, we say Chinese demand had been somewhat slowing down mainly because of the so-called macroeconomic situation in China. Is that fine?
Next question please.
Our next question is from James Pulsford from Eikoh Research.
Can I ask couple of questions on the auto and appliance, commercial, industrial area, and both of them were marked by relatively muted sales growth, but profit margins were obviously very good. Can you comment on that please and particularly the demand picture in that quarter whether it was rather lower than you expected and the future outlook and what impacts that might have on your business?
I think across the -- even though the sales has been down in the June quarter, we have been trying to reduce the cost of the groups, and particularly in -- and one in the European operation we acquired last year, it's OP margin has been up last fiscal year mainly due to the cost reduction in procurement and also the reduction of SG&A cost. It has been contributing a lot to improve operating profit margin in ACI. It's kind of the main reason why the operating profit has been increased even though -- although sales number is decreasing.
And are you at all -- the sort of the weaker sales picture for both auto and ACI a little bit in Q2? What visibility do you have in Q3 and Q4, the second half of the year, is that a concern?
Yes, I think the -- we are expecting to increase the sales number, particularly in the appliance area and also industrial motors area because it's a kind of seasonality. It's getting better compared to June quarter and that's why we are expecting the increase of the sales in the second half compared to the first half.
Can I ask you a separate question, please. We've had a few questions on HDD. I wonder, could you just comment briefly on the operating margin you achieved in the second quarter. I see ASP has risen and, obviously, your ways to near line has risen, which sounds good. What happened to margins? Are there any one-off factors that depress them in Q2 or are they natural?
Okay. So we say a 25.0% for hard disk drives in the motor OP margin after the one-off cost, so adjusting one-off cost that should be 25.8%.
So quite a big increase compared to Q1. And is it also possible to make a brief comment, I think perhaps the other precision motor profitability may also have improved and sales rose quite sharply there. And you highlight cooling fans as an area for growth. This is quite a different picture from Q1. Why the sharp improvement in sales and margins in Q2 compared to Q1?
So you mean the non-HDD smartphone area?
Non-HDD.
Non-HDD, right, okay. Non-HDD area, the big driver is vibration and haptic, mainly because of the so-called seasonality. Because as you understand we were supplying those component into the smartphone, which was announced in September and starting the sales in October. So thereby September quarter is a high season for production of those component and shipment, then that's going to be completely different from June quarter. So the total sales of that haptic vibration is coming up. In terms of the number, JPY 10.1 billion in June quarter, now we were JPY 19.4 billion in September quarter. So nearly double in that number. And also the margin from that haptic vibration improved quite significantly from the negative last quarter and the positive year -- like a 10% margin this quarter. So that's going to be helping the non-HDD segment of the small precision motor mainly. And also, as we mentioned the fan motor is increasing, mainly because the thermal management needs is coming up for a more big data and the 5G, and the all the other trend that we discussed here in Slide #15.
Okay. Next question please.
Our next question is from Takashi Ito with Arga Investments.
I have some questions on the automotive product segment. So first of all, I think you have a large exposure to Europe and we've been seeing pretty weak production in Europe in the recent quarter. Your revenues were still positive growth and then your margins went up, so that was very reassuring, but can you tell us what you're seeing in that space right now? What are your customers telling you in terms of production going forward? And if you have any responses to that, we would be very interested in that.
So in terms of the motor for the automobile, as we have shown you in the previous financial announcement that the order for this year is somewhere near 80 million motors for the auto. Last year, that was 60 million. So one year, we see 20 million order increase. That's a huge increase nearly 33% from 60 million to 80 million, but as you mentioned, the total car number or car sales in the global market is down mainly in September and China, we say the auto sales is down, in Europe down, so thereby in short term, we do have some negative impact from that so-called quarter-by-quarter sales and showing somewhat lower sales, as you can see in Slide #6. So Slide #6 is a stepping chart, talking about the auto sales and the ACI sales, right? And sales is down for the auto and ACI, after adjusting the foreign exchange. So clearly, we are seeing quarter-by-quarter basis, we are seeing some slowing down of our sales, but still it's in line with what we have received the order amount up to 80 million. So when we close fiscal year 2018, maybe 2 million to 3 million or 3 million to 4 million may be down from that 80 million, but 80 million minus 4 million is still 76 million, which is 16 million up from 60 million last year. So this is a total picture we are drawing for the automotive demand for our motors this year, okay?
And just on the margins. Was that up mainly on cost cutting? If this is for the auto margins or was it because of the good mix profitable modules, et cetera? So maybe you can talk a little bit about the margins and that's my last question?
Yes, as you know, it's has been up to 16.1% in June quarter -- sorry, September quarter, compared to 14.1% in June quarter. So it's up the margin, but it's mainly due to the cost-reduction effort, because as you know, the material cost related to sales is relatively higher in our automotive area than the one in hard disk drive or precision motor area. That's why we have been trying to reduce the procurement cost by accelerating more in-house production in terms of -- I mean, in die cast also. That's why we have been successfully reducing the -- our cost in the automotive area. And that's a main reason to improve the profit margin in automotive area.
Next question please.
[Operator Instructions] Our next question comes from Kuni Kanno from Balyasny Asset Management.
I have a couple of questions please. First on the traction motor on the E-Axle on the Slide 20, so revenue target in '25 was JPY 100 billion last year but now you raised the JPY 100 billion reaching in fiscal '22 and JPY 200 billion in '25, and could you explain me the difference from the last time. The last time, if I remember correctly, you mentioned you have a 1 Chinese customer confirmed, and 1 is considering and what is driving those the upward revision for those traction motor or E-Axle?
So the major reason that we were accelerating our target from '25 for JPY 100 billion up to 2022 is clearly that we do have the inquiries mainly from all over the world, so that means we were now talking with many European OEM Tier 1s, and also Asian OEMs, and also North American Tier 1s. So thereby, we do see a more visibility that we can make more sales in '21, '22-year period. And in addition to already secured the Chinese one that we were seeing at this moment more opportunity in the European OEM and European Tier 1s, as well as the North Americans and also the Asians. Does this answers your question?
Yes. So just a quick follow-up, you mentioned that, you mentioned that in addition to Chinese 1, but the European OEM or Tier 1? So is this just a motor or E-Axle?
Both.
Both. Okay.
So we do have more than, say nearly 20 companies. Then that's going to be sometime -- something like a system like E-Axle or something like a motor. ASP might be different, but we are just counting up then the possibility as you see this, but we do have inquiries almost more than 3x of our JPY 100 billion for 2022. So when we can make a contract only 1/3 of the inquiries then we can reach JPY 100 billion, that was the ACI number 20 shows.
Understood. So in terms of the CapEx, which may be related to this the more -- the traction motors, but you mentioned that you would be spending about JPY 500 billion in 3 years, including this year? And is there, I know it's a little too early to mention, but is there any change possibility to go up considering that you have such a better demand on those traction motors. So what's your latest view on those CapEx in next 2 years or 3 years?
What we said was fiscal year '18, '19, '20, 3 years, at this moment, we were thinking of spending JPY 500 billion for 3 years. Then, we said this fiscal year '18 already, we mentioned that will be JPY 150 billion, okay? So all that JPY 150 billion, JPY 160 billion, JPY 165 billion and the rest in the last 2020, that makes JPY 500 billion total, and that what we say for our plan for the CapEx in the next 3 years, including this fiscal year. Then, if you're looking at the auto, auto would be, what we say was, auto would occupy as much as 40% of that in 3 years. Then, all the auto target 40% of JPY 500 billion is something like JPY 200 billion, right? Is not just for the traction, but also the other -- the motor and the nonmotor area also. So we are saying that at this moment, it's a little bit difficult, because we are near the final contract with some of those global OEM and Tier 1s. Once they are done, then we have to recalculate how much needed to make a investment. But what we said was, we were now making a very big factory in China, then we're going to expand our Poland factory, then we are going to expand the Mexican factory in order to provide, for example, 3 million traction motors, then we need maybe 1 million in China, 1 million in Poland, and 1 million in Mexico. But by 2025, maybe China, maybe another million, but somewhat we have to make another factory. So at this moment, it's little bit too early to calculate the total CapEx covering those forecast, but we say that's going to be -- the yearly expense will be something within the number, which I mentioned, okay.
Great. And my last question will be the cash conversion cycle you mentioned. So you said the cash -- you would improve CCC cycle, I would just like to know how would you like to do that? And if there is any target for those days, that's my last question, please?
Currently cash conversion cycle is around 78 days and our target for 2020 is 60 days. Of course, mainly we're trying to reduce inventory level by the streamlining our kind of workflow or production should be down in kind of local market where it might be close to our customer's factory. By doing so, maybe we are going to reduce the cash conversion cycle, particularly in inventory to some extent, but that's kind of main action to reduce the cash conversion cycle to 60 days from 78 days at this point.
Next question please.
Our next question is from [ Melrose Chu ] from Balyasny Asset Management.
I have 1 question, can you share some color on the end-to-end outlook for automotive, cloud data center and also industrial in the current year 2019? Recently, we see some commentary across the companies in Asia, Europe and U.S. at a recent earnings call talking about the concern on the incident given the U.S. and China trade war tension, would appreciate any impact on you.
So you're asking the U.S. China tension impact on our automotive motor business?
On the overall end demand for automotive, cloud data center and also the industrial?
Okay. So overall impact of the U.S. China trade tension will have on our business.
Yes.
Right?
Yes. Yes. Correct.
Yes, we are seeing that is our opportunity because for instance, Slide #18, we are saying that we are going to get more share by producing in Mexico, more than now, because our competitor for motors, for air conditioner producing in China, which means they have to pay 25% more import duty. So it's going to be -- their price is going to be up by 25%. And in our case, we have the factory in Mexico, and then we can increase production capacity in Mexico. And then, we increase the top line from Mexican factory to our American customer, so at a cheaper cost than the Chinese competitors. That's why we are seeing that is our good opportunity to increase our share in that area, including the automotive and ACI. Is that the answer to your question?
Yes. Yes. And another question, how do you think about the end demand for next year in the...
Could you say that, again?
Sorry. The end demand.
End demand.
Yes, including auto, data center and also industrial for next year? What's your expectation for the end demand next year?
So we were operating in the global market, okay? Then at this moment a U.S. China trade tension might have some negative impact on Chinese rather than U.S., okay? So we say if you're looking at the end demand in the China, there might be some possibility that the demand in China might be weaker already today and could be weaker more, but in the long run China is a big market with a very good and a very so-called solid technology and solid business. So we say, we are not so much worried about the future of China. So thereby, we were making investment in China, number 1. And at the same time as Mr. Sato mentioned that we are making investment in Mexico and U.S., so wherever the demand are there that we will be making investment. So it is very difficult to forecast what's going to happen next year. Because we do not know at this moment what kind of tensions are there between U.S. and China then especially after the midterm elections in The United States. Is that fine or?
Yes very clear.
Next question please.
Our next question is from Sukyong Yang with Cumberland.
It's actually Patrick for Sukyong. I have maybe 3. Regarding shifting production to Mexico, how much capacity do you have in Mexico? Is it very tight already? So you're going to incur a lot of cost and maybe in the short term, you would miss a certain amount of revenues? Because you cannot support that shift? So what is the OP impact for that shift, capacity utilization in Mexico, that's number 1?
Okay. So you're asking the Slide #18, right?
Yes.
Okay. So as we say that we were picking up 2 cases, one is the automotive, then clearly, we say EPS, electric power steering. The other one is in air conditioner motor. The 2 cases are a little bit different. EPS, electric power steering, we have already prepared to start the production in Mexico for that EPS, already we're starting the production there, but because of the U.S. China tension, then we see clearly the order is coming up in that area. So as you can see from the slide that we have to double output. So at this moment, we need maybe to expand the factory space and others to accommodate that change. So we say we need some CapEx there. In case of the appliance or air conditioner motor, we have been supplying those motor also, but maybe we are competing with so-called Chinese competitors. But our Chinese competitor have to shift their motor from China to our customer in Mexico. There they have to pay some tariff if they are going to be using so-called the Chinese made component. Because if you understand the more and more local content is required from any finished product imports from Mexico to United States. So thereby our customer is looking for any supplier, if we can make motor in Mexico, okay? Or thereby, we are now trying to increase our production in Mexico. So there if that trend continue, again, for this one, we have to expand our facilities, thereby we are now looking at the CapEx increase in Mexico. That's the current situation.
Right. Right. So on the CapEx, I think your original plan for H1 was something like JPY 80 billion, if I'm not mistaken. And then you're coming in at maybe JPY 57 billion, so and then I don't think you're changing your full year CapEx guidance either. So are you actually cutting CapEx somewhere else. I mean -- why if you have to invest more that you actually came in a little lower than you have thought you would spend on H1?
Okay. So overall demand is increasing, so we have to increase the CapEx, but when we talk about JPY 150 billion CapEx budget, we are now trying JPY 150 billion, but rather, we were just looking at somewhere at JPY 150 billion, so the real so-called the bottom up number is not JPY 150 billion, so we do have some room to making any CapEx there in Mexico. So we are not so much a tight budget schedule for the CapEx.
Okay. So just one last clarification. On Slide 11, you have a automotive target of something like JPY 700 billion to JPY 1 trillion? And then separately on Slide 19, I think the figure is JPY 600 billion, if I'm not mistaken. So what is the difference between the 2?
Okay. As we say, okay, the Slide #11 is clearly the same statement we announced for 3.5 years ago, April, 2015, okay? So we haven't changed that. So still we were keeping that as a target, but JPY 600 billion is somewhat more like a forecast that we may be achieving in 2020. Because the major difference comes difficulty of acquisition in this area. So as you understand, the last major acquisition we did is the united motor operation in Germany, which we acquired in February, 2015, GPM. German pump makers, okay. So after February 2015, we have not announced any major acquisition in the auto. So this makes a little bit difficult to achieve our original target we announced in April, 2015, because acquisition is much far less than the target we set 3.5 years ago. But still the current business OI, we can reach something like JPY 600 billion, that's what we are saying. Is it clear?
Next question please.
Mr. Abe, there are no further questions today. So at this time, I'd like to turn the conference back over to you for any additional or closing remarks.
Okay. Thank you. Then we would like to conclude this conference call. Thank you very much for your participation today. Should you have any queries, 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.
Thank you. That concludes today's conference. Thank you for your participation, and you may now disconnect.