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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 the conference to Mr. Kiyomi at Mitsubishi UFJ Morgan Stanley Securities for opening remarks. Mr. Kiyomi, Please go ahead, sir.
Thank you very much. Ladies and gentlemen, thank you very much for joining today's conference call. This is Kiyomi, Head of Equity Group of Mitsubishi UFJ Morgan Stanley Securities, Tokyo. Before the meeting starts, please make sure all the 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 Performance Officer, who will be speaking to you shortly. First, Mr. Sato will make a presentation. After his presentation, we'll move on to a Q&A session. Mr. Sato will now discuss Nidec's second quarter of Fiscal Year 2019 results, future outlook and management strategy. Mr. Sato, Please go ahead.
Thank you very much, Mr. Kiyomi. Good day [indiscernible] and welcome to today's conference call. My name is Akira Sato, Chief Performance 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 Number 2 of our presentation material for details. Now, I will review the key figures. Please see Slide Number 3 for our first quarters result, oh no, first half results, as shown on Slide Number 4 and the first half net sales were almost flat year-on-year and annual guidance remains unchanged. The first half operating profit decreased 35% year-on-year due to the additional R&D and start-up costs of along JPY 8.5 billion for traction motors which are in high demand and to the additional acquisition related expenses of around JPY 3 billion of Embraco needed to promote the [ modernization ] strategy. As the R&D expenses for traction motors are expected to increase to around JPY 30 billion on -- through year basis. The annual forecast has devised downward mainly for this reason. For the first half profit attributable to owners of the [indiscernible] decreased by 65% year-on-year mainly due to the loss of around JPY 20 billion related to the sales of Secop following the European commission [ instructions ]. Based on the first half results and expected to decline in the operating profit for the second half, the annual forecast has been devised downward. The annual dividend has been devised upward by JPY 5 yen to JPY 115. On Slide Number 5 and 6 you have a step chart showing the net sales and operating profit year-on-year and quarter-on-quarter respectively by product roots with exchange date effect eliminations and structure reform expenses. As you see, the upper chart on Slide Number 6, the net sales increased in all of the business segments and you, as you see, the bottom chart, the operating profit of small precision motors, appliance, commercial and industrial, or ACI, and machinery went up compared to 3 months ago. Whereas auto and [indiscernible] components were almost flat. Please see Slide Number 7 from the September quarter. We have achieved [ level ] high net sales on a quarterly basis. We will continue the WPR 3 cost of restructuring and repair for demand recovery. Slide Number 8, it is shown the cash flow, strong cash flow is created to see less improvement of cash conversion cycle in the first half. And please see Slide Number 9, just one comment on this slide; R&D expenses is devised upward to JPY 90 billion, long JPY 75 billion in full-year [ basis ]. Slide Number 10, as I explained earlier, the annual guidance has been devised downward and annual dividend devised upward. Please see Slide Number 13. We are currently promoting structure reforms for R&D functions of small precision motors, business quite slowly. Among the R&D functions of auto and other small precision, small motors, which were located at Nidec [indiscernible] Technical Center, the other small motors team has been [ de ]-assigned to Nidec's Central Technical Laboratory to join the hard disk drive motors [indiscernible] team by unifying the strengths of how disk drive motors and other small motors, we will facilitate development of strategic motors such as FDB fan and tactile devices, proper camera functions and the areas [ eco-friendly ] home appliance as well as new business launch such as the chamber business and [indiscernible] integration of traction motor production for electric vehicles. Please see Slide Number 14. We will aim for annual net sales of JPY 100 billion in Fiscal Year 2022 for thermal solution which is new business in the 5G related field. Out of the 3 pillars of communications IT and smartphones and auto, the smartphone related products are expected to grow significantly towards Fiscal Year 2022 as 5G technologies evolve. Please see Slide Number 15 on the traction motor business, we are receiving an increasing number of orders mainly for E-Axels and [ total volume ] of received orders including HEV motors has increased by [ fivefold ] over the past [ 3 ] backed by the order of HEV motors for the European market. We're accelerating to prepare to capture all of the orders in EV/HEV, PHEV fields. Please see Slide Number 16. As illustrated in this pie chart, we are aiming to become absolute number 1 in all of the 3 areas of basic automotive functions like steer and stop which are traction motors that I just mentioned; electric power steering motors and next generation braking system motors. Slide Number 17, despite the current difficult business environment such as China's economic slowdown and U.S. channel trade tensions, some of our overseas businesses are showing signs of turnaround. As you see on the left-hand side, our air conditioner business in North America is increasing its market share through implementation of high efficiency [ negotiations ] and the U.S. China trade tensions. Also, on the right-hand side, our elevator business in North America is significantly increasing its [indiscernible] sales backed by safety regulations of the New York State. Please see Slide Number 18, Embraco, which was a newly acquired Brazilian compressor manufacturer for refrigerators is starting to contribute to Nidec Groups operating profit in the second half of Fiscal Year 2019. A refrigerator is a home appliance that [ lands ] 24/7 all year round and lastly 80% of compressors and refrigerators are estimated to use in efficient [ S-C ] motors globally [ even now ]. As a new member of Nidec Embraco, #1 company in the market is accelerating to replace AC motors with highly efficient brushless DC motors and is ready to meet the increasing demand for energy efficiency and sustainability. Please see number, Slide Number 19. As you see the graph on the left-hand side, the sales of subsidiary, Nidec-Shimpo, whose main businesses are machinery and speed reducers. Nidec-Shimpo business are expected to exceed JPY 80 billion, top line, this fiscal year, JPY 40 billion in the Fiscal Year 2014 which means double in 5 years. All of the acquired overseas businesses are performing well and above our [indiscernible] global #1 [indiscernible] of cans for foods and beverages with 85% global share is receiving increasing orders now. This is due to plastic bottles being replaced by aluminum cans on the back of concern over plastic pollution. In the -- [ both ] of the main business areas, Nidec-Shimpo, is aiming to continue high growth by steady organic growth to new product launches and by product portfolio expansion through a series of acquisitions. Please see Slide Number 20. We have started a new environment strategy called SMART2030. This is an initiative for Nidec Group to reduce our operational CO2 emissions and the target is to reduce our total CO2 emissions by 30% in Fiscal Year 2030 compared to the benchmark year of Fiscal Year 2017. And the key approaches include energy efficient operations and [indiscernible] adoption of the new [ indiscernible ]. Lastly, on behalf of the entire management team, I would like to thank our customers, partners and suppliers for their support and commitment as well as our shareholders. At this time, we would like to open the call for questions. Thank you very much for your attention.
Thank you, Mr. Sato. Now we would like to turn to the Q&A session. Mr. Sato will be pleased to answer any of your questions.
Today's question and answer session will be conducted electronically. [ Operator Instructions ] Our first question today comes from Jake Wilhem with Wells Fargo.
Congrats on the quarter. I know you're no longer providing detail around HDD shipments, but I was wondering if you could give us any detail around your expectations for the near-line market heading into the December quarter?
Okay, we are not going to give you any future guidance or forecast on the HDD [ downside ]. And saying that, we're going to be looking at [indiscernible] our shipment in December and March quarter. That's the only thing we can say.
Our next question comes from James Pulsford with Eikoh Research.
I wonder, I'd like to ask a couple of things about the traction motors if I may. First of all, can you give us any more color in terms of the clients, the orders you picked up over the last quarter, maybe any of the company names and number of clients. Second question, development costs have obviously risen very sharply, and again, to be JPY 30 billion this year, so loss in the second half. Can you -- looking at your current order inflow, can you talk about how you'd expect development costs to change what you roughly expect them to be next year and the year after? So what's the trajectory there? And then the third part is you have a -- you have had, I think, a target before of sales of JPY 100 billion in traction motors in 2022 and JPY 200 billion in 2025. Are those still current or may they now be or have they been revised as a result of this order surge?
So #1 question is, what's the order, right? And that's going to be described in the -- Slide Number 15. So --
So the -- yes.
The previous quarter -- yes, you were talking about 15. As you say, we were -- this time we were separating an E-Axel order and the other order. So, we could just [ work in ] the E-Axel order, the order increased from JPY 0.5 billion 21 up to 0.7 and after that it's also gradually increased up to 23. So there we have received a new order from a new customer and that's going to be a major part of the increase. There, as you see that we do have a new, so called, other area, which is in Fiscal Year 2022, 2023, so those are what we say is in the [ hybrid ] area, as you see, then especially those at the [indiscernible] market and that is composing a huge amount of the unit in 2022 and 2023.
Are those orders from a component supplier or from the -- directly from the automakers themselves?
So usually we say E-Axel is a so-called [ system ] composed of the motor inverter and the gear. So the customer is naturally OEM carmakers. But, the others, on the other hand, is a motor, as we say, you can look at the title of Slide Number 15, while HEV motors for the European market also -- So those are the HEV motors for the European market. So, those are the motors. So the motors, usually the OEM will not buy the motor alone or rather, the other Tier 1 is [ competing to buy ] those motor, [ in the system ] and ship it to the OEM. So you can understand those E-Axel businesses, our Tier 1 business, we ship direct to the OEM but the blue line, which is the other one that we shipped the motor or some other component to the other Tier 1, then that Tier 1 is making the [ system ].
Okay, that's great. And how many -- in Europe how many Tier 1 clients do you have now?
For this list we do have [ a one ], but we did have some other Tier 1 who are committing a number in the later years, which is not listed here. So we are just cutting fiscal 2023 for this [ time ].
Yes, I'll try to respond to your second question about the R&D costs for traction motors. We now spend JPY 30 billion more than planned in this fiscal year and we have received ten models, orders, at this point and JPY 3 billion per model for R&D cost is expected. So, yes, that's why we devised our guidance downward by JPY 25 billion including this JPY 30 billion increasing of the R&D costs for the traction models. And then after that, maybe it's R&D cost will decrease because we try to standardize the traction motor system and also traction motor itself which means we'll be able to reduce the R&D cost to some extent by standardizing the traction motor system. So, this fiscal year we have received a lot of orders at this time and even though our next fiscal year we will receive the [ more ] order but we can deduce this R&D cost to more than our current fiscal year.
Okay, will the number of models increase -- it's a good answer. Can I just ask, will the number of models, do you have any idea the number of models on which you're developing likely to increase next year do you think or, I mean, have all of the -- I didn't know how far in advance you carry out the R&D and over how many years but do you have a -- I appreciate the cost per model is going to fall but what's going to happen to the number of models that you're working on, do you think?
You're talking about the number of the orders next fiscal year?
Yes, well, or number of -- where you're working on, you're doing R&D on ten models this year, when you -- which gives a certain cost. When you look at next year, do you think it's likely that the number of models that you're doing R&D on will be the same ten, dropped down to 5, go up to 20? Can you give any indication on that front or does it just depend on how many completely fresh orders you get?
Yes, that's my gut feeling that it's going to be half of [indiscernible] which means the JPY 1.5 billion -- it's most likely.
But the number of models, there are ten models this year, do you think that will be the same next year or more or less, the number of models?
I -- yes, I have no idea at this point because we -- yes, I'm expecting a lot of orders to be coming but, yes, at this point I have no idea how many.
Okay, great. And sorry, apologies -- you have time, but the last question was just whether the target for JPY 100 billion in 2022 and JPY 200 in 2025, whether that's still current or that now looks too low?
At this moment we are talking about a 2022, right? And we are talking about the volume, right? Based on that volume we say we're looking at the revenue from those traction motors which you see Slide Number 15 is a something like a over JPY 100 billion, maybe JPY 100 billion to JPY 120 billion, okay, for 2022.
So that --
So, if you're going to achieve this --
-- [ 1.25 ], yes? Yes.
Yes, yes. So the E-Axel is something like a 1.25. Yes, JPY 1.25 million, all right, a unit. Then E-Axel is much higher ASP and the blue line, the HEV motor is much lower ASP but overall the total will be something like a JPY 100 to JPY 120 billion. So clearly we can maybe achieve the target we mentioned before, right, JPY 100 billion for Fiscal Year 2022, okay?
Yes.
Then 2025, at this moment we don't have the a -- so called, the order, right, covering 2025 enough to make JPY 200 billion. So, still, we -- if we can make a JPY 100 billion or over JPY 100 billion, 2022, then we believe that we can achieve JPY 200 billion in 2025. But there's no really order to support that [ equate ], okay?
[ Operator Instructions ]. Our next question comes from [indiscernible] with Mitsubishi.
I would like to ask about the speed reducer. With regard to speed reducer market, the industry [ global ] market, it's stagnant especially in China, I think. There any change in midterm, mid long-term demand outlook for you and I also, I would like to ask about how you reviewed your capacity expansion [ problem ] at all?
Yes, long-term outlook remains unchanged because we are expecting core [ working global ] market will be expanding. Probably, it's now or later. It will be coming because, as you know, the [ working rich ] population has been significantly reduced at this point. It's kind of trend. So, maybe a core [indiscernible] would be a cover that's lost of that population. So sooner or later, that's -- the demand would be coming. That's why, long-term vision or a long-term strategy remains unchanged at this point. But the current order, it's very slow. For instance, the September quarter which is 13% down [indiscernible] period last fiscal year. So, it is now slow moving but we're not going to change our long-term strategy. So, for that, maybe in order to increase production capacity for the future, we now are investing the money to increase the [ traditional ] capacity in Japan and [indiscernible] at this point. So, that's our long-term strategy.
Okay, so you keep investing for the expansion update with your capacity while the short-term, the order, it's not as strong. Okay, do you see any turnaround in the short-term in the near future in terms of order?
Yes, actually the September quarter order intake has been increased by 62% compared to the June quarter. I'm seeing now that -- [ turnaround mainly from ] China but maybe that should be sustainable. So that really the next quarter, or this quarter, and in the December quarter, maybe -- we'll be able to see clearer [ signal ]. But, at this point, maybe I'm not sure which quarter will be the turnaround point of the demand for [ indiscernible ].
Our next question comes from James Pulsford with Eikoh Research.
Hello again. Sorry, just a couple of different questions, if I may. First of all, could you just give me an indication of what HDD profit margins were in the third quarter, in the second quarter, please?
So the margin for the HDD in the second quarter was something, just a minute, like a 24%, 24.3%.
24.3%, great. And there were no restructuring costs or anything to distort that, yes?
For the second quarter we are not posting any -- except for the onetime cost regarding to the small precision motor area. We do though in the ACI area.
ACI. Yes, I think structural reform costs, where they JPY 3.5 billion for the quarter, is that correct, and were they all in ACI or just JPY 3 billion in ACI?
Yes, JPY 3.5 is in ACI area.
So it's JPY 3.5 is the total --
-- quarter, it was -- yes. Yes, JPY 3.5, yes.
And all in -- all in ACI, and that's the total for the whole company, yes, as well as just ACI, yes?
Yes, it is. It is. And June quarter, it was -- it was JPY 25 billion and out of JPY 2.5 billion, JPY 1.5 billion was spent for service lines -- small precision motor.
Small precision, yes.
-- structure.
Our next question comes from Dong Zheng with Ariel Investments.
I have a few. First on the thermal solutions products, just wondering if you could provide us with some, I guess, can you explain what capabilities you could leverage from the existing businesses in this new business?
Okay, number one, we have been providing a lot of thermal solutions already in the [ home ] business; the fan motor business. So fan motor is used to cooling down the servers, datacenters or [ base ] stations so we have been shipping a lot of fan motor to cool down and also, as you understand in the desktop PC or notebook PC you are using a fan motor to cooling down the system. That's the fan motor we ship. There, the key point is the heat generated by those devices, mainly because of the 5G, then the heat will be much larger so the new solution is needed especially in the smartphone area so far they didn't use any fans or any heat pipe but now the heat is so enormous so that in the smartphone area they need to do some thermal solution inside of the smartphone. Then what we said was mainly we believe that the vapor chamber is one of the key solutions and that's going to be a key component to be used in the thermal solution in the smartphone. So thereby the number, the volume, of the vapor chamber or the heat pipe or heat [ tank ] number will be coming up in a very rapid manner because new demand is coming from JPY 1.5 billion number and in the unit [indiscernible] for a smartphone. Do you understand that?
Yes, am I to understand that the vapor chamber -- what's the secret to that? Is it the material composition of the product itself or is it something else, the design of it --
The key is, those thermal solutions -- the thermal solution has been provided by maybe handful, maybe 4 or 5 Taiwan thermal solution companies. So their size or the company is very small because the solution demand was limited in the PC or desktop PC or datacenters or servers. But now it comes to the smartphone, the volume becomes enormous, like JPY 1.5 billion unit per year, for example, the total smartphone. So thereby there are 5 company -- all these company is now expanding their capacity and try to give out the solutions and we [ worked ] one of that companies [ CCI ], November of last year. And then we were con -- you know, tried to integrate their technology into our thermal solution business. That means the vapor chamber, heat pipe and the fan motor and together try to maybe offer more sophisticated thermal solution to whatever -- the -- our customer. Then the biggest [ formula ], as I mentioned, is coming from the smartphone maker and already the Chinese smartphone maker are moving from the -- a current solution to the solution using a heat pipe and vapor chambers.
Got it, and the second question on the -- on Slide 16, you have to UPS unit forecast for 2025, JPY 90 million. Is -- that kind of assumes that full -- all of the auto market converts into EPS motors from the hydraulics, is that correct?
Well, maybe over 90% but we [ are after the all ]. So assuming 100 million units total car sales, 90% is -- we're going to be looking at maybe over 100 million. So, a [ little bit under ] 90%, would become the -- a [indiscernible] power steering or steering motor. That's what we think.
Okay. And then the JPY 700 billion to JPY 1 trillion target for automotive, can you remind us, to get there from the current base, what -- half and half coming from M&A and the other half organic or how should we think about the growth to get to the 700 to --
Which target and what year you're talking about?
On Slide --
What year are you talking about?
Give me a second.
Slide number --
I saw it somewhere before. Actually, it's Slide 12.
You mean the -- yes, Slide Number 12. Slide Number 12 is, as you see here, we have not changed that slide from April 2015. So it was the same [ warning ] and same commitment still we are keeping today for over 4.5 years. Then, at this moment, okay, the sales target for automotive is JPY 200 billion to JPY 1 trillion is a little bit difficult to achieve in the next year because the target year is next year. So we just remind you that any investor that we've committed this way 4 years and a half ago. Then where we are now, we are maybe looking at somewhere near JPY 600 billion there including a newly announced the [indiscernible] acquisition. So we [ do not think ] today that we are going to achieve JPY 700 billion to JPY 1 trillion next year, okay?
Right, okay. So --
So we have that in mind -- we had -- this year we may not be able to achieve JPY 700 billion to JPY 1 trillion for the auto sales. Then we say maybe roughly that could be something around JPY 600 billion.
Got it. And the -- just a quick one on the next generation braking system motors, is that mostly for the regenerative braking systems or is that including the -- so the, sorry, electric by wire motors?
The key thing is, the next generation braking system is a system, you know, functioned by the motor. So, function by the motor means in that system, even the driver [ put ] the pedal, right, and try to apply the brake then that power is not going anywhere but the motor rotates sensing the human movement, you understand what I'm saying? So, the key thing is, the new generation braking system always the braking, or brake, will be applied by the motor, another human; that's what the key characteristic of this next generation braking system -- regeneration and the other is not the key issue but rather the key thing is, always the brake will be applied by the motor.
Sorry, is it the brake by wire technology?
Yes, in -- it's a brake by wire, mean -- yes, the electric, electronic, [ order ] and the motor [indiscernible] is applying the brake, there are no physical or no, you know, other thing. So you can say that it's a brake by wire.
And the 37 million units, am I to understand that it's for 4 units per car that -- do some ma -- quick math, it implies 10% penetration by 2025?
The key point is, number one, the [ automatic ] driving. Level 2, Level 3, Level 4, we are not [ saying ] the Level 3 but even Level 2, you know, more and more on this generation braking system is coming in. The reason behind that is also the carmakers thinking to transform the current gasoline engine model into the EV, okay? When they are going to change from the current gasoline engine model to EV, then they can not depend on the engine so the vacuum power of the engine. But today, most of the braking systems of the gasoline engine system is using the vacuum power created by the gasoline engine. But if they are thinking to transform those models into the EV in the future, they cannot rely on the gas engine power especially the vacuum power. So thereby the require a new braking system, okay?
Understood. Got it. And then a quick one on the Embraco, just curious, how much -- what would be a percentage cost increase for the system, the compressors, etc., if you were to add the DC motors to the system?
You mean the cost increase from switching from AC to DC [ compressors ]?
Yes.
So the motor cost is not the whole compressor cost. So, the -- just the motor by itself we say 10% to 20%. But the motor is only a component of the total compressor. So at this moment we don't know how much is the compressor cost increase. Usually, that might be a little bit higher but we say 20% already are brushless DC and variable speed and that's going to be expanding mainly because of the -- a higher, you know, energy efficiency of those brushless DC's.
Got it, and historically, Embraco, manufactures their own motors or do they make them in-house? I'm sorry, do they buy them from external suppliers?
Usually they buy from the external suppliers. So the [indiscernible] motors. [indiscernible] motors are produced by the various motor supplier. So we understand that Embraco is a compressor maker, buying the motor from our side and put into their compressor and sell it to the refrigerator maker.
Got it. And just curious on the -- I understand that Embraco also works with different types of refrigerants if any change in refrigerant will change the -- sort of the product itself, or that the compressors could work with different types of refrigerants --
They do have a different compressor [indiscernible] household and the commercial and all that different, right? But I'm not sure what is your real question, they do have a lot of different compressor models and those would -- different…
I'm just curious if you could help me understand the [ Copeland ] compressors for the HVAC and co-chain versus Embraco compressors. What are the main differences? Is it that the power of the compressor or how should we think about the differences?
You mean the compressor for the refrigerator and the compressor for the air conditioner?
Yes.
Or auto -- yes, those are completely different.
Okay.
The reason is we are running a, you know, so-called fan motor business for the air conditioner so we know a lot of air conditioner makers as our customers, okay? Then, if you're going to be talking about a compressor for the refrigerator and a compressor for the air conditioner, at this moment from the technology and the also from the business standpoint is a completely different market.
So what types -- what types of compressors are using the refrigerators?
Yes, the type is something that you can see here like a picture here. Embraco is making a compressor, right? But, this one we don't know so much, we don't know so much about a compressor for the air conditioner because those are what our customer, air conditioner maker is usually making in-house for --
-- those are mostly -- grow -- those are mostly [ squirrel ] compressors.
We don't know so much about the points of the compressor because we are not supplying that at all at this point. We are supplying compressor for the refrigerator from our pervious operation like [indiscernible] and Embraco. We started to supply to those refrigerator makers. Then the key point is, you know, as you suggested, can we use this technology into any air conditioner, compressor, type of business? The answer is, no.
[ Operator Instructions ]. Mr. Kiyomi, 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.
Thank you very much. We would like to conclude today's conference call. Thank you very much for your participation today. If you have any inquiries, please don't hesitate to contact Nidec Corporation. Sorry, one question [ more ], we are waiting for the last one, thank you.
And we do have a question from [ Harry Waite ] from BMO Global Asset Management.
I'd like to ask a question about the health of the air conditioner market in China, the most recent quarter. I know you talked about elevated inventory levels of your customers earlier in the year, could you kind of give an update on what the health of demand is in the air conditioning space in China this quarter?
Okay, number one is September quarter is an off-season as we have been saying so usually we are seeing a -- the revenue is coming down. So if you're going to be comparing our revenue for those air conditioner business in this September quarter with the same quarter last year, still it's going to be down. So, clearly that suggests the Chinese market is not good and we heard that the inventory is pairing up over 8 month [ caution ] which is really [ right ], maybe 4 months is the right inventory level but 8 months is almost double of the -- appropriate level of the inventory. So, this quite -- at this moment, this number -- I mean, the result is not so great but not so really bad because the -- other than China, we see a huge demand in Europe and also Asia and Japan because of the very hot summer in Europe and the other part of the Asia. The overall global air conditioner market was not so bad. Okay? But China is not so great and really had a huge, so called, the excess inventory of those air conditioners in China.
Thank you and this concludes today's conference. Thank you for your participation and you may now disconnect.