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Nidec Corporation (ADR) (NYSE:NJ)

Q1 2014 Earnings Call

July 23, 2013 9:00 am ET

Executives

Akihiro Kiyomi

Shigenobu Nagamori - Founder, Chairman, Chief Executive Officer, President, Chairman of Nidec-Shimpo Corporation, Chairman of Nidec Sankyo Corporation, Chairman of Nidec-Read Corporation, Chairman of Nidec Nissin Corporation, Chairman of Nidec Copal Corporation, Chairman of Nidec Tosok Corporation and Chairman of Nidec Copal Electronics Corporation

Masahiro Nagayasu - General Manager of Investor Relations Department

Analysts

Benjamin Lu - J. & W. Seligman & Co. Incorporated

James Pulsford

Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division

Mark R. Yim - GAMCO Investors, Inc.

Barbara Heap - British Airways Pension Investment Management Ltd.

Operator

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

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

Akihiro Kiyomi

Well, thank you very much for joining this conference today. This is Kiyomi, Head of Equity Group of Mitsubishi UFJ Securities Tokyo. Before the meeting starts, please make sure all the materials have been distributed. If not, please download the file on Nidec's homepage right now.

Now may I introduce Mr. Shigenobu Nagamori, President and CEO of Nidec Corporation, who will be speaking to you shortly. First, Mr. Nagamori will make a presentation. After his presentation, we will move on to a Q&A session.

Mr. Nagamori will now discuss Nidec's fourth quarter of fiscal year 2012 results, future outlook and management strategy. Mr. Nagamori.

Unknown Executive

[indiscernible] FY '13.

Akihiro Kiyomi

I'm very sorry. 2013 results. Very sorry. First quarter of fiscal year 2013. Very sorry, for everyone. Mr. Nagamori, could you start, please?

Shigenobu Nagamori

[Japanese] Thank you very much for gathering for this call. [Japanese] And I would now like to touch upon the highlights of the first quarter.

[Japanese] For the first quarter net sales, we have set a new record. [Japanese] Our operating income, compared to the initial guidance, we have exceeded the results by JPY 5 billion. So we have been on course in a V-shaped recovery.

[Japanese] And although on a year-on-year basis, the profits were down in regards to the hard disk drive small precision motors, so in terms of the automotive, the home appliance and the industrial, we have seen profits at JPY 4.5 billion, which is a new record for us. [Japanese] And so, therefore, for the full fiscal year outlook, because we have been able to exceed our guidance by JPY 5 billion, it has been decided that an upward revision on operating income by JPY 5 billion shall be made.

[Japanese] Furthermore, in terms of net sales, there has been an upward revision for the net sales of the full fiscal year by JPY 20 billion. [Japanese] And we have seen that, in regards to the previous fiscal period structural reforms and other adjustments that have been made, the effects of this are being realized.

[Japanese] And furthermore, in regards to the past acquisitions that have been made in the area of appliance, commercial and industrial products, as well as in the automotive area, we have been able to make full-fledged efforts in getting profits.

[Japanese] And certainly, in the area of automotive, as well as in appliance, commercial and industrial products, we believe that in terms of both net sales, as well as in profits, there can be major growth that can be expected for the future.

[Japanese] And so, from here onwards, as we head from 2013 to 2016, the way that the transformation of our business portfolio will be carried out steadily and very quickly.

[Japanese] And whereas we had been focused in the past to really expand in the HDD motor area, we believe that it will be other small motor areas, as well as the automotive and the appliance, commercial and industrial product area, in which the emphasis on both sales and the profits will be made in. [Japanese] And we believe that, relatively speaking, when we look at the category of the small precision motors, the non-HDD area will grow in terms of both net sales, as well as in profits.

[Japanese] And we believe that when it comes to 2014, in terms of the top line in the net sales for the automotive area, as well as the appliance, commercial and industrial product area, will exceed that of the small precision motor area.

[Japanese] And furthermore, when it comes to profits, in 2015, we believe that the automotive, as well as the appliance, commercial and industrial product area, in terms of operating income, will exceed the profits of the HDD.

[Japanese] And so, therefore, there is going to be a very swift change made in shifting our portfolio. So I believe that we are now entering a new stage of growth.

[Japanese] In regards to the HDD motor market, we believe that it will not be possible to anticipate the major growth in the quantity. Rather, because of the impact of the PC market, we believe that, at best, it will remain flat and perhaps possibly go down. [Japanese] And so, even if this goes down, we believe that we will be able to cover that but with the area of other compact motors, as well as in the area of automotive, appliance, commercial and industrial product.

[Japanese] And we believe that we are seeing steady growth in our market share, especially in the area of the growth observed in emerging markets for that of air conditioners and so on.

[Japanese] And generally speaking, worldwide, in each of the countries, because of the various types of laws that will be placed so that it will be required to use high-efficiency, high-tech motors, we believe that there is further wind blowing in our favor.

[Japanese] And furthermore, in terms of the fixed expenses and the structural reforms and other adjustments that have been made in the previous fiscal year, we believe that, as net sales increase, then profits will also follow steadily.

[Japanese] And despite the weaknesses in the PC market, as well as the digital camera market, we believe that the strength that we have in the automotive market, as well as in the commercial and industrial product, and also in the non-HDD compact motor area, we will be able to achieve strong growth so that we will be more than adequately able to cover the weaknesses in the PC and the camera markets.

[Japanese] And starting from this fiscal year, as we look at 2013, 2014 and 2015, compared to the past several years whereby there has been somewhat of a stagnancy in our net sales, we believe that we will be able to get out of that situation.

[Japanese] And we believe that -- I believe that our company is now facing a stage of a new era of growth.

[Japanese] It's been a brief explanation on my part, but I've touched upon the highlights of the first quarter results. And in regard to other aspects, I would like to cover them in the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll hear from Ben Lu with Seligman.

Benjamin Lu - J. & W. Seligman & Co. Incorporated

My first question is really on the ACIM, as well as the auto business. It seems like you guys are doing really well there. Can you talk a little bit about how much of the strength there is coming from just general macro versus share gains or execution on your part? [Japanese]

Shigenobu Nagamori

[Japanese] So as far as we have been able to observe in the Q1 results, we believe that the positive effects of the macro economy have not yet been felt by us. [Japanese] However, we believe that we are benefiting from the depreciation of the yen. [Japanese] And it must be mentioned that over the past 2 years, we have launched onto the market many new products. And as a result, have been able to acquire many new customers. And we believe that finally, the results of all of this are being observed. [Japanese] Also we have seen steady progress in the improvement of the profitability of the companies that we had acquired. [Japanese] And furthermore, synergies are now being realized. [Japanese] And furthermore, we are also having an increase in the top line so that our capacity utilization is also benefiting. [Japanese] And we believe that these are all positive factors for future profitability. [Japanese] And also, we have also been able to -- be able to benefit from the favorable winds blowing worldwide demanding energy conservation. [Japanese] And especially in China, whereas in the past, the mainstream has been inefficient motors that have been used. Because of regulation coming about and because of the fact that there are subsidies being provided for energy conservation, we are seeing now high-grade motors now being adopted. [Japanese] Furthermore, in other Asian countries besides China, such as India or Turkey, as well as in South America, markets which we had not been able to reach out towards in the past, we are now seeing progress. [Japanese] And another way of expressing this would be to say that, whereas we have been spreading seeds for the future over the past 10 years, now the results are being generated of our efforts. [Japanese] And we had always been talking about the fact that Nidec is not simply an HDD motor company. And finally, we are seeing the results of the efforts that have been made. [Japanese] And we believe that this will become more clearly evident from Q2 onwards. [Japanese] So even if there is a negative situation in the PC market or the digital camera market, we are headed in a direction where we are not going to be adversely affected by this.

Benjamin Lu - J. & W. Seligman & Co. Incorporated

Okay, great. And then, in terms of the Q1 upside to operating profits of about JPY 5 billion, I know that at the Tokyo meeting, you mentioned that JPY 1 billion was because of the yen, and the JPY 4 billion was because of higher volume. Can you break down that JPY 4 billion upside from volume by the different product segments? How much were from auto, small precision, ACIM, et cetera? [Japanese]

Shigenobu Nagamori

[Japanese] We have not made detailed disclosures to that extent.

Benjamin Lu - J. & W. Seligman & Co. Incorporated

Okay, great. And then, my last question is, if I look at your HDD TAM forecast, for Q2, you originally thought 135 million. Now you have 140 million. So we're talking 5 million upside. Q3 is unchanged at 140 million. But Q4 goes from originally 140 million to 130 million, so that's a 10 million downside. So maybe if you can just help us understand what drove -- what is driving the 5 million unit upside in Q2 and what's causing the 10 million unit decline in Q4? [Japanese]

Masahiro Nagayasu

Okay, Ben. We have seen the market is weak except the new game console demand. And we're estimating the demand for the new game consoles around the 10 million on the side of the hard drive and 5 million for a September quarter and 5 million for the December quarter. Those are the reason that we are keeping a 140 million forecast for the second quarter, whereas we are raising our forecast from 135 million to 140 million for September. But we were seeing that the number will be down in the March quarter next year.

Operator

[Operator Instructions] Next, we'll move to James Pulsford with Eikoh Research.

James Pulsford

I'd like to ask a few questions about the precision tool size motor area, if I may. And my first one is, I wonder would you please comment on the fact that the U.S. dollar at these HDD motors fell both quarter-on-quarter and year-on-year? And perhaps, could you also give a comment to that, what you expect to see there going forward? [Japanese]

Masahiro Nagayasu

Okay. We are seeing the dollar ASP for our spindle motor for hard drive will be -- are coming down around 0.5% per quarter, from March quarter to June quarter. Then from June quarter to this September quarter, at this point, we are seeing a similar result. So what we are seeing is a little bit lower percentage of the pricing down, only 0.5% per quarter at this point. Because as you may understand that hard disk drive price is more stable, thereby the component price, like our motor price is also stable, nearly flat or slightly down.

James Pulsford

And why did it fall by 5%? Or 5% or 6%, for this last quarter? [Japanese]

Masahiro Nagayasu

No, no, I said 0.5%. So if you look at the -- our dollar ASP for the March quarter was around $4.66. Then, that is coming down to $4.64 for the June quarter. Then, September quarter, we are looking at $4.62. Then, in the December quarter, around $4.58.

James Pulsford

But didn't -- in the quarter that just finished, did it not fall in dollar terms by about 5% or 6%? You mentioned that in your materials. It says that it does, here it did.

Masahiro Nagayasu

Yes. Okay. That is coming from the method of calculating the dollar ASP. So in the past -- in the last quarter, because of the yen depreciation, as you understand, then the dollar ASP was somewhat calculated a little higher than $4.66. So if you're just using a pro yen sales, divided by our spindle motor hard disk drive volume, and divided by the average foreign exchange rate for the quarter, then our number would be coming up to around the $4.94, and that was a little bit high. So what we are talking about is using that method, then the dollar ASP was supposed to come down a little bit. But in the more -- in the other calculations that we're using on the constant dollar basis, we are finding that the dollar ASP is not coming down as such.

James Pulsford

Right. Can I ask also, what percentage of HDD motors went to servers in Q1? Does that continue to increase?

Masahiro Nagayasu

Okay. The server number for the June quarter was around the -- 14%, 14.1%, which is up from 12.7% -- no, sorry, 14.7%, which is coming down a little bit from 14.7% in the March quarter. But still, looking at those server area, because the percentage is more influenced by the floor number, okay? The real number that we ship for the server spindle motor was, for example, for this quarter, was around -- the number was 14.4 million, which is up from 12.9 million in the March quarter.

James Pulsford

Right, right. You told me -- gave me 2 figures. One is 14.1% against 14.7%. The other is 14.4 million against 12.9 million. What's the difference between those 2, please?

Masahiro Nagayasu

Okay, so the total number of shipments for the server spindle motor was, in the March quarter, the number was 14 -- just a minute, yes. The total number of the server motor was, in the March quarter, that was 12.9 million. Then, the number we shipped during the June quarter was 14.4 million, okay?

James Pulsford

Million? Okay, got you.

Masahiro Nagayasu

In terms of percentage, the percentage of that was 14.7% in the March quarter, but 14.1% in the June quarter.

James Pulsford

Great. That's great. Can I ask, just to finish up, could you comment within the small precision area, could you comment on the split of profits between HDD motors and other precision motors in Q1? And also, how you see that -- how you see profitability of both the HDD side and your other small precision motors changing over Q2, Q3, Q4, please? [Japanese]

Shigenobu Nagamori

[Japanese] We are not disclosing to that detail of segments.

James Pulsford

Do you not give a rough split, like 25%, 75%? Or comments as to how that may change? I heard this with some comments to that effect in the Tokyo meeting. [Japanese]

Shigenobu Nagamori

[Japanese] I do not recall making any such statements in regards to a more detailed explanation of the breakdown of segments.

James Pulsford

Okay, I understand that. I'd ask just one very last question. The HDD area, do you expect volumes to be broadly flat from Q1 going into -- for the rest of the year? Do you think it's possible to further improve profit margins compared to Q1? And if so, why? [Japanese]

Shigenobu Nagamori

[Japanese] The profit margin will be improved. [Japanese] The reason why is because, first of all, there are various types of improvement that are being carried out because of the structural reforms and other adjustments that are being made. And also, the other aspect is because of the fact that the product mix will change.

Operator

[Operator Instructions] Next, we'll move to Aaron Rakers with Stifel.

Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division

I just want to follow up on the server number. Relative to the 14.4 million number that you just disclosed, could you tell us what that was a year ago? And then also, relative to your 105 guide -- 105 million guide for this quarter, how do you anticipate that to trend into this quarter, into the back half of the calendar year?

Masahiro Nagayasu

Okay. So the June quarter number, which I said was a 14.4 million and the 1 year ago, the same quarter, the number was around 16.2 million. Then you're asking me a trend?

Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division

Do you expect that contribution to continue to go up? Or how are you thinking relative to the 105 million? How do you -- what do you expect that number to be in the current quarter?

Masahiro Nagayasu

Okay, this quarter, we are looking at a similar percentage. [indiscernible] Okay?

Operator

And next, we'll move to Ben Lu with Seligman.

Benjamin Lu - J. & W. Seligman & Co. Incorporated

One, I wanted to ask you, Nagamori-san, have you noticed any impact from China ending their energy savings subsidy as of May 31? [Japanese]

Shigenobu Nagamori

[Japanese] Although the subsidy ended, there is going to be, once again, a new subsidy system in place as of October.

Benjamin Lu - J. & W. Seligman & Co. Incorporated

So you're expecting another subsidy program to come in October? [Japanese]

Shigenobu Nagamori

That's correct.

Benjamin Lu - J. & W. Seligman & Co. Incorporated

Okay, great. And then, my last question is, you gave some very bullish numbers on Techno Motors. You're looking for sales to double to JPY 100 billion in fiscal March 2017. Can you talk about what is driving that double yen sales? How much of that is organic versus M&A? [Japanese]

Shigenobu Nagamori

[Japanese] There are no acquisitions taken into consideration at all. [Japanese] This is completely due to organic growth.

Benjamin Lu - J. & W. Seligman & Co. Incorporated

Okay, can you talk about what are some of the growth drivers here in terms of products or other geographies? [Japanese]

Shigenobu Nagamori

[Japanese] It's the market situation. [Japanese] So as -- Ben, do you understand that specifically, the Chinese market is the driver? But at the same time, overall, the Asian market is also expanding in air conditioners. [Japanese] India and Middle East and other areas. So we're looking on non-Chinese market also.

Benjamin Lu - J. & W. Seligman & Co. Incorporated

Okay. So it sounds like a lot of the growth driver will be coming from the Chinese AC market? [Japanese]

Shigenobu Nagamori

[Japanese] Yes, China -- China is also a growth factor. But then, there's also the major factor of the new emerging economies.

Benjamin Lu - J. & W. Seligman & Co. Incorporated

Got it. And do you have any idea what percent of, let's say, ACs in China or other emerging markets are brushless today? And where do you see that going by fiscal March '17? [Japanese]

Shigenobu Nagamori

[Japanese] We think that the percentage represented by brushless motors is only in the area of around 15% or so, so there is going to be still a tremendous momentum that we can expect to happen.

Operator

[Operator Instructions] And we'll hear from Mark Yim with GAMCO Investors.

Mark R. Yim - GAMCO Investors, Inc.

My question is on your M&A plans. You mentioned on Slide 7 that you're looking through fiscal 2017 to acquire something in the automotive sector. Can you give us -- I know you can't be specific, obviously, but just some color. Are you looking mainly within Japan? And is the purpose for technology or is it for distribution? Things like that. [Japanese]

Shigenobu Nagamori

[Japanese] We'll be looking at both domestic, as well as overseas. [Japanese] And we'll be carrying out M&A activities in order to supplement where we are lacking in both technology, as well as in markets.

Mark R. Yim - GAMCO Investors, Inc.

Okay. And another question has to do with the air conditioning side. Huck [ph] , can you reveal that you're a supplier to Daikin? And was this a recent client development? Or have you been supplying them for a long time? [Japanese]

Shigenobu Nagamori

[Japanese] We are a very strong supplier to Daikin. [Japanese] In fact, we are the top supplier to them. [Japanese] And it is a very long-standing relationship of dozens of years.

Operator

And we'll move on next to Barbara Heap with British Airways Pension.

Barbara Heap - British Airways Pension Investment Management Ltd.

I have 2 questions. The first is about the thin panel ultra-thin HDDs. I'm sorry if this is actually in the presentation, I just haven't found it. What percentage is now going into the ultra-thin? And I'm just wondering, can you just talk generally about the adaptation -- the adoption of ultra-thin products? I was reading an article which was suggesting they're starting to be adopted in items other than PCs. I'm wondering, are you seeing that trend at all? Could you just elaborate on that? And the second question is just a follow-on question on the brushless motors. I'm just wondering particularly in developing markets what the price difference is between brush and brushless motors? [Japanese]

Shigenobu Nagamori

Okay, so the ultra-thin spindle motor for hard disk drive like a 7-millimeter thickness or 5-millimeter thickness. For this June quarter, more than half of our 2.5-inch hard disk drive spindle motors are going to a thin pack. So 7-millimeter is now becoming the majority of our 2.5-inch shipment. That's number one. Number two, as these will be used mainly in the PC right now, but we believe that, that's going to be used in the tablets and some other core [ph] motor mobile device, as the 5-millimeter is now coming. And especially, the 5-millimeter is designed to be adapted in the tablet. [Japanese] In regard to your second question, in regard to the price difference between brushless and brush motors, it would depend on the application. And in some applications, there is not much difference between brush and brushless. Whereas in other applications, there could be as much as 20%. So the reply would be anywhere between 0% to 20% difference.

Barbara Heap - British Airways Pension Investment Management Ltd.

Okay, and then can I just clarify in the 0.5 -- 5-mil -- 0.5, the comments about the tablet. Are you seeing any genuine inquiries? Or is this still in sort of R&D and development? [Japanese]

Shigenobu Nagamori

[Japanese] We already have a customer.

Barbara Heap - British Airways Pension Investment Management Ltd.

Can you elaborate on what percentage might be going into tablets?

Shigenobu Nagamori

[Japanese] Please forgive us as we are told by our customer not to talk about it. [Japanese] Rather, ask the hard disk distributor. [Japanese] It would be a problem if we replied to such a question.

Barbara Heap - British Airways Pension Investment Management Ltd.

I think I'd get the same reply from them. They'd obviously tell me [indiscernible] [Japanese]

Operator

[Operator Instructions] And 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.

Akihiro Kiyomi

All right. Thank you for your participation today. If you have any further queries, please let us know to contact Nidec Corporation or our U.S. representatives at Mitsubishi UFJ Securities. Thank you very much, again, and good night or a good day.

Operator

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

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