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Nidec (NYSE:NJ)

Q2 2013 Earnings Call

October 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

Karl Hammond

Jon Greenhill - Baring Asset Management Limited

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

Raj Menon

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 at Mitsubishi UFJ Morgan Stanley Securities for the opening remarks. Mr. Kiyomi, please go ahead, sir.

Akihiro Kiyomi

All right, thank you very much. Ladies and gentlemen, Thank you very much for joining this conference call today. This is Kiyomi, Head of Equity Group of Mitsubishi UFJ Morgan Stanley Securities Tokyo. 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, and after his presentation, we will move on to the Q&A session. Mr. Nagamori will now discuss Nidec's second quarter of fiscal year 2013 results, future outlook and management strategy. Mr. Nagamori, could you start please?

Shigenobu Nagamori

[Japanese] First of all, I would like to talk about the financial results of the first half of FY 2013, and the cumulative results will be mentioned. [Japanese] Now we have set a new record in net sales on a consolidated basis at JPY 430 billion. [Japanese] And in terms of the consolidated operating income, we have exceeded by far the initial guidance, and so therefore, we are on course with a V-shaped recovery.

[Japanese] And furthermore, I mean, with the changes taking place in our business portfolio, the details of which we've explained previously in terms of the automotive and the appliance, commercial and industrial area, we have also set a new record at the operating income level of [ph] JPY 9.6 billion. [Japanese] And so therefore, this has led to the second upward revision in our guidance this fiscal year.

[Japanese] And so in net sales, we have made an upward revision by JPY 30 billion and a JPY 5 billion upward revision in operating income. [Japanese] The results have been an upward revision made in terms of the dividends. For the first half, this has been increased from JPY 40 to JPY 45, so that for the entire fiscal year, the dividend will be JPY 90 per share.

[Japanese] And so therefore, although if you look at the situation of the industry as a whole, then we see that the situation is not entirely favorable, however, because of the new products, as well as the entrance into new markets that have been carried out, we have seen contributions of these factors into terms of both net sales as well as profits. [Japanese] And furthermore, we have carried out a series of acquisitions over the past 4 or 5 years, and because of the improvement in the business results of those companies, then we are seeing this improvement taking place very rapidly. And so as a result, we are seeing upside from these elements as well.

[Japanese] And we have talked about the shift in the overall business portfolio. And since we have seen, as previously mentioned, the downturn in the PC market, as well as the downturn in the digital camera market, we have focused in the area of the precision -- small modules, as well as the electronic components. And so we have focused our efforts in the new businesses to contribute to net sales, as well as to profits. And so therefore, we have been solidly moving forward in progressing in these areas.

[Japanese] In regard to how we intend to make a shift in our business portfolio as we head towards FY 2015, if you'll refer to Page 15, then you will see the details.

[Japanese] And you can see how the business portfolio will shift from looking at the comparison between the business portfolio of FY 2011 as opposed to FY 2015. And you will see that there is going to be a major shift that will be taking place. [Japanese] And well, if we look at the situation, whereas in terms of the net sales and profits, up until FY 2010, a major portion has been represented by the small precision motors. We will see that the percentage that's represented by that area will be going down. But in its place, we will see a major growth in the areas of the automotive and appliance, commercial and industrial.

[Japanese] So that means that relatively speaking, the overall dependence, which we had in the HDD area, is going to be going down.

[Japanese] So therefore, the core of our growth from here onwards will be focused in the area of the automotive, appliance, commercial and industrial, as well as in the area of small precision motors. It will be in the non-HDD area.

[Japanese] Now, if we look at the situation of the past net sales data, you can see the details on Page 16. You can see that in the 7- to 8-year period from 2000 to 2007, there has been major growth that has been achieved during that period. After that, we faced the Lehman crisis, there were the floods in Thailand, and the appreciation of the yen also caused an impact in terms of net sales, as well as profits. However, with the period starting from 2013 onwards, we are looking forward to a new period of growth. [Japanese] Now in terms of the improvement in revenues from here onwards, there are 3 points that must be mentioned.

[Japanese] Now, first of all, in the past, when we look at our group in -- on a consolidated basis, there are 233 companies. And we had continued to operate on -- with them as independent business units, so that there was not consideration made to the synergy to be generated among the group when we consider the terms of the net sales and profits generated by those companies.

[Japanese] However, what we are striving to achieve is to move forward under the banner of One Nidec, so that for all the group companies, it will be necessary for us to take into consideration how synergy for the group as a whole can be achieved. [Japanese] Now the policy is that, whereas in the past for a capital expenditures, for recruiting of people and for development activities, as well as basic research, each of the companies had carried out their own separate activities. However, from here onwards, the group companies will be in united, although they will remain separate companies as the operations will become more united so that waste can be eliminated and we can achieve new revenues. [Japanese] And so we will be focusing on business synergy to be achieved through the group as a whole and so that the group companies can be united in efforts into penetrating new markets, as well as to mutually providing each other technologies so that new products can be developed. And so we are looking forward to the results of the business synergies that can be generated as a result of these activities.

[Japanese] And in terms of cost synergies as well, whereas the procurement activities have been carried out by each company independently, we are now going to be moving forward on a company-wide joint procurement basis, so that it will be possible for us to look at what would be the least expensive in terms of procurement of products. And so, therefore, we will be looking for united efforts so that the waste can be eliminated and revenues can be increased. And for that purpose, the global consolidation headquarters will be carrying out these activities.

[Japanese] And furthermore, whereas or not the second major reform we'll be carrying out -- we will be carrying out will be in regard to the various expertise held by the individual group company. Whereas, there may have been several group companies that had the same type of expertise in regard to motors, these will be organized more so that it will be possible to have more contribution made in terms of the revenues. [Japanese] And the third area is in regard to the basic research motor facility that will be completed soon. This will be carrying out activities for basic research on motors.

[Japanese] And furthermore, in the research facility that we are planning, we are going to be pursuing 3 direction for motors of the future. The first is that we'll be seeking to achieve motors that are lighter, thinner and shorter and smaller. The second point would be that we'll be seeking energy conservation through wireless technology and battery drive to lower the electrical power consumption. And the third area are in the problems of noise and vibration. And so in the facility for basic research, we will be carrying out the research activities starting with the material aspects and covering all areas of motors, so that the research activities can be carried out to solve the issues held by the group as a whole.

[Japanese] And so through these kinds of activities, we are hoping that for the group companies as a whole, we'll be able to move forward on a comprehensively consolidated basis, so that in FY 2015, it would be possible to increase our revenues by 15%.

[Japanese] I've already spent 20 minutes carrying out this explanation. So therefore, I would like to spend the remaining time on a Q&A session and answer any questions which you may have.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll hear from Ben Lu with Red Tail Capital.

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

I have 2 questions. One, can you talk a little bit about why Pat Murphy is leaving? I was under the impression that he was one who did all the acquisitions. I was thinking that he would be in charge of running ACIM? And maybe if you can talk a little bit about how K Pang's strategy will be a little bit different or similar to what Pat Murphy was going to do? And then my second question is, you've also recently outlined a strategy to sell more ACIM modules rather than specific components. Can you talk about how selling more modules, how that will impact your sales and margins going forward?

Shigenobu Nagamori

[Japanese] Now in regard to the first question that you mentioned, Mr. Ben Lu, up until now, we had been striving for greater growth. And so we considered that if we continued as we had done in the past, it would be a problem. And so therefore, we wanted to change the way we've moved forward with our business. And furthermore, in regard to what we had been thinking about, the thoughts of Emerson was not necessarily in correspondence with that of Nidec. And so therefore, what we wanted to do was to try and strive for a new growth method and new challenge. And so therefore, we have decided to move forward with K Pang to achieve greater growth. However, having said that, this does not mean that what we had carried out with the dismissal of Mr. Pat Murphy, but rather because of personal circumstances, Pat Murphy has left. [Japanese] I think that Pat did a good job for the past 3 years. [Japanese] However, in regard to what we want to achieve for NMT, then we have a higher target in mind. [Japanese] Now my expectations is that one of the -- Mr -- in regard to K Pang, the partner who had been serving as the COO, it is my hope that he will be more challenging and will be willing to strive for even a higher goal. [Japanese] And wouldn't this be typical, Mr. Ben Lu, about what you would see in the United States, although it would not be so typical for a thing like this to happen in Japan. [Japanese] And was that an adequate answer to your first question?

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

Yes. And then on the second question was about the strategy to sell more modules and what impact that has on your sales and margin outlook.

Shigenobu Nagamori

[Japanese] Now in regard to the strategy, the more modular we go, it will possible to have benefits in higher unit prices, and it would mean that we can increase the prices 2x or 3x higher. So this will benefit the sales, the value-added elements, and then consequently, it will benefit also in terms of higher profits. Of course, to do this, it will be necessary to have the technology to accomplish this, but we do have the technology to do this. And so therefore, we would like to go in the direction of a greater modular approach so that we can achieve differentiation. [Japanese] Now in terms of a modular, more complex approach, it is necessary to have the sophisticated technologies available to do this. And by combining 2 or 3 or even 5 technologies together, then it would be possible to achieve competitive advantage over our competitors.

Operator

[Operator Instructions] Next we'll move to Karl Hammond with Eikoh Research Management, Investment Management.

Karl Hammond

Nagamori-san, in terms of restructuring costs. I think you incurred around JPY 3 billion of costs in the first quarter. I was wondering what that level was likely to be in the second quarter and whether you could give any guidance as to what you would expect those to in the second half and perhaps going into next year? As a second question, in terms of small precision motors, I think in the first half, you generated around JPY 26 billion of OPM. Just wondering, how did that split roughly between the HDD side and the precision motors?

Masahiro Nagayasu

Cost savings in Q2 was JPY 3 billion, the same as quarter 1. That is our information. And for the second half of the fiscal year, we're estimating JPY 2 billion each for Q3 and the Q4. So in total, JPY 10 billion cost savings in this fiscal year.

Shigenobu Nagamori

[Japanese] We do not give out the breakdown on that here, in regard to your second question.

Karl Hammond

All right, okay. And if I may, I just have a question regarding the General Motors business. I know, certainly, you've said in the presentation about increased demand from clients for sort of modular solutions. And I know that applies to -- also is in a sense of offering motors and ECUs and then also, in the appliance area, offering perhaps sort of compressors alongside motors. It does seem that although you do have some technology in that area, but it's perhaps lagging behind, obviously, the technology you have in the motor space. And also, when you look at other industries, modules tend to be lower margin, perhaps, than individual components. Could you perhaps talk a bit about that and how, perhaps, you'd mitigate those effects?

Shigenobu Nagamori

[Japanese] You mentioned about the -- aside from the motors, our technology being somewhat lagging behind. In what sense do you mean lagging behind?

Karl Hammond

Well you don't -- while you have a long illustrious history in motors, you don't necessarily have that history in ECUs and compressors within sort of air-conditioning [ph]?

Shigenobu Nagamori

[Japanese] Not at all, because we have made acquisition of companies that have technologies, so we do have such technologies in place. [Japanese] So we're not at all lagging behind. Rather, we should say that we are in advance of others. [Japanese] So your anticipating of what's taking place is mistaken in that sense. [Japanese] So we would like your accurate understanding of the situation that we're in. [Japanese] Because we dislike the word lagging very much. We are advanced. [Japanese] Please refrain from using such a word as lagging to describe us.

Karl Hammond

Okay. I should have expected that. And with regard to the modules question and the fact that, certainly looking at other industries, modules tend to be lower margin, perhaps, than sort of individual components?

Shigenobu Nagamori

[Japanese] That is -- on the contrary, it is completely the opposite in the case of motors. [Japanese] What we mean when we offer modularization, it means that we are going into the solutions business, that is we are trying to solve problems which the customers have. And when customers are centered on motors and have pains, then what we want to do is to offer solutions to the pains that our customers are going through. [Japanese] Now in the case of dryers, which is an easy-to-understand example, they use motors and then they have the blower to dry, and the problems which the customer has is that there is too much noise being generated and there is the matter of the fans, and also too much electrical power consumption. These are the problems which our customers have. [Japanese] In this case, it is not just the motors, but rather the design of the fans that we can offer. We can provide the ECUs and components, so thereby it would be possible for us to provide solutions that are causing problems -- for problems that the customers are suffering through. By the -- by our solutions, it would possible to reduce the electrical current and also the noise that is being generated. That is the kind of thing which we are trying to offer. [Japanese] And so therefore, in the sales price, whereas opposed to selling the 3 elements separately, it will be possible by combining them together to sell it at a sales price of 1.5x or 2x higher. [Japanese] Also, even if there are companies that can offer the individual products, there are not that many companies that are able to combine 3 elements into a modular form and provide the performance necessary. [Japanese] So your understanding is perhaps in contrary to the facts. [Japanese] So the general understanding is that a modular approach means that there is a greater margin to be gained. [Japanese] Because there are not that many companies in the world that are capable of taking this kind of a modular approach.

Operator

And next, we'll hear from Jon Greenhill with Baring.

Jon Greenhill - Baring Asset Management Limited

Just on Slide 15, looking at your fiscal '15 targets. When we look at sales, your targets for ACI and automotive are the same, yet the profit distribution still favors ACI quite a lot. Is that simply to do with the upfront R&D still in automotive? And when, if ever, would we expect automotive to get to the same kind of margin level as you see in ACI?

Shigenobu Nagamori

[Japanese] It is due to the R&D expenses. [Japanese] Okay, if you look at the FY '15, that our target is JPY 300 billion for ACIM and with the same JPY 300 billion for the auto. But we assume JPY 150 billion, half of that, will come from the merger and acquisitions. Then for those other merger and acquisition -- [Japanese] We have had that a little bit, but less than half that. But still, for those who manage, it will be difficult to assume some OP margins. So we are saying that for the OA gross portion, we were assuming 15% target, but we were assuming 12% OP margin for the future M&A portion. That would making a total automobile margin looks lower, but in the reality, it is not.

Masahiro Nagayasu

[indiscernible] of which we have paid 14, it is a breakdown of automotive section, but if possible [indiscernible]. That portion of the margin is 15, and we are taking consolidated view on the M&A portion. So including amortization of our intangible assets, that the portion our is measuring thereabout [ph]. So overall, 7.5% over the JPY 300 billion of net sales.

Jon Greenhill - Baring Asset Management Limited

And then just the second question, within the One Nidec strategy, isn't it the perfect time to actually go to One Nidec and tidy up some of the small and slightly messy subsidiary listings that you have, and therefore, not have to battle with how these synergies are split amongst minority holders in various companies?

Shigenobu Nagamori

[Japanese] Well, we don't know when that would take place. [Japanese] If we deem that it'll be effective to clear out the situation, then we will be move forward with efforts to do so. And if we deem that it is not effective, then we will not do so. [Japanese] Now in order to move forward with taking steps, unless there are benefits to be derived from doing that, it would be meaningless to move ahead with efforts.

Operator

And is Mr. Greenhill -- next we'll move to Aaron Rakers with Stifel.

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

The questions on the expectations for the hard disk drive TAM assumptions that you're making in your presentation today. You've guided to a JPY 135 million TAM, which I think is a reduction from what you've previously said. And then you've also guided JPY 500 million in total annual shipments in calendar '14 and '15. Can you help us understand a little bit, given how you guys are looking at the mix changing within those businesses, what assumptions you're making between the traditional PC business relative to the enterprise piece of that, including both mission-critical as well as near-line drives?

Masahiro Nagayasu

Okay. This is Masahiro. Long time no see. What we have seen this -- the long-term trend of the hard disk drive demand. What we are looking at is the strategic decline of PC numbers. And we're assuming 12% decline of PC numbers for the calendar year 2013; and 2014, 7% decline; then 2015 and onwards, it's a minus 5%. Those are our assumptions. Then also, we assume that the SSD would have some penetration into the notebook market, where we assume 10% penetration, 2013; 15%, '14; and then the 5% each will be increasing, therefore, in years. Then, depending on that, and also for this year's number, we have to take into the account that the -- a new game console demand, which we believe that's going to be a maybe onetime for this year. So next year, those demands from the game console will be gone. But we were thinking that the enterprise and near-line numbers is going to increase, and maybe we are seeing the enterprise number will be a flat, but the near-line number will be increasing around the 25%, '13; 10%, '14; and 15%, '15 and onwards. So these are the major assumptions that we're making to come up with these medium and long-term how the strategy and demand work [ph].

Operator

[Operator Instructions] And next, we'll hear from Raj Menon with State Teachers of Ohio.

Raj Menon

On Slide 17, the appliance, commercial and industrial products, could you talk about your relative competitive advantages, vis-à-vis the current suppliers of these motors? So who do you expect to replace in the overall market?

Shigenobu Nagamori

[Japanese] First of all, we are the top manufacturer and the biggest in size in terms of the brushless motors. [Japanese] And we are following the major flow, in which we are going to replace the conventional AC motors or the brushed motors with our brushless motors. [Japanese] And because of wireless cards and also using batteries, this trend is becoming stronger. [Japanese] Or furthermore, there is also the energy conservation trends that force people to reduce their energy consumption. [Japanese] And furthermore, in the various nations, we are seeing legislation taking place limiting electrical power consumption. [Japanese] And this area is where we have brushless motors, which has this aspect as its most prominent feature. [Japanese] And we have a very high share in this particular segment. [Japanese] And the biggest business way that we're pursuing is that we are trying to replace the competitors who have been using conventional technologies in this industry, such us AC motors or brushed motors, with our brushless motors, where there is less competition. [Japanese] And so because our motors happen to be light, thin, short and small. And furthermore, because it does not consume as much electricity, and so therefore, it can make a contribution to energy conservation and there is less noise or vibration generated. It seems that we have very strong competitiveness in the market. [Japanese] And it's quite difficult to explain just in words what this is about, so perhaps if you could take the opportunity to come to Japan, visit our research facilities, then it will be very obvious to you as soon as you see what we mean by this. [Japanese] And most likely, you will go home astonished at what we are able to accomplish.

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. We are concluding the conference call today. Thank you very much for your participation today. If you have any Q&As, please feel free to contact Nidec Corporation. [indiscernible] at Mitsubishi UFJ Securities. Thank you very much again. Have a good day or good night.

Operator

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

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