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Nidec (NYSE:NJ)

Q3 2013 Earnings Call

January 22, 2014 9:00 am ET

Executives

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

Hiroko Charles

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

Raj Menon

Raj Bharwani

Operator

Good day, everyone, and welcome to today's Nidec 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. Abe [ph] at Mitsubishi UFJ Morgan Stanley Securities for opening remarks. Mr. Abe [ph], please go ahead, sir.

Unknown Executive

Yes. Thank you very much. Good morning, and good afternoon, ladies and gentlemen. Thank you very much for joining this conference call. This is Abe [ph], General Manager, Institutional Sales Department of Mitsubishi UFJ Morgan Stanley Securities, Tokyo. Before the meeting starts, please make sure all materials have been distributed. If not, please download the files on Nidec's homepage right now.

Now may I introduce Mr. Shigenobu Nagamori, the President and CEO of Nidec Corporation, who will be speaking to you very shortly. But first, Mr. Nagamori will make a presentation. After his presentation, we will move to the Q&A session. Mr. Nagamori will now discuss Nidec's third quarter fiscal 2013 results, future outlook and then management's strategy. Mr. Nagamori, please go ahead.

Shigenobu Nagamori

[Japanese] How do you do, everyone, and good evening. [Japanese] Now I would like to give an explanation of the outline of the results for the third quarter of this fiscal year. [Japanese] Now I believe that the materials have been handed out, but in regard to the 9-month cumulative results, we have been able to set new records in terms of the consolidated revenues, as well as net income.

[Japanese] And for the third quarter operating income results, it is the first time in 5 quarters that we have been able to return to operating income ratio of double digits at 10.4%. [Japanese] And it can be said that in regards to the shift of the business portfolio, we have seen a very smooth progression.

[Japanese] And we have also set new records in terms of the 9-month cumulative operating income results for automotive, appliance, commercial and industrial products. [Japanese] So therefore, for the full fiscal year, we have made the third upward revision. [Japanese] And furthermore, we have made a revision in regard to the full year's dividends by increasing it compared to the previous fiscal period by JPY 15 to make it a record JPY 100 dividend.

[Japanese] Now in regard to the third quarter, there were some seasonal factors that impacted things, as well as a large amount that was involved for the development expenses so that these were pressures upon the results. [Japanese] However, we anticipate that we will see a steady improvement as we go for the fourth quarter and onwards and into the next fiscal year. [Japanese] And in regard to the third quarter, for the shipments for the HDD, the quantities have reached the level of JPY 103 million. [Japanese] And we have seen a steady improvement in the operating income ratio.

[Japanese] And furthermore, we have seen steady solid improvement in terms of the profits generated in the area of automotive, appliance, commercial and industrial products, which are referred to as the General Motors area. [Japanese] And at the beginning of this fiscal year, we had promised that we believed that there would be an operating income of JPY 20 billion. However, we believe that as of now, we should be able to achieve a level of JPY 21 billion. [Japanese] And in this segment, we believe that since it's quite easy to get a view of the outstanding orders on the medium to long term, we believe that it would be possible to have further improvement in terms of the revenues, as well as profits.

[Japanese] And so therefore, we believe that in the next fiscal year, the possibilities have become quite high that we would be able to achieve results of -- from JPY 35 billion to JPY 40 billion. [Japanese] And we are even more confident because of the large expectations we have for the growth in the future of the new businesses that we can once again enter a second phase of high growth rates.

[Japanese] And furthermore, in regard to the growth segments in the future, outside of the HD area, we believe that we will continue to see increased revenues, as well as profits in the area of small precision motors. [Japanese] And in this segment, whereas in the past, the motors for the PC market, as well as the digital camera market, represented a large percentage. Since then, there has been a shift in the business portfolio so that there has been a shift in the growth patterns here. [Japanese] And in this market, we are seeing a major market change that is taking place right now.

[Japanese] First of all, in regard to all electrical products, we have seen a strong trend of the products becoming cordless. [Japanese] In other words, almost all of these products have shifted to a battery-drive system. [Japanese] And also, the trend to make products more lighter, more thinner and more shorter and more compact have become even more stronger. [Japanese] And furthermore, the noise suppression as well as measures against vibration have become prominent here.

[Japanese] And so there are very strong inquiries coming from the market in regard to the area of DC brushless, high-efficiency motors, which we excel in. [Japanese] And there is a major market trend that is taking place whereby instead of the conventional brushed AC motors, we are seeing a shift towards the DC brushless high-efficiency motors. [Japanese] So therefore, we anticipate that we should see very large growth in this segment from next fiscal year onwards.

[Japanese] And also, another area that is doing very well is in the area of air-conditioning units. And we see a global trend whereby there is increased demand for brushless motors in this area. [Japanese] And we also saw -- we also see a very rapid growth in the very large industrial applications such as in the shale gas plants or also in infrastructure deployment in Asia and the Mid-East. [Japanese] And we're becoming even more strongly confident that in all segments, we will see more improved results.

[Japanese] Last year, we had made an announcement in regard to the contract to acquire Honda Elesys. [Japanese] And currently, there is investigation for any antitrust violations, but we believe that we should be able to complete the closing of this deal by the end of March this year. [Japanese] And so therefore, from the next fiscal year onwards, we are having great expectations of the synergy effects that will result from the combination of these 2. [Japanese] And furthermore, in regard to the Mitsubishi Material CMI, a change in the company name has been carried out. And under the name Nidec Sankyo CMI, we are also seeing steady results taking place here.

[Japanese] And since we have moved forward by carrying out a shift in the business portfolio from the conventional HDD-based business by focusing on a comprehensive area of activities from the micromotor level to the large-sized motor level, we are increasing our confidence in the fact that we should be able to achieve major growth and become the largest and strongest motor company in the world. [Japanese] And as we head towards 2015, we are striving to achieve revenues of JPY 1.2 trillion and an operating income ratio of 15%.

[Japanese] And this is an outline of the results. And in regard to any questions that you may have, we would like to take advantage of the Q&A period to answer your questions. [Japanese] Also, I would like to request that we limit each person to one question at a time. So if you have several questions, we would appreciate it if you could first ask your first question and then ask later.

Unknown Executive

Thank you very much, Mr. Nagamori. Now we'd like to turn to the Q&A session, and then Mr. Nagamori will be very pleased to answer any questions.

Question-and-Answer Session

Operator

[Operator Instructions] And at this time, there are no questions.

Shigenobu Nagamori

[Japanese]

Operator

We do have a question that just came in from Hiroko Charles with TT International U.K.

Hiroko Charles

I just wanted to ask you about -- regarding the extra R&D cost. You said there was an extra R&D cost for the quarter ended. How much was the actual cost more than you have expected?

Shigenobu Nagamori

[Japanese] Now for the third quarter, when we estimated that I was speaking of an operating income at a level of JPY 21 billion, so it can be considered that there was an extra charge of JPY 2.5 billion.

Unknown Executive

Thank you. Next question, please.

Operator

Next, we'll move to Aaron Rakers with Stifel.

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

I guess the question is last quarter, you guys had given an outlook for the hard-disk drive industry. Obviously, you put up some slightly better-than-expected results and outlook into the next quarter. But just curious of how your updated thoughts stand with regard to the hard-disk drive industry shipments for calendar 2014 and '15 relative to the prior guidance of roughly 500 units shipped, and in particular, how you're assuming or what you're assuming in terms of growth within that enterprise piece of that motor business.

Shigenobu Nagamori

[Japanese] First of all, in regard to the anticipation that we had in the beginning of the fiscal period of 500 million units, we have seen that there has been an increase over that so that we are looking at perhaps around a 10% increase by 530 million or 550 million units. [Japanese] And probably in terms of the prices here, not of the hard disks but of the motors themselves, we believe that it has -- the prices have bottomed out. And so therefore, we have seen that regardless of volume, we are seeing an upside in terms of the average sales price. [Japanese] And this is one indication of the fact that there is a gradual shift in the product mix. [Japanese] So we believe that rather than looking at the production volumes or the percentages of market share, it's necessary to look at what the product mix is and where is it that we have the share -- market share. And that would be the areas that would be impacting the profitability. [Japanese] And so therefore, when we look at the TAM situation, then we believe that in this regard, it should be in the area of 550 million plus/minus some number. And this should be the situation for fiscal 2014, as well as fiscal 2015. But after that, although this is a personal opinion on my part, we believe that the overall volume should be going up gradually. [Japanese] And it may be said that this is a slightly overly conservative outlook. However, we believe that it is necessary to look at our profitability in those terms and then consider it a positive factor if there is an upside to that.

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

And any comment or thought on the enterprise portion of that growth assumption? I mean, I think you've given a forecast of that explaining how fast do you see that piece of the business growing.

Shigenobu Nagamori

[Japanese] Now we believe that you're referring to -- for servers. But when we look at the PC market then, although it had been anticipated that the PC market volumes will be going down, still, we see a steady progression there. [Japanese] And for the servers, we see the gradual growth in quantities. However, rather than looking at the quantities, I believe that the key is which models are going to see growth from here onwards. [Japanese] So we believe that it's not simply going to be a matter in the future of talking about the fact that markets are good or bad based on just volumes alone. That will no longer be the case. [Japanese] And if the average unit price goes up, then it should be necessary to look at the overall growth in the revenues. [Japanese] So therefore, what we are especially focusing on is in regard to what degree the growth margin rates are going up.

Unknown Executive

Thank you very much. Next question is from Ohio Teachers.

Operator

And next, we'll hear from Raj Menon with State Teachers Ohio.

Raj Menon

Quick question on the electronic and optical component segment. It seems like you had a very good quarter with good margins in that segment. What was the source of the strength? And what is your outlook?

Shigenobu Nagamori

[Japanese] We believe that one factor is that we were very successful in moving forward with the shift in our business portfolio. [Japanese] So despite the fact that we are seeing a very poor situation in the digital camera market with the element technology that are used there can be applied to other areas such as the cameras for automotive use. [Japanese] Or there are various areas, which we had not in the past penetrated into, which we are now doing, is represented by examples such as in the area of medical care or semiconductors or robots where we are penetrating the markets. [Japanese] So therefore, we -- our take on this is that our margin rates are improving as a result of this. [Japanese] So we believe that this kind of trend will continue for a long period of time from here onwards as well and that we will be seeing increased profitability as a result of the shift in our business portfolio. [Japanese] So it's not just in this segment, but in the next year or 2, especially in the next year, we believe that it's going to change things greatly as a result of the strong shift that we'll be carrying out such as in the next fiscal year of our business portfolio. And this means that there is going to be a considerable change in the content of the business that we carry out.

Unknown Executive

Next question please.

Operator

Yes, we'll hear from Larry McManus with Gryphon International.

Raj Bharwani

This is Raj Bharwani from Gryphon International. I have one clarification and one question. The clarification is, Nagamori-san, when you were talking about JPY 35 billion to JPY 40 billion during your prepared comments, it sounded like that was operating profit per quarter. And I assume that ties into the JPY 1.2 trillion in revenues and the 15% OPM you're talking about. But if you'd clarify if that is what you were referring to when you were talking about JPY 35 billion to JPY 40 billion. The question is in terms of your progress that you're making in things such as consolidation of purchasing and manufacturing locations, et cetera, could you just update us as to how far along you are in your plans knowing that it's probably a continuous process? But would you say that you are 50% done, 75% done? And are we seeing the impact of those initiatives on the operating margins already? Or is that still to come?

Shigenobu Nagamori

[Japanese] It should be mentioned that the JPY 35 billion and the JPY 40 billion -- JPY 35 billion to JPY 45 billion figure was mentioned for the revenues of the automotive, appliance -- the operating income for the automotive, appliance, commercial.

Masahiro Nagayasu

So additionally, we mentioned that the JPY 35 billion to JPY 40 billion OP for the year covering auto and ACIM only. Did you get it?

Shigenobu Nagamori

[Japanese] In regard to the actions to be taken, we believe that about 70% of the action that needs to be taken have been completed. [Japanese] However, in regard to how this will push up our profits, for this fiscal year, it would be JPY 5 billion; and for the next, it would be JPY 15 billion; and after that, it would be JPY 30 billion. And the plan is moving forward smoothly. [Japanese] And we believe that the various different items need to be implemented. And as we steadily move forward with those efforts, there will be a slight time lag before the results become apparent. And for some cases, it would take between 3 months to 6 months. And as accumulation of these results, then we will see the impact as previously mentioned of JPY 5 billion, JPY 10 billion and then JPY 30 billion. [Japanese] And in regards to your question, looking at this from a different perspective, it would mean that these kind of efforts for improving profitability will be accumulated and would be placed onto the results of a shift of our business portfolio from areas of high volatility to that of comparative stability, and so therefore -- which is more comparatively stable areas that we'll be shifting to so that we will be not looking at just simply quarterly ups and downs of the profits, the fluctuations of quarterly profits, but rather, we are looking at an upside in both the revenues, as well as the profits on a sustainable basis for the next 3 years, 5 years and 10 years.

Raj Bharwani

Just a point of clarification again on the automotive profitability of almost JPY 40 billion, is that -- for which fiscal year, and is that fully burned including all amortization of goodwill, for example, and R&D?

Masahiro Nagayasu

Okay. For that one, as I mentioned, that covers the automotive and the appliance and the commercial and industrial. And the amount is talking about the operating profit for the full fiscal year 2014.

Raj Bharwani

And that's fully burned, correct?

Masahiro Nagayasu

Yes, all after the amortization of any intangibles or any other margin accretion-related costs.

Operator

[Operator Instructions]

Unknown Executive

Okay. This is Abe [ph]. Thank you very much, and then so we would like to conclude this conference call. Thank you very much for your participation today. And then should you have any inquiries, please do not hesitate to contact Nidec Corporation or you ask us, the representatives at Mitsubishi UFJ Morgan Stanley Securities. Thank you very much.

Operator

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

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