Call Start: 09:00
Call End: 09:42
Nidec Corp (NYSE:NJ)
Q3 2016 Earnings Conference Call
January 20, 2016, 09:00 ET
Kazuwo Abe - General Manager, International Sales Department of Mitsubishi UFJ Securities
Masuo Yoshimatsu - SVP & CFO
Masahiro Nagayasu - Senior GM, IR
Ben Lu - Moon Capital
Aaron Rakers - Stifel Nicolaus
James Holdsworth - Eikoh Research Investment Management
Kartik Nehru - Permian Investment Partners
Barbara Heap - British Airways Pension Investment Management
Welcome to today's Nidec conference call hosted by Mitsubishi UFJ Morgan Stanley Securities. Today's call is being recorded. At this time, I would like to pass the conference over to Mr. Abe at Mitsubishi UFJ Morgan Stanley Securities for the opening remarks. Mr. Abe, please go ahead, sir.
Thank you very much. Ladies and gentlemen, thank you very much for joining this conference call. This is Abe, General Manager, Institutional Sales Department of Mitsubishi UFJ Securities. Before the ` starts, please make sure all the materials have been distributed. If not, please download the files from Nidec's homepage right now.
Now, may I introduce Mr. Masuo Yoshimatsu, our house Senior Vice President and Chief Financial Officer, who will be speaking to you shortly. But first, Mr. Yoshimatsu will make a presentation. After his presentation, we will move to Q&A session.
Mr. Yoshimatsu will now discuss Nidec's third quarter fiscal-year 2015 results, future outlook and the management strategy. Mr. Yoshimatsu, please go ahead.
Good day, ladies and gentlemen and welcome to today's conference call. My name is Masuo Yoshimatsu, CFO 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 statement, please see slide 2 of our presentation material for details.
Now I will review the key figures and the points. Please turn to slide 3. Our results for the FY15 accumulated nine months are in the second column from the left. We have achieved the highest nine-month results in all of net sales, operating income, income before tax and net income.
As mentioned in the middle of slide 4, we have achieved eight consecutive quarters of increased net sales and 11 consecutive quarters of increased operating income. Also, for the first time in the past 23 quarters, the cash and cash equivalents have exceeded the interest-bearing debt which was achieved three months ahead of the disclosed plan. Consequently, financial base and the financial discipline have been strengthened, eyeing for Vision 2020 and this has resulted in higher fund raising capacity for such investment periods as M&A, CapEx and R&D.
Please turn to slide 6. As the HDD turns for the second half of FY15 decreased substantially due to the weak PC demand, we have seen our HDD motors shipments decline in the second half accordingly. However, concerning the differences between shipment basis and production basis, we're expecting to secure virtually a depart buck in the corresponding period.
Please see slide 7. Technological innovations are surging in various views of social environment which is creating many business opportunities, especially in the automotive area. Autonomous driving is about to be materialized which was regarded as just a dream in the past. As a result, communication between the human and the car is becoming more important and the human-machine interface or HMI, is changing the car design completely.
In Japan, the people integration have been devised so that leader less cars around on public roads from coming June. The New World IoT appears almost every day in mass media. The year 2015 [indiscernible] robotics and will be remembered as a year when service robots were received in ordinary households. Technological innovations are globally underway at a staggering pace. We will tackle these business opportunities with all of our Group companies and saturate new business areas by utilizing our Group technology.
Slide 8 [indiscernible] HMI which is one of these new areas. HMI is an interface which supports communication between the human and the machine. And its wide adoption is progressing in the automotive field and in IT devices such as smartphones and wearables. Interface facilitates communication between the human and the car or the smartphone by making the most of human senses, such as sight, sound and touch. And HMI is supported by three intertwined technologies of the filter which replaces human senses that first wear which processes information derived from the sensors and the motor which works on humans and moves machines.
At Nidec, we develop and supply HMI-related products for ADAS, displays, tactile devices and switches in the automotive and for displays and other products in the IT area. On slide 9, I am going to touch on robotics which is another new business area. In Japan, communication robots were launched by a Japanese company last July and they have a large backlog from the customers. Many other companies are also starting to sell robots for domestic household usage. These robots are designed to communicate with humans and therefore are called communication robots.
In addition to these human-type robots, drones which we hear frequently recently, are also categorized as robotics products. Leading robots and smart AGVs can be called robots as well in the sense that displace human voices. With these robots, the sensor, especially on the motor which I mentioned in HMI, are indispensable. We're not only developing and supplying various motors and speed reducers which are essential driving technologies for robotics, but also making inroads into applied technological areas such as cameras, sensors, interface and tactile devices developed in businesses with higher value added through motorization.
Please turn to slide 10. Here are examples of our Group companies where we acquired the majority of the shares first and then 100% shares afterwards. In order to put these subsidiaries back to growth trajectory, our strategy is to integrate them fully to allow for more central business management, intensively focus R&D resources on new product areas and transform business portfolio by launching new products one after another.
In the case of Nidec Sankyo, on the left-hand side of this slide, we acquired the majority of its shares first and nine years later 100% shares. Currently at Sankyo, three new areas of automotive, energy conservation and labor savings are the theme to support their midterm strategic goals. Also, on the right-hand side of the slide, we acquired the majority of the shares in the current Nidec Copal product and 15 years later fully integrated them.
As the conditional DSL2 cameras lose ground to smartphones and its tariff decline, new areas of mobile, automotive and the industrial, medical, nursing care and services have become their new team for the midterm strategic target. Most of these subsidiaries have particularly build up to growth trajectory through portfolio transformation after the complete integration.
Please see slide 11. To further promote the growth -- Group's growth and create a manufacturing system suitable for the 21st century, we have established Nidec Center for Industrial Science or NCIS, on October 1, 2015, with the purpose of enhancing the Group's manufacturing infrastructure and adopting advanced technologies. While Nidec research and development center Japan is doing its research at the world's leading comprehensive motor research institute, the NCIS will cover the wider range of research and development related to innovative manufacturing from basic to applied technology.
In particular to realize a manufacturing system suitable for the 21st century, now NCIS will invest its efforts into creating smart factory equipment, logistics and energy systems, promote IoT strategies and engaging in the R&D activities for robots from their element technologies, artificial intelligence and growth technologies, among others.
In addition to adopting new materials in the new missions and processes, the NCIS will also actively try to innovate production technologies in consideration of such new concepts as Industry 4.0 and Industrial Internet.
Please see slide 12. Nidec Group exhibited product for the first time at the 2016 international CES, the world's largest appliance show, held in Las Vegas this month. At the robotics zone of this exhibition, our latest lineup of products for robotics, tactile devices and commercial robotics were displayed and product demonstrations workshops conducted. During five days of exhibition, 14,000 visitors visit our stand, giving us many inquiries and showing great interest, especially in the drone and virtual reality.
Lastly, on behalf of the entire management team, I would like to thank our customers, partners, suppliers for their support and commitment, as well as our shareholders. At this time, we would like to open up the call for questions.
Thank you very much, Mr. Yoshimatsu. Now we would like to move to the Q&A session. Mr. Yoshimatsu would be pleased to answer any questions.
[Operator Instructions]. And we will now take our first question from Ben Lu from Moon Capital.
My first question is on slide 8, where you talk about HMI opportunities, including sensors and software and I know in the past you've focused most of your M&A efforts on more mechanical parts, namely motors. But I understand that Nagamori is now talking about more M&A opportunities potentially in the HMI sector.
So, maybe can you elaborate a little bit more about how your M&A strategy may change going forward and whether some of those M&A new areas would include the need for semiconductor parts that are crucial to some of your automotive motors? Thank you.
This is Masahiro Nagayasu. As Mr. Nagamori explained in today's analyst meeting, what we're seeing is the key technology in the robotics, as well as the autonomous driving, has clearly, as you see there in slide 8, sensors and software motors. So sensors, as Masuo Yoshimatsu explained, would be used to replace a human being, so-called the sight and sound and touch. And the software is also there to control motors.
So the key thing is we have been doing the business for the motors, but now we're adding a new technology to our motors. Number one is a controller and software which is -- one example is a so-called [indiscernible], where we're selling our motor with software, but in the future, we're going to make it a more modularized business. To do this, we need these technologies, as well as we need those products in our business. There, Mr. Nagamori mentioned that we're going to acquire a [indiscernible] company in his business to enhance our motor business.
I guess the follow-up to that is two parts is do you think you need semiconductor components within that strategy and also, as you move to more of a module strategy going forward, how does that impact your balance sheet and working capital needs?
So number one, then, if you're looking at so-called supply chain, the motors and software and sensors we see are going to provide in one module, then, as you understand, we're using of a -- so-called a controller of the motors. Those controllers, as you may know in the name of a ACU or a drive and otherwise, therein, as you understand, they are using [indiscernible] conductor in there.
So that is so-called an upper stream supply chain for us than what Mr. Nagamori mentioned in today's analyst meeting was we would like to go up the stream and also go down the stream to enhance our key confidence, our products such as motor business, okay?
Then if we're going to go for a loose module business, then clearly what we say is we do have those key technologies in the black box of ours, so it's not a simple product, but it's a combination of different -- three key technologies. But it's going to be more difficult for anyone to imitate these kind of technologies. So that is going to differentiate our product and that, we believe, will give us a higher profitability.
And then in the meantime if he is going to be doing a what kind of size and how we're going to do it, then maybe you might be asking how working capital may be changed or how the other things may change, but at this moment we're not really saying, because it is going to be depending on the size of the company.
And my final question is on the HDD side. I know you typically don't like to talk too much questions on the hard disk drives since it is not that meaningful for you, but just given the magnitude of the downside, I wanted to see if you can clarify that a little bit. December quarter, unit TAM was missed by 4 million units and you cut your March quarter forecast by 13 million units. Can you elaborate where the downside is coming from for both the December and March quarters?
Okay, so December quarter we thought the number was somewhat better, like a 117 million, but if you will be looking at the difference between our original guidance the last quarter and this guidance, we were talking about something like a 116 million in second quarter and 117 million in first quarter, then we say today December quarter was 119 million and the third quarter is 113 million. 119 million plus 113 million is something like a 232 million which is our guidance for that 233 million, so almost similar in terms of second quarter and third quarter. Okay?
Then, clearly, the weak guidance is now even to a fourth quarter which is March quarter. So clearly, we say that March quarter at this moment we see the market will be coming down. And maybe because, number one, a PC number is down and also, as you say, this year or this quarter we see a more heavier seasonality downside, so those are the major two reasons that we say 113 million original guidance is now we say 100 million. Did you get it?
Yes. But then, are you seeing any downside from the enterprise side, whether it is near line or mission critical?
Okay, so clearly if you were to look inside the different form factors, we say mainly 3.5 and 2.5 megs will be down and also mission-critical 2.5 will be down slightly, but we say fourth even better near line drive number.
And then one last thing, Nagayasu, if I can, is earlier you made the distinction between production and shipments. The numbers that you're talking about, are those more production or shipment forecasts for the unit TAM?
Okay, so once you look at the site, we have clearly mentioned it is a shipment count. Then as we say the virtually number is, if you're looking at the slide, then we say 113 million for December quarter, but we believe that production was only 111 million, okay? Then we say 100 million shipment in March quarter, but we see production will be only 98 million. So using those numbers and our shipment numbers and compare with the production number, you will find out that our share is over 85%.
And our next question comes from Aaron Rakers from Stifel Nicolaus.
I want to stick on the hard disk drive discussion. I was curious in the context of the December quarter and the commentary and stepping forward into the March quarter if you could provide the breakdown between 3.5 and 2.5, as well as the enterprise mission-critical versus near line to set us -- the basis on the commentary that you made going into the March quarter?
So into a market number, we do have something like this. 113 million number for this December quarter is not yet finalized until Seagate or Western Digital announce the real shipment number, but the current reading of 113 million by a different form factor is an enterprise like 7.7 million and near line 8.9 million. And the 3.5 is only 40.1 million and then the 2.5, 56.4 million.
And then we're talking a 100 million shipment in March quarter. We're looking at the number like enterprise going down to 6.5 million, but near line will be going up to 9.1 million and 3.5 will be down to 35.8 million and 2.5 will be down to 48.6 million--
And those were the industry numbers. I was curious if you could break down your shipments in the December quarter by those pieces.
At this moment, we say 95.8 million in the December quarter number, then 2.5-inch high end, the mission-critical, 5.4 million; 6.5 million in near line; and 37.5 million in 3.5 and 45.2 million in 2.5. And when we say 83 million in the December quarter, the 2.5-inch high end is 4.2 million and near line will be 7.7 million and 3.5, 340, 34.8 million and the 2.5-inch is 36.4 million. So, clearly, in history we're already at 85%, so all the trend is clearly for in the market.
Yes and then obviously the economics are materially different between those different pieces of the market. Last quarter, you also talked about the increasing relevance of helium-filled drives and the benefit that maybe you see within the mix. Could you give us an update? I think you even talked about maybe that being a 25% of the total near line business. Any update on near line drives now that you have two vendors actually in the market -- or, I am sorry, helium-filled drives?
Yes, December, helium was something like 2.1 million which was only 1.1 million in the September quarter. So we're looking near 2.5 million in March. And as I already gave you the number, that's -- let's see here. Just a minute. 6.6 million in December quarter and 7.7 million in the March quarter, where you can calculate 2.5 million divided by 7.7 million is something like 32% already in the March quarter.
Yes, so pretty material ramp there and continuing, very helpful.
The key thing is, as you already heard, that the other maker -- there was only one maker making the helium, but now the second maker start to making the helium.
And so, that second vendor is impactful to the March quarter or were you already starting to see some impact in the December quarter?
Clearly, we say from the March quarter.
[Operator Instructions]. And we will now take a question from James Holdsworth from Eikoh Research Investment.
I would like to ask about the other small precision motor area, please and I wonder is it correct to assume that the 12.3 revenue growth achieved during Q3 was basically driven by haptic motors and the other small precision motors were broadly flat? That is question one.
And also, I wonder, could you comment please on shipment volumes of haptic motors in Q3, what you expect in Q4? And then, doing that, can you touch on trends in both market share and the impact of any expected inventory adjustments in the Apple supply chain, please?
So we're not really disclosing a real shipment number at this point, but as you can see, as you suggested, the increase from the second quarter -- from the second quarter to the first quarter, as you suggested, is mainly by a loose kind of vibration at automotive. That is right.
As we mentioned earlier, maybe the last time, at this point we have not yet diversified this product, so the major customer is very limited and as because some of the numbers may refer to any particular customer, so we're now refraining from talking about the [indiscernible] number.
Can you give any comment in terms of what you expect or what is happening in Q4 relative to Q3 without actually touching on specific volumes?
No. At this moment, we're not giving out any guidance for a shipment in the March quarter.
Or even in terms of relative to Q3. If you take whatever the Q3 number was, if you don't know, can you make a comment on what Q4 will look like just relative to Q3?
Sorry. At this moment, we would likely refrain from talking to that number.
I have got one last thing on the subject. I wonder, could tell me how much money you have invested so far in building up your haptic motor production, please? And what your plans are going forward?
So at this moment, we're not disclosing the total number, but we mentioned in the previous quarter that the increase from the original CapEx budget to a current CapEx budget. Simply at the analyst meeting, we mentioned that of that something like a 4 billion is used for this particular vibration, not this particular, but for the vibration area.
Vibration, so I didn't catch that number. What amount was the vibration area you mentioned the last call?
At the time of talking about the second quarter results, we said that the 72 billion CapEx budget increased to 90 billion.
An 18 billion increase. Then we said that 12 billion out of 18 billion -- for this vibration motor area. That is what we said last time.
And no, you haven't made any change to your -- hadn't made any change to your CapEx plans in this area at the moment, yes?
Yes, at this moment we're not announcing any change of the CapEx budget which we changed at the time we announced the second quarter results.
[Operator Instructions]. And we will go now to Kartik Nehru from Permian.
I am just curious again on the HDD side. In your first quarter guidance, how much of the 13 million unit decline in demand do you think is destocking versus actual declines in underlying demand?
Okay. As we say, there were still at this moment at the end of December maybe HDD maker tried to adjust the inventory buildup, but there might be some impact from the inventory adjustment into that 13 million number. But that might be merely something like 2 million to 3 million or upward maybe 3 million to 4 million, okay? Then the rest is real world timing demand is down, number one, because PC is down and number two, because usually the seasonality reason because that is going to be including the Chinese New Year, where half these working days will be down.
And then, can you talk about what you expect for the next few quarters with respect to the near line HDD market? Do you expect that market to continue to grow this year and next year or are there problems in the channel on the near line side?
Okay, at this moment we understand this near line HDD business will be negotiated between hard disk drive makers and so-called a cloud service provider CSP directory. So, at this moment, I don't think there're going to be some channel issues there, but when they see [indiscernible] or a large HDD buyers are going to order these because their business is thriving and a better base for bigger storage requirement is getting larger. So because of that, we say that near line number will be higher and higher and as we said in the past, the helium will be a majority in the near term.
[Operator Instructions]. And we will now take a question from Barbara Heap from British Airways Pension.
I am just wondering if you could help me with a very general question. In your results statement, you give the information on the contribution from the weak yen and we can see the data that you have given us is the sales increase and the OP increase. Now the OP increases more significant, so the sales increase is more significant than the operating profit increase. And if I look at your operating margins overall, they are not expanding.
So the implication here is that without the currency benefit, your margins are actually contracting. But I struggle as I go through the numbers to identify what area you are seeing that contraction in. I am wondering if you could help me with that.
Okay, thank you for your question. So quarter-to quarter basis, we had suffered from weaker demand for air conditioner and also overall demand in China market. And for the [indiscernible] development, we're investing heavily on R&D and CapEx, so temporarily providing our profitability.
Also, as we address our business needs and amortizations of intangible assets are also contributing to lower profitability temporarily. So we're making the right investment on R&D and CapEx, as well as M&A. So we haven't changed our Vision 2020 target, so that's our overall situation.
Would you be able to identify areas where -- more specifically where you are maybe seeing margins not moving in the direction you want? Because as you have mentioned, you are doing lots in terms of R&D, M&A, development costs and it is difficult sometimes to strip out where those are going. So, as I said, it looks to me as though you're seeing overall margin contraction. Is that mostly coming through the areas of the -- I guess that is the AACI. Is that where you are indicating that the margin contraction is coming from?
Again, ACI suffered from seasonality and we had demand for air conditioner, but for March quarter, we're expecting recovery of seasonality; also, a new demand for our products, for new area like AGB and so on. So, we're on the right track to attaining 10% OP margin for ACI and automotive.
Could I also ask another question which is a completely different tack, but it is just that in the area where you're talking about the shifting to modularization, sorry, I am unclear at the moment whether or not you are able to provide modularized products or whether you need to do further investment before you can actually provide those products commercially?
Did you talk about the tax question or a more strategic question regarding a modularization strategy?
It is a strategic question on the modularization and it is -- I will just repeat the question. It is I am unclear as to whether or not you can actually provide these products commercially at the moment. So do you have the facilities that you need or can you buy in from the supply chain to provide the modularized products commercially now or do you need to do further investment before you can provide them commercially?
Okay, what we were talking about is not really now question. Because what we say is more future question, maybe two years, three years from now, what is the trend of the current so-called innovation in the market and where we're supposed to go. So if we're really talking about the automotive area, as you may know well, after making a contract it will take at minimum two years to make those sales realized.
So at this point, we're pushing that in the many area like air assist, ECU and automotive. Then some other function by the others in these strategy in the future, then the sales; it is going to be in the auto area will be further down there. Okay? So it is -- we're not really talking about anything in the particular immediate future.
Okay, I understand that, but if you are developing products now for two years out, as you know, as you mentioned that the auto supply chain is very long, presumably you are doing R&D on these products now. So I am just wondering. You currently have got facilities or you are able to work and develop on products now with the components that you have within your Group company or do you need to actually outsource in order to develop those modules?
Okay, so at this point, as we say, we're doing this, but we do have some indication because of the resources that we have or the variety of technology that we need, so clearly we say that we need those technology and those -- our human resources demanding in this new area, like a sensor and software.
So that's the reason why that, as Nagamori mentioned in today's analyst meeting, that we're looking for any opportunity in the so-called technology in this area and in terms of supply chain, you mentioned that we will be looking into the upper stream and also we're looking at the downstream from here. So as we do here so we have some indication, that is the reason why we're looking at those opportunities in the future, including the merger and acquisitions.
And as you may know that we already mentioned that we were strategically have alliance with IBM Watson. Those are some of our efforts to strengthen our position in this market. But strategic alliance is one thing, but still it is just one function; it does not cover everything. So we're always saying that we're still looking for these opportunity in the future.
Mr. Abe, there are no further questions today, sir. So at this time, I would like to turn the conference back over to you for any additional or closing comments.
Thank you very much. Then we would like to conclude this conference call. Thank you very much for your joining today and should you have any inquiries, please do not hesitate to contact Nidec Corporation or U.S.S representatives at Mitsubishi UFJ Securities. Thank you very much. Have a good day.
Thank you. This does conclude today's conference. We do thank you for your participation. You may now disconnect.
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