Nidec (NJ) on Q4 2015 Results - Earnings Call Transcript

| About: Nidec Corporation (NJ)

Nidec Corporation (NYSE:NJ)

Q4 2015 Earnings Conference Call

April 26, 2016 9:00 am ET

Executives

Masuo Yoshimatsu - Senior Vice President, Chief Financial Officer

Masahiro Nagayasu - General Manager, Investor Relations

Kazuo Abe - Mitsubishi UFJ Morgan Stanley Securities

Analysts

Aaron Rakers - Stifel Nicolaus

Jean-Louis Lafayeedney - Haitong

John Roberts - Mitsubishi UFJ Securities Intl. London

James Holdsworth - Eikoh Research

Operator

Good morning everyone. 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 this conference to Mr. Abe at Mitsubishi UFJ Morgan Stanley Securities for opening remarks. Mr. Abe, please go ahead, sir.

Kazuo Abe

Thank you very much. Ladies and gentlemen, thank you very much for joining this conference call. This is Abe, General Manager of Institutional Sales Department of Mitsubishi UFJ Securities Tokyo. Before the meeting starts, please make sure all materials have been distributed. If not, please download the files from Nidec’s homepage right now.

Now may I introduce Mr. Masuo Yoshimatsu, First Senior Vice President and Chief Financial Officer, who will be speaking to you very shortly. First, Mr. Yoshimatsu will make a presentation. After his presentation, we will move to a Q&A session. Mr. Yoshimatsu will now discuss Nidec’s fourth quarter fiscal year 2015 results, future outlook, and management strategy. Mr. Yoshimatsu, please go ahead.

Masuo Yoshimatsu

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. Our results for FY15 are on Slide 3. As mentioned on Slide 4, we have achieved the highest net sales for four consecutive years, increased operating income, income before tax, and net income for three consecutive years following the structural reforms in FY12, with the highest figures for FY15. The March quarter operating income ratio of automotive, appliance, commercial and industrial products, which drives the business portfolio transformation, has exceeded 10% for the first time. We have also achieved net cash position for the first time in six years on a fiscal year-end basis. Cash conversion cycles have also shown improvement, resulting in further financial soundness and allowance for capital funding.

Our results over the past 10 years are shown on Slide 5 and onwards, and as illustrated on Slide 6, we were successful in transforming our business portfolio from the previously heavy dependence on small precision models to the key growth areas of automotive, appliance, commercial and industrial products.

Please turn to Slide 8. FY16 capex is expected to reach a historic high level of 110 million yen, and we will continue investments aggressively to support organic growth. The operating income of the FY15 March quarter [indecipherable] car products as well as the one-time expenses maintaining the level about 30 million yen per quarter currently.

Please turn to Slide 10. The HDD comp for FY16 is expected to decline by around 10% compared to FY15 due to the slowing down of the PC market; however, we are seeing our motor shipments decline by a modest 6% year-on-year as our market share is expected to rise to around 85% throughout the fiscal year. Regarding the focus for FY16, we are expecting net sales of 1.25 trillion yen, operating income of 130 billion yen, and operating income ratio of 10.4%.

From Slide 17, I’m going to touch on our midterm strategic targets. Vision 2020 on Slide 18 remains unchanged, and we will aim to achieve net sales of 2 trillion yen, automotive sales of 700 billion to 1 trillion yen, operating income ratio of 15% or higher. ROE of 18% or higher, and to establish five regional headquarter management [indecipherable].

Slide 20 is showing the quarterly results of the key growth areas of automotive and appliance, commercial and industrial, or ACI. Over the past four years, you’ll see that both net sales and operating income are on a stable growth trajectory. Starting on the [indecipherable] growth outlook of automotive on Slide 22, the business is expanding at a faster pace than originally expected, and the organic sales growth over 500 billion yen for FY20 is intact.

On the ACI side on Slide 23, the business is growing steadily, in line with original expectations, and the organic sales of over 400 billion yen seems reachable.

Please turn to Slide 24. The automotive industry is experiencing a major shift from hydraulic to electric components, and in addition to our proven areas of [indecipherable] power steering motors and other [indecipherable] products, we are aiming to make a full-scale entry into power train components. The market size of this business, including transfer related and transmission related products, is expected to stand up around 1.7 trillion yen, and we are already collaborating with our customers in this area.

Please turn to Slide 25. In the commercial area, or ACI, we have received orders for major components used in the traction system of low-speed electric vehicles, or LSEV, in China. LSEV is electric vehicles for short distances, and typical specifications are maximum speed of less than 80 kilometers per hour, travel distance of less than 100 kilometers, and weight of less than 1,500 kilograms. We will [indecipherable] the four-wheeled market in China and the three-wheeled market in India and Southeast Asia.

On the industrial side of ACI on Slide 26, we have received orders from a major German utility company for energy management systems. This project includes six units of 15 megawatt systems in two German states, totaling €17 million. With our technologies of motor invertors and drives, we are expanding into industrial solutions businesses as illustrated on the right-hand side of this slide.

Please turn to Slide 28. Our FDB motors have been introduced to HTC’s virtual reality system. This system allows the user to experience virtual reality by wearing the head-mounted display, and its major characteristic is that the user can walk around the room while experiencing the systems. In order to achieve these characteristics, an accurate position of the user is required, and this is materialized using the wall-mounted lighthouses which emit lasers to detect the user’s position accurately. Our FDB motors are used in those lighthouses. The market for this kind of LIDAR, or laser imaging detection and ranging, is expected to grow rapidly going forward. We will aggressively enter this market with our FDB motor technology nurtured through the HDD business.

Slide 31 illustrates our robotics related businesses. Smart AGV for warehouse management, drones for logistics, articulated robot arms for production lines, and robotic cleaners in daily life are examples where our robotic related technologies play a key role to materialize social innovation.

Slide 32 is showing our support for [indecipherable] emerging and developing countries through IoT technology. This was originally a direct request from Indian Prime Minister Modi to our CEO, Chairman and President, Mr. Nagamori in [indecipherable]. In India, it is [indecipherable] to safely AC power pumps to pump our groundwater necessary for agriculture due to the shortage of power supply capabilities and the power grid. We are Nidec have integrated all our group technology to develop a solar pump for irrigation, and by adding IoT technology to it we have built a system to be able to gather and analyze operational deltas. This solar pump can be used outside India to support agriculture in developing countries, and we will aggressively promote this as an IoT-directed business.

Lastly, I would like to take this opportunity to inform you that as of 1st of May, my assignment will be changed and I will assume the position of Member of the Board, past Senior Vice President, Executive General Manager of newly created Robot PMI Promotion Division. I will be based in Europe and will be in charge of post-March integration of acquired companies in Europe and the Americas. In this new position, I’ll be [indecipherable] to improve the profitability of acquired companies in those regions in automotive and ACI, which are crucial as growth drivers to our Vision 2020. I would like to express my heartfelt appreciation to all of you for your support that you have extended to me during my seven years as CFO. I would appreciate your continued support to the succeeding CFO, Mr. Akira Sato, and the IR team going forward.

At this time, we would like to open up the call for questions.

Kazuo Abe

Thank you very much, Mr. Yoshimatsu. Now we’d like to move to the Q&A session. Mr. Yoshimatsu would be very pleased to answer any questions.

Question-and-Answer Session

Operator

[Operator instructions]

Our first question today comes from Aaron Rakers with Stifel. Please go ahead.

Aaron Rakers

Yes, thanks for taking the question. Last quarter, you were able to help us understand the moving dynamics in the hard disc drive industry. Obviously you’ve cut your expectations on a forward basis quite significantly. I was wondering if you could first of all help us understand the breakdown of your motor shipments for this March quarter, both for yourself and how you saw the market play out, and then I’d love to, also those same numbers, understand what you’re expecting into the June quarter for the market as well as Nidec shipments. Finally, I was just curious of how the helium drives are ramping with regard to your motors as well. Thank you.

Masahiro Nagayasu

Okay, this is Nagayasu speaking, and I am explaining the volume of our spindle motor shipments during the March quarter, then also a summer forecast of our June quarter number.

So we shipped around 80.5 million spindle motors during the March quarter, where we see 2.5 inch high-end was 3.7 and [indecipherable] 7.1, and 3.5 desktops 32.3, and 2.5-inch mobile 37.3. Overall, ASP was $4.90. The key figure here is a 2.5-inch high-end is certainly reduced from the previous quarter 5.4 to 3.7, so that’s going to be causing a total server motor number is 10.8 versus 12 million in the previous quarter.

In June quarter, we are guiding around 78 million where we say 2.5-inch will be flat 3.7, and the [indecipherable] a little weaker by 6.3 and the 3.5-inch ATA desktop 31.2, and the 2.5 mobile 36.8. So we see speed maybe down a little bit, and then as you question, the helium shipment in March quarter was around 2.4 million, but it’s going to be down to 1.7 million in the June quarter.

Is that fine?

Aaron Rakers

That’s very helpful. And your relative share between those segments has been consistent with what we saw in the prior quarter?

Masahiro Nagayasu

Yes, I think there are only two suppliers today, so we are saying that overall share in each segment is very stable.

Aaron Rakers

Okay. Final question on your forward longer term forecast. Obviously you’ve laid out now through 2020, it looks like a rate of decline around 6% annually in hard disc drive shipments. I was curious if you have any opinion with regard to capacity ship dynamics in the hard disc drive industry. Do you guys have any views on how you see it with regards to that unit number, what you think capacity ship might look like for HDDs?

Masahiro Nagayasu

Well, we believe that digital data is increasing, so the capacity the AC industry is going to ship will be bigger and bigger. So the unit number is a somewhat--would be calculated by capacity by drive, per drive, and the whole capacity the AC industry will ship. So the key thing is we see more demand for storage from the cloud servers and also the other promotional service, so we do see the capacity per drive will be increasing significantly. So I think it’s going to be a function of a capacity per drive and the total capacity needed by the industry. So we are seeing somewhat cautiously estimating the number of the server hard disc drive numbers.

Aaron Rakers

Okay, thank you very much.

Kazuo Abe

Thank you. Next question, please.

Operator

As a reminder, it is star, one if you would like to ask a question. Our next question comes from Jean-Louis Lafayeedney with Haitong.

Jean-Louis Lafayeedney

Hi, this is Jean-Louis from Haitong. Thank you for taking my question. I have a couple of questions. Firstly, just on FX, can I please ask you for FY16 forecast of sales in OP, what would happen if we saw 10% appreciation of the yen? So I believe you’re using 110 to the dollar. If it were to move to an average of 100 for the year, what would we be looking at for sales in OP?

Masuo Yoshimatsu

Okay, please look at Slide 16. The second bar top--upper side is sales and the lower side is operating income. The bars are--the second bar from left indicating FX impact year-over-year basis, so our assumption for FY16, 110 yen per dollar and 120 yen per euro, those will impact on sales by 750 [indecipherable] and OP margin by 130 [indecipherable]. So this is answer to your question.

Jean-Louis Lafayeedney

Okay, thank you. May I ask also, just for the 2020 Vision that you’ve got in terms of your longer term sales target, are we also using 110 and 120 for the euro? Is it that kid of rate, or do you have a different kind of rate in mind for your longer term targets?

Masuo Yoshimatsu

Yes, basically the same rate for longer term as well.

Jean-Louis Lafayeedney

Okay, thank you. If I may just as, last quarter, so March quarter--and I apologize, I missed right at the beginning of this particular conference call, but what particular areas of weakness were a surprise, perhaps, to you? What was the biggest surprise in terms of weakness in the March quarter?

Masuo Yoshimatsu

So if you go to Slide 12, this is a quarter to quarter analysis of the OP margin movement. There is a one-timer of 3.4 billion yen, that’s hard above from the left, and this is an area we suffered from negative impact due to the lower demand from a specific customer for other small production products, so it includes impairment of fixed assets. So overall [indecipherable] our internal process, we suffered from 10 billion yen lower OP margin for the fourth quarter, and out of 10 billion yen, 6.5 billion is related to this specific product and customer and 2 billion yen for [indecipherable] motors, and 1.5 billion yen for other products.

Jean-Louis Lafayeedney

Okay. That’s very helpful. Thank you very much.

Masuo Yoshimatsu

You’re welcome.

Kazuo Abe

Thank you very much. Next question, please.

Operator

Sure, and as a final reminder, it is star, one if you would like to ask a question. Our next question comes from John Roberts with Mitsubishi UFJ Securities International London.

John Roberts

Hello. You talked about the ASP decline quarter-on-quarter. What about year-on-year? Could you give us the figures, the ASP in the same quarter last year?

Masahiro Nagayasu

Do you mean the ASP for the hard disc drive?

John Roberts

That’s right, the one you gave earlier of, I think--

Masahiro Nagayasu

Okay, so I said the March quarter number of our spindle motor ASP was $4.90, and the same quarter last year was $4.70. So $4.90 divided by $4.70, which is up around 4% year-over-year.

John Roberts

Thank you, and the same thing for the June quarter?

Masahiro Nagayasu

June quarter is not yet--you know, it’s just a forecast, so it’s not comparable as what we had. But just for your interest, the June quarter number for the past year was $4.73.

John Roberts

Okay, that’s [indecipherable], thank you. Then if I can follow on, I read from our analyst, [indecipherable] this morning, you’re moving facilities and people from HDD into other areas. What will be the effect year-over-year for 3-17 over 3-16 in terms of lower costs? Will you take 10 billion yen, or 1 billion yen? What’s the plan for the cost savings in the HDD area?

Masuo Yoshimatsu

For HDD, the March quarter OP margin ratio is around 23%, which is just lower than 0.5% on quarter-to-quarter basis for this [indecipherable] volume decline. So our target is improve OP margin 1 percentage point per quarter going forward, so during such target setting and attaining targets, we are aggressively shifting the focus from HDD motors to other growing businesses like automotive products.

John Roberts

Okay.

Masuo Yoshimatsu

So this is the process reform we are planning.

John Roberts

So the improvement in OP margin is basically by this cost cutting over the next year?

Masuo Yoshimatsu

Yes, also a better product mix and both fixed costs and variable costs steady.

John Roberts

Yes, okay. Thank you very much. Thank you.

Masuo Yoshimatsu

You are welcome.

Kazuo Abe

Thank you. Next question, please.

Operator

Our next question comes from James Holdsworth with Eikoh Research. Please go ahead.

James Holdsworth

Good evening and thanks for your time. I just had a quick look through the materials and perhaps I’m missing it, but I can’t see a breakdown of your forecast in terms of sales and profits by division. Is that in there, and if not, could you just tell me what it is, please?

Masuo Yoshimatsu

Yes, Slide 16, if you go to Slide 16--

James Holdsworth

Okay.

Masuo Yoshimatsu

So in this slide, we are describing the year-over-year change of sales and OP margin, excluding FX impact. FX impact is second bar from the left for total EBIT total and each product segment. For example, automotive and ACI, we are expecting 130 billion sales growth.

James Holdsworth

Very good. Super, that’s great. Thank you very much. Just one I thought - you wouldn’t by any chance have numbers including the forex impact would you, or not?

Masuo Yoshimatsu

At this point, this is the material for us that we can present to you.

James Holdsworth

Okay, thank you. I’ve got one or two other questions, if I may. I wonder, could you please tell me the--you also showed quite a good improvement in operating margins for your automotive, appliance and commercial area, which is very good. I wonder, for last year, for the full year and also for the fourth quarter, could you give me an indication of how the automotive and normal automotive side, what the relative margins were there for both the full year and the fourth quarter, please?

Masuo Yoshimatsu

Okay, hold on please.

James Holdsworth

Thank you.

Masuo Yoshimatsu

So for automotive full-year basis, OP margin ratio was 9.2%, and for the March quarter, or Q4, 10.9%. For ACI full-year basis, 8%, and the March quarter 10.1%.

James Holdsworth

Wonderful, thank you very much. That’s great.

Masuo Yoshimatsu

Automotive [indecipherable], sorry, full-year basis 8.6% instead of 9.2, and the March quarter 10.5.

James Holdsworth

10.5 - okay. So that’s 8.6 [indecipherable], then 10.5 and 10.1, yes?

Masuo Yoshimatsu

Yes.

James Holdsworth

Super, that’s great. Thank you. Can I ask, roughly what were your revenue, and also allowing for the asset write-down, the profit impact of your interest in haptic motors, please, and can you explain again what your thoughts are in terms of prospects for this market over--during this year and also over the next couple of years? I appreciate it’s relatively early days and so it may be difficult to say much concrete, but I’d just be interested to know what your current thoughts are, please.

Masahiro Nagayasu

Okay, so we don’t disclose haptic only, but including other vibration motors, FY15 [indecipherable] was 56 billion yen net sales. Including impairment in March quarter, OP margin was almost breakeven.

James Holdsworth

Right, okay. In terms of--can you talk about--give me any indication of the scale of that business, what percentage that might have accounted for very roughly of the 56, and when you look at this year, do you have any visibility as to what this business will look like? I mean, you’ve taken the decision to write down some assets here. Do you have other manufacturing assets still that you have committed to the haptic area, or have you written down--was 3.4 the last element, or do you have any left?

Masuo Yoshimatsu

Yes, so we have taken a very conservative accounting for March quarter.

James Holdsworth

Okay, good.

Masuo Yoshimatsu

[Indecipherable] area, we are expecting similar size of revenue [indecipherable].

James Holdsworth

Sorry - I keep interrupting you. Apologies, please carry on.

Masuo Yoshimatsu

Yes, so for this current fiscal year, FY16, our revenue forecast for vibration motors, [indecipherable] including haptic, is about the same amount as last fiscal year’s sales, 56 or 57 million yen. We are taking very conservative estimations of [indecipherable] just around 5% only.

James Holdsworth

Okay, right. Thank you. Sorry, one last question. I notice your depreciation charge you forecast for this year falls from 64.7 down to 62. Does the--I’m not sure how much of your intangibles is goodwill or non-goodwill, but is that decline just a complete dropping out of intangibles? Can you just explain the specifics, please?

Masuo Yoshimatsu

Yes, so this fiscal year’s capex forecast, 110 billion yen, includes a newly built laboratory for production engineering, and also an in-house university. [Indecipherable] buildings and equipment, the period of depreciation is much longer, so that’s the reason why the depreciation amount is lower than--lower compared to the [indecipherable].

James Holdsworth

But can you tell me for this year, what’s the split between fixed assets and intangible depreciation, or is the intangible depreciation [indecipherable] or not? Is it going to remain similar?

Masuo Yoshimatsu

We don’t disclose that information.

James Holdsworth

No, perhaps not a precise figure, but you could perhaps tell me--it was about 9 billion last year, whether it’s going to be any dramatic change for that or not.

Masuo Yoshimatsu

You are talking about amortization due to acquisitions?

James Holdsworth

Correct, yes.

Masuo Yoshimatsu

Yes, okay. The last fiscal year, [indecipherable] amortization for the year is about 7 billion yen.

James Holdsworth

In your cash flow statement, I can see a figure of 9.4 billion for intangible amortization, yes?

Masuo Yoshimatsu

Seven billion yen is [indecipherable] due M&A.

James Holdsworth

Yes?

Masuo Yoshimatsu

And the 9.4 billion yen is including other amortization, right?

James Holdsworth

Yes, okay.

Masuo Yoshimatsu

So almost same level.

James Holdsworth

Okay, super. Thank you very much. Thank you very much for answering all my questions. It’s much appreciated, thanks.

Masuo Yoshimatsu

You are welcome.

Kazuo Abe

Thank you very much. Next question, please.

Operator

Sure, and as a reminder, it is star, one to ask a question. Our next question comes from Aaron Rakers with Stifel.

Aaron Rakers

Yes, thanks for allowing the follow-up question. I was just going back to the hard disc drive motor discussion and just trying to understand kind of the dynamics relating to the declines that you’re seeing going forward. When you look at the segments for this recent quarter, are you able to provide us what the industry or what your estimate was for the industry ship between the 3.5 desktop, 2.5-inch notebook, as well as the two segments of the enterprise market, and on that, would I assume that you are assuming basically a flat relative share in each segment going into the June quarter, or is there some differential to consider?

Masahiro Nagayasu

Okay, for the industry, for the industry we say the March quarter shipment number, we estimate it at this point. We have to wait for Seagate and Western Digital announcement, but at this point I say 98 million for the March quarter. Where we are looking at the enterprise shipment [indecipherable], very small contributor, it’s 6.4 million, and the [indecipherable] is something like 9.0 million. Then--

Aaron Rakers

Okay--

Masahiro Nagayasu

Yes?

Aaron Rakers

I’m sorry.

Masahiro Nagayasu

[Indecipherable] number for March was 9.0 million, and the 3.5-inch desktop, 36.1, and the 2.5-inch mobile, 46.5. Those are the numbers for the March quarter we just finished.

Aaron Rakers

Okay, and would I assume that your relative share in each segment, your expectations, that remains unchanged, because it looks like you’re assuming in terms of the total number, you’re assuming basically an 82% relative share, unchanged with what you did in the March quarter?

Masahiro Nagayasu

Yes. The difference between the shipments and production should be considered. When we say 98 million were shipped in the March quarter, really we are estimating production number is [indecipherable] smaller than 98, something like 95. Then based on that 95 production number, we will estimate our share is roughly around 85%.

Aaron Rakers

Okay, perfect. Final question - one notable metric that kind of stands out is you’re expecting a fairly sharp decline in helium motor shipments in the June quarter relative to the roughly 2.4 million you did in the March quarter. Is there something behind that? Is there an inventory dynamic, a production versus shipment number? Just curious because correct me if I’m wrong, I believe you guys still have roughly 100% or do have 100% share in that market.

Masahiro Nagayasu

So we understand the demand for those helium drives is growing and expanding, but at the same time still the helium drive is still in the competitive position with the air drive. So all that, then some of the demand shifts as well as the competitive position of helium drives against air drives, then we say a quarter-by-quarter [indecipherable].

Aaron Rakers

Okay, thank you very much. Very helpful.

Kazuo Abe

Thank you very much. Are there any questions, please?

Operator

Mr. Abe, 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.

Kazuo Abe

Thank you very much. We’d like to conclude this conference call. Thank you very much for your participation today. Should you have any inquiries, please do not hesitate to contact Nidec Corporation or [indecipherable] representatives at Mitsubishi UFJ Securities. Thank you very much for today and have 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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