Nidec's (NJ) Q1 2016 Results - Earnings Call Transcript

| About: Nidec Corporation (NJ)

Nidec Corporation (NYSE:NJ)

Q1 2016 Earnings Conference Call

July 22, 2016 09:00 AM ET

Executives

Masayuki Abe - General Manager, Institutional Sales Department, Mitsubishi UFJ Securities Tokyo

Akira Sato - Executive Vice President and Chief Financial Officer

Masahiro Nagayasu - General Manager, Investor Relations

Analysts

James Holdsworth - Eikoh Research

Hamish Adam - Ruffer

Aaron Rakers - Stifel

Mark Kim - GAMCO Investors

Joe Petrecki - Stifel

Presentation

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 this conference over to Mr. Abe at Mitsubishi UFJ Morgan Stanley Securities for opening remarks.

Mr. Abe, please go ahead, sir.

Masayuki 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 the materials have been distributed. If not, please download the files from Nidec’s homepage right now.

Now may I introduce Mr. Akira Sato, Executive Vice President and Chief Financial Officer, who will be speaking to you shortly. First, Mr. Sato will make a presentation. After his presentation, we will move to a Q&A session. Mr. Sato will now discuss Nidec’s first quarter fiscal year 2016 results, future outlook, and management strategy.

Mr. Sato, please go ahead.

Akira Sato

Okay. Thank you very much Mr. Abe. And welcome to today’s conference call. My name is Akira Sato, Chief Financial Officer of Nidec. I will be your main speaker for today. Joining me is Mr. 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 the first half quarter of fiscal year 2016 are on slide 3. As we mentioned on slide 4, we have shifted from previous U.S. GAAP to IFRS transformed the growth. Sales for this year was 3% down year-on-year mainly due to the inefficiency, however, the operating profit was 6% up exceeding the previous highest year recorded in the same quarter of 2015. In product groups, the operating profit ratio of automotive and appliance, commercial and industrial or so called ACI both of which are drivers for the business portfolio transformation. It’s continuing to improve.

Now, please turn to slide 5. As I mentioned, we have shifted to IFRS from previous U.S. GAAP for the first quarter of fiscal year 2016. The purpose of this shift is to improve the group management and disclosure even further as a global company based on the global standard and managerial accounting has also been turned with that using IFRS across the group companies. The impact of shift is only limited to the extent of pure adjustment and these clarifications.

The fiscal year 2016 outlook based on IFRS also – it remains unchanged while the previous announced in April. However, considering the current exchange rate situation, we have changed our in-house exchange rate to 105 yen per dollar and 115 yen per euro. All of that shift to IFRS and exchange of in-house exchange rates are expected to have negative impact on our forecast; we have maintained the figures based on the results of the first quarter and outlook and beyond.

Please turn to slide 9. Despite the rapid yen appreciation, we have achieved the highest operating profit in the first quarter of fiscal year 2016. Now please turn to slide 10. The HDD, hard disk drive trend and the motor shipment in the first quarter were shipped at slightly higher than originally expected. However, given the uncertainties in the market going forward the annual focus remain unchanged.

Slide 11, we’ve shown the mid-term trend for the hard disk global market. The shipping volume is expected to decrease gradually and the previous remain unchanged from the April forecast. The capacity is expected to continue to rise on the back of a global digitalization. However, we see capacity for hard disk drive increasing the landscape, it’s [indiscernible] which is expected to offset the volume that we have and the keep the product there from the hard disk drive flat-ish going forward.

Now slide 12, it shows the quarterly results of automotive and ACI key growth areas of the company. All those sales and operating profit for the first quarter of this fiscal year was down Q-on-Q due to the drastic yen appreciation. You would be able to see strongest flow that we scheduled already on the steady growth projected.

Please turn to slide 13, regarding the electric power steering or EPS motor, which is our core product in automotive price. As you can see, we have seen our global share increase in that space as the market is expanding on the back of the [indiscernible] and we are aiming to exceed our 50% global share in fiscal year 2020.

Please turn to slide 14, also in the automotive area we are seeing motor shipment for Dual Clutch Transmission or DCT to increase drastically from fiscal year 2017 over. And shipment volume over the produce from fiscal year 2015 to fiscal year 2020 is expected to grow by 3.5 times. This is because our advanced technologies for [indiscernible] and higher outlook is addressing a broader range of customers for Dual Clutch Transmission.

Please turn to slide 15, in the ACI area it was traditionally AC motors, which was leading the so called [indiscernible] appliance product such as washer, dryer, and dish washer. However, our Brushless DC motors are increasing its share recently on the – back to their superior energy efficiency.

In the fiscal year 2020, we are seeing 50% of motors used in the web appliance area to become Brushless DC motors. And this is expected to have a positive effect on the improvement of operating profit margin in ACI. Next is, please turn to slide 16. One of our subsidiaries Nidec-Shimpo is launching robotics related products. Firstly, FLEXWAVE, did [indiscernible] access, which plays well of [indiscernible].

And the second is CORONEX, did use therefore basic access, which trades well on few months shorter and with designs to achieve quietness require [indiscernible] side by side. Third one is, S-CART, S-CART is a next generation automotive guided vehicle and does not require batteries and [indiscernible] is high precision [indiscernible] accelerator, that’s the best [indiscernible] using very less pressure instead of gears to achieve [indiscernible].

All these products have dragged us to expanded our group businesses in the fast growing robotics related market. Slide 17 is showing two acquisition completed in this first quarter with the acquisition of 100% ownership interest in ECE and Italian cable hoist manufacturer. We are aiming to strengthen our group position in the building construction machines market.

We also acquired approximately 94.8% of shares of a ANA-IMEP, which is a Romanian washing and drying machine motors manufacturer. Through the transaction not only expecting to enhance the competitiveness of appliance motor business in the European markets we also intend to bid at major manufacturing base for ACI in Romania, which is a cost efficient company with qualified labor force.

We intend to utilize these Romanian companies [indiscernible] benefits and facilities, including a manufacturing factory for the appliance business and the new remake investment and enhance its production capacity for the commercial and industrial business as well. So that we can establish an optimal production structure [indiscernible]. In the future, we intend to use this company as an engineering center and share [indiscernible] center of ACI business. Lastly, on behalf of the entire management team I would like to thank our customers, product launch, suppliers for their support and betterment as our shareholders.

At this time, we would like to open up the call for questions. Thank you very much.

Masayuki Abe

Thank you very much Mr. Sato. Now we would like to turn to the Q&A session. Mr. Sato will be very pleased to answer questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from James Holdsworth with Eikoh Research.

James Holdsworth

Hi good evening and thanks very much for your time today. I got a couple of questions, if I may about the HDD motor business and I wonder, could you comment, in fact give numbers if they are available on what happened to motors, the server use demand in the quarter and also within that near line, I’m sorry very precise within that helium use near line motor shipments or through helium filled near line motor shipments; and if there are any changes in trend you would like to comment about that would be great? And secondly, I wonder, could you give just a brief comment on what the HDD motor operating margins where in the quarter please, will have it changed? Thank you.

Masahiro Nagayasu

Okay, this is Nagayasu speaking. So, we say a total shipment for June quarter of our spindle motors were 83.1 million where the server application is 10.4. Among that 10.4 enterprise mission critical ones are 3.2 and near line application was 7.2. Then overall ASP was $4.76 and a 3.5 – among the near line was 7.2 million we say 2.3 million is helium, which comprising around a 32% of the near line. Then we have a shipment number for 3.5-inch, which was 30.630.6 [ph] million and 2.5-inch 42.2 million, which is making an 83.1 million shipment that we shipped during a June quarter. Is that fine?

James Holdsworth

That is tremendous, very detail. Thank you very much indeed.

Masahiro Nagayasu

Comment on the near line, a near line number for a March quarter was 7.1 million then we say 7.2 million is lucky for us, but going forward we see a September quarter number would be higher and at this moment we are looking at something around 7.7 million near line number.

Operator

Hamish Adam with Ruffer, your line open.

Hamish Adam

Hi there, thank you for your time. Can I ask what has caused the FX sensitivity to change from 0.78 billion per yen on the OP on the dollar moves and 0.23 billion on euro news at the end of last year to the level of – is it 1.1 and 0.3 billion today?

Akira Sato

Please see the page, slide 3. That sensitivity remains unchanged. As you said the $1 million change 1.1 billion yen [indiscernible] area basis and 0.3 billion yen on 1 euro change, that remains unchanged.

Hamish Adam

Sure. If you could explain why sensitivity rose versus, I’m just trying to understand because the geographic split of revenues have seemed to have changed too much, so I just wonder, I know this is not a new thing that is quartered within, it was a new thing at the end of Q4, but if you could remind why the sensitivity changed?

Masahiro Nagayasu

Okay, so fiscal year 2015, we stressed on sensitivity number and we did not change that often, number one. Then we acquired a German [indiscernible] on February 2015. So at that point we were not sure what kind of a contribution of that operation could be in terms of a euro, in terms of the OP. Then during a - fiscal year 2015 what you are observing is a rising revenue for the auto business as there was ACI business. So, at the end of fiscal year 2015, we calculated all these contribution in terms of revenue and in [indiscernible] of the OP then we came up with a new number starting from April we used that number which you mentioned. Is that fine?

Hamish Adam

Okay, thank you very much.

Operator

Our next question come from [indiscernible].

Unidentified Analyst

Hello, can I just ask about the outlook or the situation for M&A acquisitions for the rest of the year versus how you viewed the opportunity say 6 months ago, do you feel that the opportunities have become better or maybe it will take a little bit more time than expected? Thank you.

Akira Sato

I think it is a [indiscernible]. Of course yen appreciation and also the variation of the expected company. That has been more. That’s why we have many opportunities to acquire the company this fiscal year and then we are looking at several companies to be acquired and then really this fiscal year we will be able to - I know that is kind of our position.

Unidentified Analyst

Thank you very much. That’s great.

Masahiro Nagayasu

Thank you. Next question please.

Operator

[Operator Instructions] Our next question is from Aaron Rakers with Stifel.

Aaron Rakers

Yeah, thank you. Thank you for taking the questions. I wanted to go further on the September quarter, I know that you are expecting 87 million hard disk drive motor shipments and I know that you had spoken about 7.7 million near lines, so first of all do you expect to see a continued ramp in helium within that and are you currently seeing volumes from now two vendors on the helium side, or is that still skewed a little bit more heavily just to one, and then I have follow-up.

Masahiro Nagayasu

So, you are asking a more detail about 87 million, which we showed in the slide. Then we say 11.4 million is our expectation for the server application, which means the mission critical enterprise 3.7 and near line, which I mentioned 7.7 where the helium would be something like a 2.8 million. So, in terms of the share 32% is going up to 36% of the near line will be the helium in the September quarter. So, clearly we see a more adoption of the helium drive within the near line from June quarter to September quarter. Is that okay?

Aaron Rakers

It is and I apologize to do this, but I am going to kind of follow on that and say can you give us what you are expecting on the 2.5 and 3.5 inch pieces of that as one?

Masahiro Nagayasu

3.5 we say it is 3.9 million and 2.5 it is 43.8 million.

Aaron Rakers

Okay, and as you go, as you increase and I know you talk now about kind of a flat industry trend going forward with obviously increases in capacity and ASPs trending upward, how do we think about the near line contribution as it relates to near line air fill versus near line helium fill in terms of pricing differential, I guess for you guys at the motor level.

Masahiro Nagayasu

Okay, clearly the helium is more difficult. As a result the price ASP is much higher in the helium. The airline is high but not as much as the helium. So when the helium is getting a higher share within the airline that means higher ASP for us and usually that will be higher profitability for us

Aaron Rakers

Okay. Thank you.

Operator

Next question comes from Mark Kim with GAMCO Investors.

Mark Kim

Hi, hello. My question is on slide 13 first, can you give us a little more color as to why you think that the market share for the electric power steering motors will more than double by 2020?

Masahiro Nagayasu

Okay, so if you are looking at slide number 13 these are the number we are getting from the third-party research company for 2012 and 2015. So if you can see, our share was only 19% in 2012 when the core market was 40 million, then three years later in 2015, as you can see, the core market increased to 51 million where our share increased also to 23%, okay. So that means that we are getting more share because our EPS motor was very – had some verification and evaluated higher and at low cost. So at this point, we do have some already received order for 2020 EPS, which is now 50%, but nearly 30% to 33%. So in order to achieve the 50% target maybe we have to go another 18% from now 2016 up to 2018 to fill that gap, but we believe that we can do that because of a huge headwind in the EPS market.

The reason being that the most of the – some of our customer and some of our competitors in this market are also EPS leader, some companies like Bosch or CLW [ph], okay. But because of the resource shortage, they are fulfilling 4% more on the EPS – electric power steering system – motor. So for those kind of shares, we can be – we can easily get those share from those tier 1 supplier who are doing the motor also. And also if you are looking at our current Japanese competitors, if you are looking at their share, their share is fairly coming down over that period. So if you are looking at the trend then clearly we are in the trend that we gain more share in that market. For those orders we have already received, we say we are looking at 33% to 34%, then from now we are just trying to market more to achieve 50% share in 2020. Is that suffice?

Mark Kim

Yes, thank you. That helps. In terms of – you mentioned lower price and better features, in terms of the features what – well, that would be too technical I guess, how would you Nidec’s product is superior to gain this?

Akira Sato

Okay, from the technological standpoint, our so called key competence in this market is we are a motor supplier in all part especially we’ve been specializing in the small precision motors. Then we can utilize that technology to make those EPS electric power steering motor smaller and more compact. The reason why we are doing a lot of electric motors, if you are looking at any motor that all the motor will be comprising a very similar material such as steel, copper, aluminium and magnet. Then we are the largest motor supplier in the global market thereby we could get – we could procure those material at a much lower cost. So that is a very huge operating point over the other motor supplier. Because we are making content like 3 billion motors per year, okay. If you are looking at any other motor supplier for the auto with that scale, there is no other company in this market. So that’s the reason why we say we can meet minimum 20% lower at the cost. All those details [indiscernible]. Is that suffice?

Mark Kim

Yes, it’s very helpful, thank you. And just related to that, on slide 15, you also mentioned that – this is just for the market as a whole, not just for Nidec, but the DC brushless motor arrived at 50% of the market overall. Can you give us more color on that as well? I mean quietly the appliance markers sort of reaching that sort of kicking point where they are deciding the cost – higher cost is worth that sort of acquired more energy efficient operation or what are the factors there?

Akira Sato

Maybe you might be aware that there is a very stringent energy efficient regulation in the industrial motor area which we mentioned in several times in the past that RE2, RE3, RE4. Then that kind of energy efficient regulation now comes into this market. So if you are looking at the U.S., in the U.S. they wanted to regulate the motor and energy efficiency, which are used in those washer, dishwasher and dryers. In EU or UK, okay, vacuum cleaners motors energy efficiency is now regulated. So for these kind of appliance makers such as Whirlpool, Electrolux, all these markers have to abide by the rules – changing energy efficient rule. So in order to clear those rules they have to switch from AC motor to more energy efficient DC process that’s what happening, that’s what is happening. Is that suffice?

Mark Kim

Yes, and you had mentioned in previous calls that the energy efficiency might be somewhere in the range of like 20% more efficient, is that what – is that right?

Akira Sato

Yeah, yeah. So clearly this is one. And also the dishwasher’s motor gives a more higher performance than the high different feature because they can clearly control the rotational speed.

Mark Kim

Okay, great. I’m looking forward to the quite hairdryer.

Akira Sato

Yeah, you remember that one, all right. Good.

Mark Kim

Thank you very much.

Akira Sato

Good. Thank you.

Masayuki Abe

Thank you. Next question, please.

Operator

[Operator Instructions] Our next question comes from Hamish Adam from Ruffer.

Hamish Adam

Actually the last speaker asked exactly the question that I was going to ask about the power steering share, but both were answered. Perhaps you could give the same feedback on what you see for the break product, I know you are also expecting in doubling your share there, you spoke about how – regarding how – steering you said how much was placed in orders already received, the same question for break.

Akira Sato

Okay. So we are looking at – maybe we mentioned before that we are looking at 20% of working motor market assuming a 20%, 100 million car will be produced, again, naturally, the first idea is 100 million motor will be used for 100 million cares. Then when we say 20 million then that – 20% that means 20 million, okay.

Hamish Adam

Yeah.

Akira Sato

At this point, break motor number, we have the order or some of the very good probability of getting the order, all those break is something about 15 million, so another 5 million that we need to achieve 20%. That’s the kind of situation.

Hamish Adam

Thank you very much.

Masayuki Abe

Next question, please.

Operator

Our next question comes from Joe Petrecki with Stifel.

Joe Petrecki

Great. Thanks for taking the question. Just a quick question on this helium drives, what’s your market share there and do you just find anyone – any new players in that market?

Akira Sato

Today, at this moment, for the helium drive motors, we are the only supplier because of that. Because at this moment there are only two motor suppliers for this helium motor for hard disk drive. Then...

Joe Petrecki

Have you -- sorry, go ahead.

Akira Sato

Yeah, so at this moment, we are 100%. In the future, maybe we will keep over 95%.

Joe Petrecki

When do you think your competitors going to be entering the market?

Akira Sato

The possibility is – the one that we have now coming into the helium may use our [indiscernible] motor because for that customer we are now supplying base plate, the base plate is a third party. So competitor can only supply motor. The most difficult part of making helium drive is the base plate because we have the helium gas without no leakage for hard disk, that’s the most difficult part of this approach, okay. So for the largest – the largest supplier of helium drive, then we supply motor and the base plate, but the new one is we are going to supply the motor, but not the base plate.

Joe Petrecki

Thank you.

Masayuki Abe

Thank you. Are there any other questions please?

Operator

[Operator Instructions] 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.

Masayuki 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 your sales representatives at Mitsubishi UFJ Securities. Thank you very much and then have a good day.

Operator

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