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 would like to pass the conference to Mr. Orikasa at Mitsubishi UFJ Morgan Stanley Securities for the opening remark. Mr. Orikasa, please go ahead, sir.
Dear everybody, thank you very much for joining this conference call, and our sincere apologies for the 10-minute delay due to technical difficulties on our side. My name is Yoichi Orikasa, General Manager of the Kyoto branch at Mitsubishi UFJ Morgan Stanley Securities. Before the meeting starts, please make sure all the materials have been distributed. If not, please download the files on Nidec's homepage at this moment. Now, may I introduce Mr. Akira Sato, First Senior Vice President and the Chief Performance Officer, who will be speaking to you shortly. First, Mr. Sato will make a presentation. After his presentation, we will move on to a Q&A session. Mr. Sato will now discuss the company's Q1 fiscal year 2020 results, future outlook, as well as management strategy. Mr. Sato, please go ahead.
Thank you very much, Mr. Orikasa. Good day, ladies and gentlemen, and welcome to today's conference call. My name is Akira Sato, the Chief Performance Officer of Nidec, and I will be your main speaker for today. Joining me is Masahiro Nagayasu, General Manager of Nidec's IR team. For the forward-looking statements, please see slide number two of our presentation material for details. I will review the key figures. Please see slide number three for our first quarter's results. As summarized on slide number four, the net sales stood at JPY 336.9 billion, 7% down year-on-year. Despite reduced profit due to the lower sales, the operating profits increased to JPY 28.1 billion, 2% up year-on-year. Mainly contributions from improvements on cost structure to the WPR program.
The profit attributable to owners of parent increased by 6.2-fold year-on-year to JPY 20.3 billion, as fiscal year 2019 first quarter saw losses mainly on the transfer of Secop, which is compressor business for refrigerators. On slide number five and six, you have step charts showing the net sales and operating profit year-on-year and quarter-on-quarter respectively by product groups with exchange rate effect, eliminations, and structural reform expenses. As you see on slide number six, the net sales went down quarter-on-quarter due to negative exchange rate fluctuations, reduced sales of Auto and Appliance, Commercial, and Industrial or ACI. However, the operating profit has improved significantly as all of the segments except for Auto have improved quarter-on-quarter.
Please turn to slide number nine, which is showing changes in our regional productions on a month-end basis, where the pre-pandemic average utilization ratio is assumed to be 100%. As of the end of April, when our previous results were announced, China and Japan were already almost fully recovered. As of the end of June, other regions like Europe, Americas, and rest of Asia also made a significant recovery. Please see slide number 10. The net sales of the first quarter were just about to form the bottom due to COVID-19, the operating profit ratio is on its way to steady recovery successfully. The net sales is expected to bounce back in the second quarter, and operating profit ratio has already shown recovery as to exceed not only that of the previous fourth quarter but also the third quarter of last fiscal year 2019.
Slide number 11. Is illustrating our automotive business as a successful example of LTR4. The graph on the left-hand side makes a year-on-year comparison of the sales and operating profit of existing businesses, excluding those from the traction motor-related business and Nidec Mobility. The graph on the right-hand side compares those of Nidec Mobility on a quarter-on-quarter basis. You will notice clearly that in both cases, we have established structure where half sales can still create positive operating profit. Please see slide number 12. The sales volume of electric vehicle or EVs that have adopted our E-Axle exceeded 58,000 units on the cumulative basis as of end of June, which consists of six models, as you see in the table on the right-hand side. Please see slide number 13. As a recent example, Chinese automaker, Geely, launched their new EV called Geometry C in June.
Nidec's E-Axle, Ni150Ex, installed in Geometry C is a model that has evolved from the E-Axle that started mass production in April 2019. It contributes greatly to improving the power performance, efficiency cost performance, sound and vibration performance, and reducing vehicle weight of Geometry C by applying Nidec's unique technologies such as circuit design, light, thin, short, and small motor structure, utilizing the permanent magnet and unique motor oil cooling structure, and adoption of the second-generation inverter. Also, as you see on slide number 14, GAC New Energy Automobile or GAC NE, a brand of Chinese automaker, GAC Group, launched their new EV called Aion V in June, which has also adopted our E-Axle, Ni150Ex. The first two models that GAC NE has already launched are also equipped with our same E-Axle.
Especially, the first model called Aion S, has always been ranked as one of the top three best-selling EVs in the Chinese domestic market. Please see slide number 15. The net sales of ACI in the first quarter went down mainly due to impact from COVID-19. However, it is showing a sign of recovery. The net sales was down at 14% quarter-on-quarter, while the operating profit ratio improved by 2.5 points quarter-on-quarter. ACI is currently undergoing a comprehensive review of its cost structure and is on its way to improve operating profit ratio by optimizing outsourcing costs, labor cost, and fixed cost. Please slide number 16. This is the same slide as the one we used in April. Just to make sure, these are Nidec solutions for the common problems of humankind, which have been exposed by COVID-19.
They are 5G and thermal solutions, decarbonization, more power saving, digital data explosion, and power saving. We will capture these new five big waves as our growth drivers from now and going forward. Please see slide number 17. The shipment of ultra-thin and ultra-small fan module, ultra-small FDB or UFF, which is used mainly for PC application, marked a record high level in the first quarter. UFF family supports the demand for teleworking, which started as one of the
New 5 Big Waves in the wake of COVID-19. Please see slide number 18. Our product lineups continue to expand into robotics as manpower saving, which is one of the new 5 Big Waves, is becoming even more important in the wake of COVID-19. As you see on this slide, we are ready to cope with manpower saving needs through such products as modules, motors, reducers, automated guided vehicles, and so on. In the field of service and communication robots, commercial and industrial robots, and logistics and agriculture. Please see slide number 19. In light of spreading of COVID-19, Nidec has made a declaration of health-oriented management in order to enhance employees' health, motivate and encourage employees, and ultimately enhance our corporate value further through productivity reform.
As concrete measures, firstly, health promotion committee has been established to facilitate liaison with management, the Corporate Health Insurance Association, industrial doctors, and employees. Secondly, in order to reduce the risk of COVID-19 infection, phased reduction of smoking areas is underway, and a total smoking ban on Nidec premises is expected by the end of fiscal year 2021. Thirdly, further improvement and measures for health promotion will be implemented through analysis of our employees' health conditions and other issues. Lastly, on behalf of the entire management team, I would like to thank our customers, partners, suppliers for their support and their commitment, as well as our shareholders. At this time, we would like to open up the call for your questions. Thank you very much for your attention.
Thank you very much, Mr. Sato. Now, we would like to turn to the Q&A session. Mr. Sato, please, to answer questions from the participants.
Thank you. Today, question and answer section will be conducted electronically. If you would like to ask a question, please press zero one on your touch phone keypad. Again, please press zero one if you would like to ask a question. If you would like to cancel the question, please press zero two. We will now pause for a moment to assemble the roster. Our first question today comes from Mr. Aaron Rakers. Please go ahead with your question.
Thanks for taking the question. Just on the small precision motor business, I'm curious as we see, you guys referenced the impact of the pandemic and some shutdowns in, I think, Philippines and Malaysia. With shipments down 19% year-over-year, I'm just curious, can you help us frame how much of an impact those shutdowns have had on your hard disk drive business? What your outlook expectations are over the next couple of quarters as far as HDD is particularly in nearline? Thank you.
Okay. Thank you, Aaron. First of all, we are just going to be talking about our June quarter results, number 1. Then, as we said that we had a policy that we are not going to talk about our future numbers, but maybe just the directions. We shipped the spindle motor for hard disk drive in March quarter, 55.7 million, and it really came down in the number in this June quarter, 50.4. 55.7 down to 50.4, the volume is down. As you suggested, there is some supply chain disruptions among our HDD customers. This is the major reason that the volume is coming down. We do see some recovery in this September quarter and onward because we believe this 50 million number in the June quarter shipment will be somewhat the bottom for maybe this year.
That how we are looking at the current situation. Is that fine? Aaron?
Aaron.
Thank you for the question, Mr. Rakers. The next question will go to James Pulsford from Alma Capital. Please go ahead. Hello?
Hello?
Mr. James, please go ahead with your question.
Hello?
Mr. James Pulsford, please go ahead with your question.
Hello, can you hear me?
Mr. James? Yeah.
Can you hear me?
Yes. Mr. James, please go ahead with your question.
Yes. Can you hear what I'm saying?
Yes. I can hear you.
Oh, good. Okay. Sorry, I apologize. I keep saying the same thing. Okay. My question is on traction motors, and you've given a lot of very detailed information on what's happened in practical terms in the last quarter. Have there been any developments you'd like to comment on in terms of new orders you may have won, new customers you may have won, some developments that have implications for the longer-term growth of that business? Have there been any changes you could comment on that have happened over the last quarter, please?
Okay. Number one, as we explained in the previous announcement, there are two businesses, E-Axle business and traction motor business. The total of the motor or system unit, which we do have a so-called order backlog, was something like 16 million last time. This time we say almost same number, 16 million. Okay. If you look inside, there are the E-Axle business, again, and the traction motor business. E-Axle business, clearly the volume, the total order backlog volume is increased by 0.5 million. Unfortunately, the traction motor business is down by almost a similar number, 0.7 million. Roughly, we say the total volume is the same as we announced three months ago. That's number one. At the other end, we say that the E-Axle business, there were seven customers at the end of April. Today, at the end of July, we say 15 customers.
The customer number increased by eight. That eight will compose of seven Chinese and one Japanese. Okay? The traction motor customer, there are six customers at that time. Today, we do have seven customers. We have new one customer, which is Japanese. Those are the main points that we mention for our current traction motor business status. Is that fine, James?
That's great. Thank you. The decline in traction motor, these are future, this is order backlog, so less influenced by what's happened in the short term. Why is it the number of traction motor orders have fallen over the period, please?
Okay. Always we say the contract. We contracted the total amount of the motor, which we have to deliver over the life, maybe three years, four years, and sometimes five years. Okay?
Yeah.
Also we contracted a [peak volume]. Our customer can choose when those motors to be delivered. As you see, most of the current customer are concentrated in 2025. If they're going to be postponed one year, then that's going to be out, because we are just limiting our total order backlog from 2019 to 2025. Is that fine?
That's very clear. Thank you very much indeed. Thank you.
Okay. Next question, please.
Thank you. The next person will be Mr. Bradley Sitter from Endeavour Capita . Please go ahead, please.
Hi. Hello.
Yes.
Thank you. I had a couple questions, but first, just if I could follow up the first two questions. On the hard disk drive, could you tell us what were the EBIT margins for hard disk drive in the June quarter, please? Any trends on pricing?
Okay, we are not using EBIT, we are using OP margin, operating profit margin. That's something like, a little roughly around 30%.
Okay. I think I remember last quarter you had said you had some pricing gains in there. Is that still the case, or do you expect that going forward?
Well, what did you say? The last time we said this business?
Yeah, I think.
You mean the COVID-19 impact?
some price increases on the hard disk drive.
We will not use the word a price increase, but we are trying to correct the profit structure of our business. That's the word that we use.
Got you. Okay. That makes a lot of sense. I think on the traction motors, I guess my understanding is you've had no change to the volume of orders, but maybe some of them were pushed beyond 2025.
I just wanted to make sure I understood that correctly. I think you said you went from seven E-Axle customers, and you now have 15 customers.
Yep.
I guess I would have expected the order book to go up quite a lot for E-Axle. Or is it the same sort of situation there as in the traction motor, where maybe there's been some postponement?
As I said, in E-Axle business, as the customer number increased from seven to 15, we say the total lifetime volume or all so-called the order backlog up to 2025 increased by 0.5 million. That's what we say.
Right.
Okay?
Right. Okay.
Always, there is a pushback or somewhat come forward. Usually at this moment, the pushback, right, is happening in the Chinese EV market. This is mainly because the order or the demand is very difficult to read. Especially the EV is really used by a so-called car-sharing service like Uber or DiDi or whatever. That volume is going to change because of the COVID-19. Those are the reasons that we understand the EV recovery in China is a little bit slower than the ICE cars. Okay?
Okay.
Yeah.
All right. Great. Thank you. Now I see the cost cuts have been going very well. I was just hoping, could you go into maybe some more detail or, kind of, separate how much of that is coming from more permanent cost structure changes than with the sales volume being down? How much is variable cost that you might expect to return when sales go up?
Through the WPR program, we just reduced around JPY 10 billion of cost in June quarter, and mainly coming from the procurement cost reduction.
which is around 60% of the JPY 10 billion. Other, probably 10% from direct labor cost reduction. The remaining portion is to reduce the fixed cost. That's a kind of a structure of the cost saving in June quarter.
Okay. Great. Thank you. I guess what I was a bit surprised, I guess the R&D expense was a lot lower than I would have thought. Is that a timing difference, or are you happy with the R&D expense staying at that level, going forward for the next few quarters, or?
Yeah. Probably two reasons. One is time difference, as you mentioned. The second one is some kind of change of the business, because we have got a big order, for instance, for traction motors. In that case, maybe our customer will pay our R&D cost up front. In that case, we can reduce the R&D cost in the first phase of the development phase. That's why June quarter R&D cost has been reduced to some extent. That's good news for us, because we are spending a lot of money for R&D.
Yeah, that's right. That's two reasons there behind reducing R&D cost.
Okay. Sorry, you said that was more for the traction motor. I was thinking maybe if you had eight new E-Axle customers, is that an area where you need to spend R&D going forward as they get further along in the design process? Or is it mainly for the traction motor?
It depends, okay? As I say, these customers, maybe the product launch will be something like 2024, 2025. We want to really start the R&D process and how much we're going to spend for those particular customer, maybe depending on the timing, okay? That's number 1. Number 2, we are trying to standardize our product lines, as you understand. We will try to use as much as possible the product that we already selling to the current customer. For the new customer, it might be much cheaper because they can save a lot of R&D cost. Thereby, the total R&D cost, which going to be required for those new customer, clearly depending on the timing and also what kind of a system they want. They want clearly the new system or something like a standard one.
That's going to depending on the total R&D cost in the future. Okay?
Right. Great. Thank you very much. Maybe just one last topic for me. I wanted to ask about the CapEx, because I think you'd said about, for the fiscal year, JPY 140 billion roughly on the CapEx. If I just looked at Q1, it seems a bit light on a run rate for that. Is that just a timing difference, or do you have an updated CapEx target? If so, why would it be lower?
Yeah. Main reason why the CapEx amount has been decreased is maybe the price of the equipment, the lower price. Because of the stagnant market, the price of equipment or machine has been decreased significantly. Of course, demand is very decreasing. That's why we are now getting the lower price from the machine manufacturer. That's a kind of big reason why. Also, time difference is another reason. We will be able to spend the JPY 140 billion in fiscal year 2020 in order to increase our production capacity for traction motor and the other products, which is kind of a growth driver for the future. Is that fine?
Yeah. I would guess maybe just since you have such a large order book, if the machinery prices are very attractive right now, I guess is there a reason why you wouldn't buy more than you need today if you know you might need it?
Just to try to clarify R&D, right? We say those new orders, the most of the R&D cost is a so-called certification or qualification fee. In order to be qualified for the new car, we have to spend a lot of the so-called durability testing and others. We are collecting all the data, right? For the first one, which we mentioned last year, we started early 2019 about that process. At that time, we used a lot of so-called outsourcing service to do that. The cost was so huge. We decided to do in-house. In order to do in-house, we have to buy the machine. Using the machine that we are doing the testing. Thereby, as Mr. Sato mentioned, the cost of the machine is very important. Overall, we have been doing more and more new customer.
We just really started this business April 2019, almost one year and three months, right? Now we do have more customer. We are more accustomed that we know how to save the money to get those, to buy the machine very cheap, and we will be doing testing by ourselves. That's going to be the cheapest way to do that qualification. Thereby, we do have some idea that how we going to be spending R&D in the future. That is not something that we mentioned one year ago about how much we spent at that time. Do you understand what I'm saying?
Yes, that's very helpful. Thank you.
Okay. That's the point. Okay?
Yeah. No, thank you very much. I guess, do you have a timeframe or how should we think about when you might do another stock buyback? Are there certain.
Stock buyback
financial criteria that you're looking to hit before you would start do that? If you can share anything around that topic. That's all for me. Thank you.
As you may know, the purpose of share buyback is to protect our current shareholders from the very volatile movement of our stock price. Maybe at this point, our stock is up in line with the market trend. In that case, we will not buy our shares back. If something happened in the market or in our share price, maybe we are not hesitating to buy our shares back from the market. That's our policy.
Got it. Thank you. Thank you very much.
Thank you. Our next question comes from Mr. James Pulsford from Alma Capital. Please go ahead, Mr. James.
Hi. Thank you very much. Sorry. Can I ask about your other precision motors where the sales in this quarter, they're down only a little bit year-on-year, and they've rebounded very sharply, quarter-on-quarter. You're back in the black here, but operating margins are still relatively low, but obviously a lot better than Q4. Could you comment on the recovery in sales you've seen here and prospects for the next quarter we've got coming up?
Which motor?
Other precision motor.
Oh, other precision motor.
small precision motor and you strip out HDD, then you're left with-
yeah.
You mean the other precision, small precision.
Absolutely. In your materials, you comment just on the very small fan motors, but for that area overall, could you talk about what happened to the different types of motor in this quarter and the recovery you saw, and the prospects for profits in this profitability to perhaps maybe whether that can improve going forward or not?
Okay. Number 1, in the past, we do have a DC motor, fan, and the others. Now, we are somewhat remodeling the total. We now say hard disk drive, and the haptic vibration, and the other. The other includes the DC motor, fan motor, and all the other new products, such as a vapor chamber or thermal solution management. Okay.
Yeah
If you're just looking at this business, again, the movement or our performance on the top line, bottom line in the March quarter and this June quarter is clearly affected by the COVID-19. This business is centered in China, so that is the very reason that we could have a little bit better number on this segment when China is recovering from the COVID-19 impact, mainly from March to the April, May, June. Around that time, you understand that Chinese economy is coming back from the COVID-19 impact. They are riding, or we are riding on that end. If you're looking at that, one of the key products that we mentioned in the slide number 17. FDB fan. UltraFlo FDB fan. Okay?
Yeah.
Those are used by notebook PC and tablets, mainly the notebook PC. As we say, the COVID-19 is making a huge demand for notebooks. Our fans are used there. Clearly we had the many historic high shipment volume over 5 million per quarter for this June quarter. This is one example. Okay.
This business is not just like a hard disk drive one application. There are so many different applications. Overall, as we say, is another very big pillar of this business is the fan motor for 5G stations. As you understand, a 5G station is more number compared to the 4G because the coverage is much little smaller than the 4G type. The total number of base stations in the future for 5G communication, they are a huge number. Each one may require a fan motor to cool down the system. We are seeing that's going to start maybe from this June quarter. It should have started maybe March quarter, but March quarter, COVID-19 impacted the supply chain in China. It's going to be maybe putting into this June quarter then we saw a surging demand for a 5G station fan motor demand.
That's another point which we can mention the other small precision motor. The other one which we mentioned in before is the thermal solution. 5G smartphone is coming, and 5G smartphone requires a new solution for heat dissipation, thermal solution, where we say we are providing a vapor chamber, heat pipe, heat sink, and other so-called heat-related technology. That business is growing. Okay. The final one is haptic. Haptic was a huge hype in 2015, but now it's coming down. Right. It's for a North American smartphone maker. We have been shipping those so-called the haptic vibration motor from 2015 to today. Right. The total volume is clearly depending on that customer's total volume. We are maybe keeping a decent share. Maybe roughly, we say 1/3 of that customer, because there are three suppliers in this business.
We are keeping 1/3 share from 2015 and up to 2020, five years. We'll be competing against the Chinese competitor, but still we are keeping that share. That's the current situation. Those are some of the last example of what kind of business are there. The other small precision motor other than hard disk drive. Is that fine?
That's good. Can I just ask one? Just, you mentioned you basically chop it up into hard disk drive, haptic, and others. Just so that I can understand what's happening in others, could you just tell me what the last quarter, what were the sales and profit margins just for the haptic business, please?
For the full year last year, we say a total haptic sales was something like JPY 37.7 billion, but that was somewhat breakeven.
Yep.
Okay. This year, maybe we are guiding something similar, like JPY 37 billion for the full year top line sales, but we are looking at something like 3%-4% OP margin for this year. Okay.
Yeah. What happened in Q1?
Unfortunately at this moment, this customer is a very severe customer. Very difficult to make money for the past, even today.
Yeah. Could you tell me, just so I can strip it out, what were the sales and margins just in Q1, please?
Q1, this quarter? This quarter
Yeah
10 billion. Yeah, JPY 10.2 billion and breakeven. Yeah.
Breakeven. Okay. Wonderful. Thank you very much indeed. That is very kind.
Yeah. Okay, next please.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press zero one on your touch tone telephone keypad. If you would like to ask a question, please press zero one if you would like to cancel the question. The next question will go to Mr. Cho Yoksan from MUFG Securities Americas. Please go ahead, sir.
Hello. Sato-san and Nagayasu, first of all, congratulations on hitting such a strong figure, which is way stronger than our figure, with our Uchino analyst. Actually, the difference between your first quarter OP, JPY 28 billion versus his JPY 16 billion, is half coming from the cost cut and the rest of the half is coming from the top line increase. I have a question on more like a qualitative aspect. I want to know if your new management has introduced any new strategies to achieve such a strong figure. Also, second question is, how the new leadership led by Seki-san positively impacted for such a strong OP result this time. Thank you.
Okay. Can I understand, your question is, how much of that JPY 28 billion OP, which we reported for the June quarter, how much is coming from a new endeavor like WPR4, which is mainly, you mentioned the cost cut, right? That's number 1 question. The second question.
Yeah
is how that related to our management structure, issued a two-top system, Mr. Nagamori and Mr. Seki. Is that fine or-
That's right.
your question is different?
Yeah. That's correct. Thank you.
Okay.
I'll respond to the second question first. Probably Seki-san, the leadership is how quickly we can decide, make a decision, in any area. Especially the capital expenditure to increase the production capacity for auto or those kinds of things is currently very difficult decision making. Seki-san and Nagamori-san discuss every week and what is the right direction. The decision making speed has been increased a lot with the new management. Seki-san's leadership is to speed up our operations. That's an answer to your second question. The first question is, as I mentioned, maybe JPY 10 billion of the cost restructuring. It's a contribution from the WPR4.
To that-
Yes.
Yep.
Yeah. We never said that half is coming from the cost cut. As Mr. Sato mentioned, clearly mentioned roughly JPY 10 billion, we just try to model how much of that JPY 10 billion is coming from the so-called procurement side or labor cost cut, and how much is a fixed cost. Already we mentioned, or we answered that in the previous question. Right?
Okay. Yep. Thank you very much.
Thank you.
Thank you. There are no further question today, if let's say there is still any question, you can press on your keypad on zero one for the queue. Any question further? Mr. Orikasa, there are no further questions today. At this time, I would like to return the conference back over to you for any additional or closing remarks.
Okay. We would like to conclude the conference call. Thank you very much for your participation today. Should you have additional questions later, please do not hesitate to contact either Nidec or your sales representative at Mitsubishi UFJ Morgan Stanley Securities. Thank you very much.
Thank you. That concludes today conference. Thank you for all your participants, You may disconnect now. Thank you.