Nidec Corp Adr

Good day, everyone, and welcome to today's NTTAC conference call hosted by Mitsubishi UFJ Morgan Stanley Security. Today's call is being recorded. All this time, I do like to pass the conference to Mr. Orikasa at Mitsubishi UFJ Morgan Stanley Security for the opening remarks. Mr. Orikasa, please go ahead, sir.

Dear everybody, thank you very much for joining this conference call. and our sincere apologies for 10-minute delay due to technical difficulties on our side. My name is Yori Jorikasa, General Manager of Kyoto Branch at Mitsubishi UFJ Morgan Stanley Security. Before the meeting starts, please make sure all the materials have been distributed. If not, please download the files on NIDIC'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 now discusses the company's Q1 fiscal year 2020 results, future outlook, as well as management strategies. Mr. Sato, please go ahead.

Thank you very much, Mr. Morikawa. Good day, ladies and gentlemen, and welcome to today's conference call. My name is Akira Sato, the Chief Performance Officer of NIDIC. And I will be your main speaker for today. Joining me is Masahiro Nagayasu, General Manager of NIDIC's IR team. For the forward-looking statements, please see slide number two. of our presentation material for details. Now, 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 336.9 billion yen 7% down year-on-year. However, despite reduced profit due to the lower sales, the operating profit increased to 28.1 billion, 2% up year-on-year. Mainly contributions for improvements on cost structure to WPR program. The profit attributable to owners of talent increased by 6.2 fold on the year to 20.3 billion yen. This year, 2019, first quarter sold losses mainly on the transfer of second, which is Compulsor 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, alienations, 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 the month and 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. However, as of the end of June, other regions like Europe, Americas, and rest of Asia also make a significant recovery. Please see slide number 10. While the net sales of the first quarter was 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 burn back in the second quarter, and operating profit ratio has already shown recovery as to exceed not only that of previous fourth quarter, but also the third quarter last fiscal year, fiscal year 2019. Slide number 11 is illustrating our automotive business as a successful example of WTF4. 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 NIDAC mobility. Also, the graph on the right-hand side compares those of NIDAC mobility on a quarter-on-quarter basis. You will notice clearly that In both cases, we have established structure where health cells can still create positive operating problems. Please see slide number 12. The sales volume of electric vehicle or EVs that have adopted our e-axle exceeded 58,000 units. on a 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. NIDEX 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, electricity cost performance, sounds and vibration performance, and reducing vehicle weight of geometry C by applying NIDEX unique technologies such as circuit design, light thinning, short and small motor structure, utilizing the permanent magnet and unique motor oil cooling structure, and of the second generation inverter. Also, as you see on slide number 14, GSE, New Energy Automobile, or GSE-LP, a brand of Chinese automaker, GSE Group, launched their new EV called AonV in June. which has also adapted our E-AXL and I-150EX, the first two models that GSE NE has already launched are also equipped with our same E-AXL. And especially, the first model called ION-S has always been ranked as one of the top three best selling EVs in the Chinese domestic market. Please see sign 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 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 costs, and fixed costs. Slide number 16. This is the same slide as the one we used in April, but just to make sure these are NIDICS solutions for the common problems of humankind, which have been exposed by COVID-19. 5G and thermal solutions, decarbonization, manpower saving, digital data explosion, and power saving. We will capture these new five big waves as our growth drivers for now and going forward. Please see slide number 17. The shipment of Rudra-10 and Rudra-4 FDD or UFF, which is used mainly for PC applications, marked a record high level in the first quarter. UFF firmly supports the demand for teleworking. which started as one of the new five big waves in the wake of COVID-19. Please see slide number 18. Our product lineups continue to expand into robotics as Manpower City, which is one of the new five 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 sign number 19. In light of spreading of COVID-19, NIDAC 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, in industrial doctors and employees. Secondly, in order to reduce the risk of COVID-19 infection, safe reduction of smoking oils in underway and the total smoking ban of NIDICS premises is expected by the end of fiscal year 2021. 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 is pleased to answer questions from the participants.

Thank you. Today's question and answer session will be conducted electronically. If you would like to ask a question, please press 01 on your touch phone keypad. Again, please press 01 if you would like to ask a question. If you would like to cancel the question, please press 02. We will now pause for a moment to assembly the roaster. Our first question today comes from Mr. Aaron Recklesville-Frakel, please go ahead with your question.

Yeah, thanks for taking the question. Just on the small precision motor business, I'm curious as we see, you know, 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 and what your kind of outlook expectations are over the next couple of quarters as far as HCD is particularly a near line. Thank you.

Okay. Thank you, Alan. First of all, we are just going to be talking about our June quarter results, number one. And 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. So, we shipped the spin motor for Hardest Drive in March quarter, 55.7 million. And it clearly came down in the number in this June quarter, 50.4. So, 55.7 down to 50.4, the volume is down. And as you suggested, there is some supply chain disruptions among our ATG customers. So this is a major reason that the volume is coming down. But 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. Or maybe this year. That is how we are looking at the current situation. Is that fine? Aaron? Aaron, what's the matter? What's the matter? What's the matter?

Thank you for the question, Mr. Aaron. So the next question will go to James Palsford from Alma Capital. Please go ahead. Hello? Hello? Mr. James, please go ahead with your question. Hello, can you hear me?

Can you hear me?

Yes, Mr. James, please go ahead with your question.

Yes. Can you hear what I'm saying?

Yes. 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 of what's happened in practical terms in the last quarter. But 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 business, e-axle business and traction motor business. The total of the motor or system unit, which we do have a so-called order barcode, was something like $16 million last time, and this time we say almost same number, $16 million. But if you look inside, there are the e-axle business, again, and the traction motor business. e-axle business query, the volume, you know, the total order backlog volume is increased by 0.5 million. But unfortunately, the traction motor business is down by almost a similar number, 0.7 million. So roughly, we say the total volume is the same as we announced three months ago. That's number one. But on 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. So the customer number increased by eight. That eight was composed of seven Chinese and one Japanese.

Okay?

Then the traction motor customer, there are six customers at that time. Today, we do have seven customers. So we have new one customer, which is Japanese. So those are the main points that we mentioned for our current traction motor business status.

Is that fine, James? That's great. Thank you. And the decline in traction motor, this is all the 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. Then also we contracted a peak void. then our customer can choose when those motors could be delivered. So as you see, most of the current customers 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 Endergo Capital. Please go ahead, please.

Hi, hello. Thank you. Just maybe 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, and any trends on pricing?

Okay. We are not using EBIT. We are using OP margin, operating profit margin. That's something like roughly around 30%.

Okay. I think I remember last quarter you had said you had some pricing gains. 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 had some price increases.

We will not use the word price increase, but we are trying to correct the profit structure of our business. Not the one that we use.

Gotcha. 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. And then I think you said you've added you went from seven e-axle customers and you now have 15 customers. I guess I would have expected the order book to go up quite a lot for e-axle. Is it the same sort of situation there as in the traction motor where maybe there's been some postponement?

As I said, e-axle business, as the customer number increased from seven to 15 customers, then we say the total lifetime volume or so-called the order backlog up to 2025 increased by 0.5 million. That's what we say.

Right. Okay? Right.

So always there is a pushback or somewhat come forward. Usually at this moment a 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. And that volume is going to change because of the COVID-19. So those are the reasons that we understand the EV recovery in China is a little bit slower than the ICE cars. OK? Okay.

Okay.

Yeah.

All right. Great. Thank you. Thank you. And 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 10 billion yen of cost in June quarter. And mainly coming from the procurement cost reduction, which is around 60% of the 10 billion yen. And the other 10% from direct labor cost reduction. And the remaining portion is to reduce the fixed cost. That's kind of a structure of the cost setting in J-Core. Okay.

Great. Thank you. And I guess 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?

Probably two reasons. One is time difference, as you mentioned. And the second one is some kind of change of business because we have got kind of big order, for instance, for traction motors. In this case, maybe our customer will pay our R&D costs up front. In that case, we can reduce the R&D costs in the first phase of the development phase. That's why June quarter R&D costs have been reduced to some extent. That's kind of good news for us. because we are spending a lot of money for R&D. So, yeah, that's why. That's two reasons there behind reducing R&D costs.

Okay. So you said it was more for the traction motor. I guess if you had – 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?

So it depends, okay? As I say, these customers, maybe the product launch will be something like 2024, 2025. Then we're going to really start the R&D process and how much we're going to spend for those particular customers, mainly depending on the timing, okay? That's number one. Number two, we try to maybe we are trying to standardize our product lines, as you understand. So we would like to use as much as possible the product that we're already selling to the current customer. For the new customer, it might be much cheaper because they can save a lot of R&D costs. So thereby, the total R&D costs, which is going to be required for those new customers, 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 depend 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 said about for the fiscal year $140 billion. roughly on the CapEx. So if I just looked at Q1, it seems a bit light on a run rate for that. So is that just a timing difference, or do you have an updated CapEx target, or if so, why would it be lower?

Yeah, main reason why the CapEx amount has been decreased is maybe the price of the equipment. and a lower price. I mean, because of the stagnant market, the price of equipment or machine has been decreased significantly. Of course, demand is very decreasing, and that's why we are now getting the lower price from the machine manufacturer. That's a kind of big... Also, time difference is another reason that we will be able to spend the 140 billion yen in 2020 in order to increase our production capacity for traction motor and the other product, which is kind of a growth driver for the future.

Is that fine?

Yeah, and I guess maybe just since you have such a large order book, if the machinery prices are very attractive right now, is it, I guess, is there a reason why you wouldn't buy more than you need today if you know you might need it?

Okay, just to try to clarify, R&D, right? So we say those new orders, 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 so-called durability testing and others. Then we are collecting all the data, right? Then for the first one, which we mentioned last year, we started the RE 2019 about that process. Then at that time, we used a lot of so-called outsourcing service to do that. So the cost was so huge. Then we decided to do in-house. In order to do in-house, we had to buy the machine. Then using the machine that we are doing the testing, Thereby, as Mr. Sato mentioned, the cost of the machine is very important. But overall, we have been doing a more and more new customer. We just really started this business April 2019, almost a year and three months, right? But now we do have more customers. We are more accustomed that we know how to save the money to get those, to buy the machine very cheap, and we're going to be doing testing by ourselves. That's going to be the cheapest way to do that qualification. So, thereby, we do have some idea that how we're going to be spending R&D in the future. That is not something that we mentioned a 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 one of the – is there – I guess, do you have a time frame, or how should we think about when you might do another stock buyback, and are there certain financial criteria that you're looking to hit before you would start to do that, if you can share anything around that topic? That's all for me. Thank you.

As you may know, the purpose of our share buyback is to protect our current shareholders from the kind of very volatile movement of our stock price. So maybe at this point, our stock is up in line with market time. So in this case, we will not buy our shares back. But if something happened in the market, or in our shared life, maybe we are not hesitating to buy our shares back from the market. That's our policy.

Thank you. Thank you very much.

Thank you. Our next question comes from Mr. James Palford from Alma Capital. Please go ahead, Mr. James.

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. 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. So if you look at your precision motor and you strip out HDD,

then you're left with... I mean the other precision, small precision.

Absolutely. And 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, so number one, in the past we do have a DC motor, fan, and the others. Now we are somewhat remodeling the total. We now say hardest drive and the haptic vibration and the other. The other includes the DC motor, fan motor, and all the other mu. products such as the vapor chamber or thermal solution management. So if you're just looking at this business, again, the movement or our performance on the top line and bottom line in the March quarter and this June quarter is clearly affected by the COVID-19. So this business is centered in China. So that is a 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. Then we are riding on that end. So if you're looking at that, one of the key, you know, products that we mentioned in the slide number 17, FDB funds, ultra-flow FDB funds, okay? So those are used by a notebook PC and tablets, mainly the notebook PC. And as we say, the COVID-19 is making a huge demand for notebooks. Then our funds are used there. Then clearly we had a maybe historic high shipment volume, over 5 million per quarter for this June quarter. So this is one example. Okay? But this business is not just like how to try one application. There are so many different applications. And overall, as we say, is another really big Another pillar of this business is the farm motor for 5G stations. As you understand, a 5G station is more number compared with the 4G because the coverage is much smaller than the 4G time. The total number of base stations in the future for 5G communication, they're a huge number. Then each one may require a farm water to cooling down the system. Then 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, so it's going to be maybe putting into this June quarter, then we saw a surging demand for a 5G station farm water demand. That's another point which we can mention the other small fishing waters. Then the other one which we mentioned before is the thermal solution. 5G smartphone is coming, and 5G smartphone requires a new solution for a heat dissipation thermal solution where we say we are providing a vapor chamber, heat pipe, heat sink, and other so-called heat-related technology. Then that business is growing. Then the final one is haptics. Haptic was a huge hype in 2015, but now it's coming down. So it's for a North American smartphone maker. Then we have been shipping those so-called Haptic vibration motor from 2015 to today. Then the total volume is clearly depending on that customer's total volume. but we are maybe keeping a decent share, maybe roughly we say one-third of that customer, because there are three suppliers in this business, then we are keeping one-third share from 2015 and up to 2025 years. We'll be competing against the Chinese competitor, but still we are keeping that share. That's the current situation. So those are some of the last example or what kind of business are there, so the other small business model other than hard disk drive. Is that fine?

Can I just ask one? 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, for the last quarter, what were the sales and profit margins just for the haptic business, please?

For the full year last year, Okay, three years last year, we say a total haptic cells was something like 37.7 billion, but that was somewhat a break-even.

Yeah.

Okay. This year, maybe we are guiding something similar, like 37 billion for the three-year top-line cells, but we are looking at something like 3%. 3% to 4% OP margin for this year. Okay?

And what happened in Q1?

Unfortunately, at this moment, this customer is a very severe customer. It's very difficult to make money for the past, even today.

Yeah. And could you tell me what, just so I can strip it out, what were the sales and margins just in Q1, please?

to this quarter. This quarter is $10 billion. $10.2 billion and break-even.

And break-even. Okay. Wonderful. Thank you very much indeed. That's very kind.

Yeah. Okay. Next, please.

Thank you. Ladies and gentlemen, if you would like to ask a question, please press 01 on your touch-tone telephone keypad. And if you would like to ask a question, please press 01 if you would like to cancel the question. So the next question will be go to Mr. Cho Yok San from NUFG Security America.

Please go ahead, sir. Hello. First of all, congratulations on hitting such a strong figure, which is way stronger than our figure, you know, with our Uchino analyst. And he goes, actually, the difference between your first OP, first quarter OP, 28 billion versus his 16 billion yen is that half coming from the cost cut and the rest of the half coming from the top line increase. And I have a question on more like a qualitative aspect. And I want to know if your new management has introduced any new strategies for companies to achieve such a strong figure. Also, second question is, you know, how the new leadership, you know, led by Taekisung possibly impacted for such a strong, you know, OP result this time.

Thank you. Okay, can I understand your question is how much of that 28 billion OP which we reported for the June quarter, how much is coming from a new end developer like WPL4, which is mainly, you mentioned the cost cut, right? That's the number one question. The second question is how that's going to be related to our management structure, which is two top systems, Mr. Nagamori and Mr. Seiki. Is that fine?

That's right.

Or your question is different?

Yeah, that's correct. Thank you.

Okay. I'll respond to the second question first. Probably Seiki-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, but Seki-san and Nagamori-san discussed every week and what is the right direction. And the decision-making speed has been increased a lot with the new management. So Seki-san's leadership is to speed up our operations. That's a good answer to your second question. And the first question is, as I mentioned, maybe 10 billion yen of the cost destructuring. It's a contribution from the WPR4 program.

We never say that half is coming from the cost cut. As Mr. Soto mentioned, we mentioned roughly $10 billion. Then we just try to model how much of that $10 billion is coming from the so-called procurement side or labor cut. level cost cut and how much is the 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 questions today. So if let's say there is still any question, you can press on your keypad on 01 for the queue. Any questions further? Mr. Orikasa, there are no further questions today. So at this time, I would like to return the conference back over to you for any additional or closing remarks.

OK. OK. 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 NAIDEC or your sales representative at Mitsubishi UFK Morgan Stanley Security. Thank you very much.

Thank you. That concludes today's conference. Thank you for all your participants, and you may disconnect now. Thank you.