Masayuki Abe - GM, Institutional Sales Department of Mitsubishi UFJ Morgan Stanley Securities Akira Sato - EVP and CFO Masahiro Nagayasu - GM of Nidec's IR Team

David Ryzhik - Susquehanna Financial Group Joe Quatrochi - Wells Fargo James Pulsford - Eikoh Research Takashi Ito - ARGA Investment

Thank you. 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 on 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 second quarter fiscal 2018 results, future outlook, and management strategy.

Mr. Sato, please go ahead.

Thank you very much, Mr. Abe.

Good day, everyone, and welcome to today's conference call. My name is Akira Sato, Chief Financial Officer 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 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-half of fiscal year 2018, as mentioned on slide number four, now we have achieved record high net sales operating profit, profit before income taxes and profit attributable to owners of the parent for the first half and quarterly result.

Based on these results, we have made an upward revision to fiscal year 2018 year-end dividend projection. The structure [ph] on slide 5 and 6 are showing our sales and operating profit year-on-year and quarter-on-quarter separately by product groups and exchange rate effect.

On Slide Number 5, both sales of all the product groups have increased and operating profit of all product groups increased year-on-year except for electric and optical components. Please turn to slide number 7.

We have achieved record high in both quarterly net sales and operating profit. The quarterly operating profit exceeded ¥50 billion level for the first time.

Slide Number 8 is showing the cash flow for fiscal year 2016. We will continuously endeavor to improve cash conversion cycle and create higher operating cash flows to support our mid-term growth.

Our mid-term strategy vision 2020's target on slide number 11 remains unchanged as long April 2015 when they were first set. Achievement of the top line target is already in sight.

As illustrated on slide 12, the mid-term shipment unit trend for the hard disk run market is expected to be a gradual decline. For the short term as shown on Slide Number 13, we have made a slight downward division of figures for the hard disk run market term and our shipment volume for our fiscal year '18 from a conservative perspective.

As you see on Slide Number 14, we have seen a significant growth of nearline drive against the backlog of strong demand for data restoration as well newly emerging cloud service providers. And our market share as well as the average selling prices are rising.

Please see Slide Number 15, the steady progress of the IoT and ICT trends are driving further development of big data and increasing cooling fan demand. With these as a backlog as shown on slide Number 16, we have results to acquire 48% share of common stock outstanding of a Taiwanese Chaun-Choung Technology Corp or CCI by way of tender offer.

CCI has strong expertise in the development, manufacturing and the sales of thermal management product. And it's through this tender offer we are aiming to improve thermal management technology and our product development and capability through collaboration with CCI and to propose a thermal solution by combining motor products with CCI thermal module to customers in a wide range of market.

Please see slide number 17, both automotive and appliance commercial and industrial or ACI have achieved record high quarterly operating profit in the second quarter, September quarter. As illustrated on Slide 18 pay attention in the U.S.

and the China accelerating the meeting market trend and we are receiving increasing orders as the all factories both in the U.S. and the Mexico.

We are currently operating more than 200 factories in the 43 countries and are responding quickly to our customers' needs for local production. And next please see sorry number 19.

Other trends for truck vehicles are becoming more solid. The leisure of partnering systems including production motors for EVs and PHEVs in our auto portfolio is expected to increase very going forward.

I've shown on slide 20, inquiries surging from emerging countries Europe and Japan for traction motors and E-Axles, which is module consisting of traction motors and inverter and gearbox. Please see Slide number 21, in order to cope with the additional demands for air conditioners from emerging countries, we are planning to increase production for brushless DC motors or air conditioners in Hanoi, Vietnam from next March.

As illustrated on slide number 22 SEI is evolving from motor-alone to module-based interface using M&A in the main home appliance products such as air conditioners, freezers and refrigerators and washers. Please see slide number 23, we have acquired a 100% ownership of MS-Graessner or simply Graessner and each group companies.

A driver tree on German company route well its owners are subsidiary Nidec-Shimpo. This acquisition will allow Nidec-Shimpo to obtain brushless light and new precision gearboxes in addition to its all linear type planetary reduces and to be able to offer more comprehensive precision gearbox solutions in Europe, which offer a large market for planetary gearboxes.

Nidec-Shimpo plans to manufacture its newly developed plain wave gearboxes for lower take application in Graessner's German factory and offer its products along with after sales services to Graessner's customers in the lower take industry. Nidec-Shimpo and the Graessner have strong lens, high technological capabilities, and solid customer bases.

We firmly believe that our financial strength and global presence, we support is advantage and will help us achieve the future growth. We will continue to serve customers who desire to achieve highest standards of activities.

Lastly on behalf of the entire management team, I would like to thank our customers, suppliers, for their support and maintenance as well as our shareholders. Now this time, we would like to open up the call for questions.

Thank you very much for your attention.

Thank you very much Mr. Sato.

We will direct the time to the Q&A session. Mr.

Sato will be very pleased to answer any questions.

Hi, thank you. This is David Ryzhik for Mehdi.

Thanks so much for taking the question. So, we see on the -- for your forecast for the HDD industry for the fiscal year, it seems like it down ticked.

And most of the lower revision is for the March quarter. Just wanted to get a sense of what your -- what you have seen, what led to the lower forecast?

Then I have a follow-up.

Okay. Number one, every year the March quarter have been reporting a lower number compared with the other quarters.

And then we understand that major reason for that is Chinese New Year and the production for that quarter will be cutting down by the Chinese New Year holidays. Then at the same time usually those production unit will be done by December this quarter.

So that is going to be making so-called a seasonality down on the March quarter.

Okay, so, no particular segment within HDD that would be softer than others as per your forecast for March quarter? It's mostly related to Chinese New Year?

Well, in terms of the different foreign factors, we say nearline are supposed to be keeping somewhat high range and also 2.5 inch mission critical would be somewhat still keeping the high range. Then the most of the down might be achieved by a 2.5 inch whereas we see a replacement from HDD to SSD might be a little bit faster in the March quarter.

And also there is a news in the market that the PC number might be coming down because of the shortage of the CPU.

Right. Right, thank you.

And if you don't mind would love to get the segment -- the HDD industry segment breakdown for the September quarter and perhaps of the December quarter.

Okay. So what we understand today as we showed you in the Slide number 13, okay, we say this -- I mean the previous quarter -- September quarter the market number say ¥97 million were mission critical 2.5 ¥5.3 million, nearline ¥14.7 million and 3.5 ¥28.3 million and 2.5 ¥48.7 million.

Then from there, we do have a forecast for ¥95 million in December quarter where 2.5 inch mission critical ¥5.0 million, nearline ¥15.0 million and 3.5 inch -- ¥30.6 million, three zero point six, and the 2.5 inch mobile ¥44.4. Okay?

Great, that's really helpful. No forecast yet for the March quarter?

March quarter ¥85 million, we say 4.5 inch mission critical ¥15.5 million nearline, ¥29.0 million 3.5, ¥36.0 million 2.5.

Great, thanks so much. And just last one from me, do you expect any increased competition in the components business motor's base plates given the pending acquisition of one of your competitors MMI?

Well, at this point the total market is coming down. So that is a major reason for the consolidation of the components supplier of [indiscernible].

So in that sense usually, the competition will be maybe the same level here at this point as far as we are majoring in the motor area but we do have only one competitor.

Okay, great. Thanks so much.

I'll get back into the queue. Thank you.

Thank you. Next question, please.

Yes, thanks for taking the question. I just wanted to follow-up on that last one, was the breakdown of the shipments that was for the industry or for Nidec itself?

The number which I mentioned was is the industry.

Okay, can you give your breakdown…

If we check in a lot -- slide number Page 13 in your handout or you can access to a website to see our presentation material we presented this morning, then a 6 million in June quarter, 97 September, 95 December, 85 March quarter is a number for that market industry.

Right. I think in the past, you give them a breakdown for your shipments by the segment as well.

Okay, so we say 84 million in September, this 84 million to sales at 83.9 million were 2.5-inch high-end mission critical 2.9 realign 13.6 and the 3.5, 27.6 and 2.5 inch, 39.8. Then we are forecasting 81 million in December quarter where a mission critical 2.5 inch is 2.4 million, realigned 13.3 million and the 3.5, 28.8 million, and 2.5, 36.5 million.

That makes 81 million the March quarter we say 73 million or but you look at the chart that's going to be a 2.5 mission critical, 2.1, realign 14.3, 3.5 inch, 26.6 and 2.5 inch 30.0, is it, okay?

Yes, that's perfect. And then, I think in the past you kind of given some color around the helium mix within the nearline business, I was just kind of curious what that was in the September quarter and how you expect that in the December and March quarters?

Our shipments 55% of nearline on the September quarter 13.6 was the helium then December for that we say that ratio will be up to 58%, but down in the fourth quarter, the March quarter by 55% -- to 55%.

Okay. That's great.

And then just one last question, I noticed that in your forecasts for the calendar years that you kind of from your forecast in April uptick to your nearline expectations, I was kind of curious maybe a could you kind of double click on what you are seeing from demand perspective there and kind of how do you think about the linearity throughout the year for 2019?

So nearline demand is clearly coming up as you show -- as you see in slide number 14. So there at this moment, we are not making any new forecast of the ASP, so the volume is, as you see is coming up, but maybe the ratio of this year as I say still the total market number and our number is coming up slightly from September quarter to December and December quarter to March quarter that is based on the very, you so-called a vigorous demand from mainly the U.S.

CSP, the cross service provider and also the Chinese CSPs, but if you compare the Chinese and the American CSPs we say Chinese demand has been somewhat slowing down mainly because of the so-called a micro economy situation in China.

Okay, thank you.

Is that fine?

Thank you. Next question please.

Thank you, hi, good afternoon. I will ask the questions on the water and appliance commercial industrial area.

Both of them were marked by relatively muted sales growth that is profit margin obviously very good. Could you comment in that particularly the demand picture in that quarter whether it was rather lower than you expected and the future outlook what impacts that might have on your business?

Yes, I think of course the even though they're consistent as that in the June quarter, we have been trying to reduce that cost of the goods and particularly in almost European operations we acquired last year, it's healthy margin has been up from last fiscal year mainly due to the cost reduction in procurement and also the reduction of SG&A costs. It has been contributing a lot to improve operating profit margins in this year.

It's kind of main reason why the operating profit increased even though said numbers is decreasing.

Okay. And are you sort of the weaker sales picture for both water and ACI little bit in Q2?

What visibility do you have in Q3 and Q4 the second half of the year, is that a concern?

Yes, I'll take the, we are expecting to increase assessment particularly in appliance area and also industrial lot of failure because it's kind of seasonality is given better compared to third quarter and that's why we're expecting the increase in the second half compared to the first half.

Good, okay, thank you. Could I ask a separate question please, we had a few questions on HDDs, no wonder could you just comment briefly on the operating margin you achieved in the second quarter I see ASP has risen and obviously you're way nearline has risen which sounds good, what are margins are there any one-off factors that depressed them in Q2, or they natural?

Okay, so we say we have 25.0% for -- intermodal margin after the one-off costs. So adjusting one-off costs that should be 25.8%.

It is a quite a big, quite a big increased compared to Q1. And is it also possible to make a brief comment I think perhaps the other position profitability may also improved and sales rose quite sharply there and you highlight cooling fans has narrowed growth, this is quite a different picture from Q1, why the sharp improvement in sales and margins in Q2 compared to Q1?

So you mean the non-HDD?

Non-HDD, yes.

Non-HDD right? Okay.

Non-HDD area the big driver is vibration and haptic mainly because of the so-called seasonality because as you understand are we supplying those components into the smartphones which was announced in September and starting the sales in October. So thereby September quarter is a high season for production of those components and shipments then that is going to be completely different from the June quarter.

So the total sales of that haptic vibration is coming up. In terms of the number, ¥10.1 billion in June quarter, now we were ¥19.4 billion in September quarter, nearly double in that number.

But also the margin from that haptic vibration improves quite significantly from a negative the last quarter and positive nearly like 10% margin this quarter. So that is going to be helping the non-HDD segment of the small motor, and also as we mentioned the motor is increasing mainly because the summer management needs is coming up for a more Big Data and 5G and all the other trends that we discussed here in Slide number 15.

Okay, excellent. Thank you very much.

That is very clear.

Great, thank you. Next question please.

Hi, good morning. Thank very you much for your time today.

I have some questions on the automotive product segment, so first of all I think if large exposure to Europe and would be seeing pretty weak production in Europe in the recent quarter, your revenues were still positive growth then your margins went up, so that was reassuring but can you tell us what you're seeing in that space right now, what are your customers telling you in terms of production going forward and if you had any responses to that would be very interesting? Thank you.

In terms of the motor for the automobile, as we have shown you in the previous financial announcements that the order for this year is somewhere near 18 million motors for the quarter. Last year there was 16 million, so one year we see 20 million order increase that is a huge increase nearly a 33% from 50 million to 80 million.

But as you mentioned the total car number for car sales in the global market is mainly in September and China we say the motor sales is down in Europe down. So there in the short term we do have some negative impact from that so-called quarter-by-quarter sales and showing some of that lower sales, sales is done for the auto and ACI after adjusting the foreign exchange, so Kerry we are seeing quarter-by-quarter basis we are seeing some slowing down of our sales but still is in line with what we have received the order amount up to ¥80 million.

So when we cross fiscal year 2018 may be ¥2 million to ¥3 million, ¥3 million to ¥4 million might be down on that ¥80 million but 80 minus ¥4 million is still ¥76 million which is ¥60 million up from ¥60 million last year but this is a total picture we are drawing for the automotive demand for our motor this year. Okay.

Thank you and just on the margins was that up mainly on cost cutting this is start auto margins or was it because of good mix profitable modules et cetera, so maybe you can talk a little bit about the margins and that's my last question. Thank you.

Yes, as it's has been up to 16.1% in September quarter compared for 1% in June quarter so it's a been March it's mainly due to the cost reduction effort because as, the material cost the leisure to sales is relatively higher in the automotive area than the one in slide or decision motor area that's why we had trying to reduce the procurement was why accelerating more in-house production in terms of that's why we being successfully reducing the our cost in automotive area that's the main reason to improve free product margin in automotive area.

Thank you very much.

Thank you very much. Next question please.

Hi, good morning. Thank you for taking my question.

I have a couple question please first on the traction motor and E-Axle on the Slide 20 and so revenue target in 25 was ¥100 billion last year and but now you raised the ¥100 billion reaching in fiscal 22 and ¥200 billion in 25 and could you explain may be at the difference from the last time. The last time I if I remember correctly you mentioned do you have a one Chinese customer confirmed and the one is considering and what are you driving goes the upward revision for those traction motor or E-Axle?

So the major reason that we were accelerating our target from 25 or ¥100 billion up to 2022 is fairly that we do have inquires mainly from all over the world, so that means we were now talking with many European OEM Tier I and also Asian OEM and also North American Tier I so thereby we do see a more visibility that we can make more sales in 21, 22 year period. In addition to already secure the Chinese one that we were seeing at this moment more opportunity in the European OEM and European Tier I as well as the North Americans and also the Asians.

That this answers your question?

Yes, so just a quick follow up you mentioned that the, so You mentioned that in addition to Chinese one but the European OEM on Tier I so is this just a motor or E-Axle?

Both.

Both okay.

So we do have more than nearly a 20 companies than that's going to be something that a system that E-Axle so or something like a motor.

Understood.

ASP might be different but we are just counting up then the possibility if you as you see this but we do have encourage almost a more than three times our ¥100 billion target for 2022, so when we can make it contract 21 of inquiries that we can reach ¥100 billion that would be a side number 22.

Understood and thank you. So in terms of the CapEx which maybe related to this the More traction motors, but you mentioned that you would be spending about ¥500 billion in three years including this year, and is there and I know it's a little early to mention that is there any change possibly to go up conserving that you have a such better demand on those traction motors, so what's your latest view on those a CapEx in next two years or three years?

What we said was fiscal year 2018, 2019, 23 years this moment we were thinking of spending ¥500 billion, yes, three, then we said this fiscal year 2018 already we mention that will be ¥150 billion, okay. So all that ¥150, 160, 165 and the rest in the last 2020 that makes a ¥500 billion total is that what we say for our firm for the CapEx in the next three years including this fiscal year.

Then if you're looking at the auto would be a what we said was auto would be a occupier as much as 40% of that in three years. Then all the auto by their 40% of ¥500 billon is something that ¥200 billion right is not a just for the traction but also the other motor and the no motor area also.

So we are saying that at this moment is sort of a difficult because we are near the final contract with some of those a global OEM and Tier I. Once they are done then we have to recalibrate how much needed to make an investment but what we said was we were now making a very big factory in China then we are want to expand our 400 factory then we are going to extend Mexican factory into to provide.

For example ¥3 million traction motors then we need may be ¥1 million in China, ¥1 million in four and $1 million in Mexico but by 2025 maybe China, maybe another million that somewhat we have to make another factory. So at this movement this arbitrary to category the total CapEx in covering those whole plants but we say that's going to be the year expense will be something within the number which I mention.

Great, thank you. Thank you so much and my last question of BD cast conversion cycle you mentioned, so you said your cash; you would improve the CCC cycle.

I would just like to know how would you like to do that, and if there's any target for those days. That's my last question please.

Yes, currently cash conversion cycle is allowing 78 days and our target for 2020 is 60 days of course mainly the applying to reduce inventory by the in lining kind of a slop although a production should be down in kind of local market where it's the might be close to our customer instruction by doing so then maybe we going to reduce cash conversion cycle particularly in inventory they are not, but that's kind of main action to reduce the cash conversion cycle to 60 days flow 78 days.

Okay, great. Thank you so much.

Thanks very much. Next question please.

Hi, thanks for the questions and one question can you share us on color on the outlook for auto proud they have been industrial is the trend be from the 2019, does recently we see some commentary across the companies in Asia, Europe and U.S. at a recent earnings call booking above [indiscernible] given the U.S., China, more attention but appreciate any inside 1Q.

Thank you.

Okay, so you are asking that U.S. China attention impact on our automotive motor business?

On the overall [indiscernible] for automotive cloud data center and also the industrial.

Okay, so overall impact of the U.S., China attention would have on our business right?

Yes, you are right.

Yes, we are seeing the that is our opportunity that because for instance number of 2018 we saying we're going to get more share by producing in the Mexico modern lab because the our competitor for motors for air conditioner producing in China which means they have to pay 25% more in both duty so it's going to be they applied so going to be up by 25% and in our case we had a factory in Mexico and then we can increase production capacity in Mexico and then we increase the supply from Mexican factory to our American customer at in a cheaper cost then the Chinese competitors. That's why we are seeing that is our good opportunity to increase our share in that area including the automotive and Asia does that answer to your question?

Yes. And another question, how to think about the event, when next year in the…

Say it again.

Sorry N demand in this including also yes auto data center and also industrial when next year, what's your ex station for the N demand next year?

So operating in the global market okay then at this movement a U.S. trade in China through attention might have some negative impact on Chinese rather than U.S., so we say if you are looking at the end demand in the China there might be some possibilities at the demand in China might be weaker already today and could be weaker more but in the long run the China is a big market was a very good and very so call it solid technology and solid business, so we say we are not so much worried about the future in China, so there by we were making investment in China number one then at the same time as Mr.

Sato mentioned that we are making in Mexico and U.S. so we're about the demand are there that we will be making the investment.

These are very difficult to forecast what's going to happen shift because we do not know at this movement what kind of attention are there between U.S and China then especially after the midterm [indiscernible]. Is it clear?

Yes, very clear. Thanks for your time.

Thank you.

Great, thank you very much. Next question please.

Hi, it's actually Patrick for Young, may be three. Regarding shifting production to Mexico how much capacity do you have in Mexico is it very tight already so you are going to incur a lot of cost and may be in a short term you would miss a certain amount of revenues because you cannot support that shift and so what is the op impact for that shift capacity utilization in Mexico that's number one.

Okay, so you asking the slide number 18, right?

Yes.

Okay, so as we say that we were picking up two cases one is the automotive then pre we say EPS Electric Pass Service, the other one is an air-conditioned motor. So, two cases are a bit different.

EPS, Electric Pass Service, we have already prepared to start a production in Mexico for that EPS, already we are starting production there. But because of the U.S.

China tension, then we see very -- the order is coming up in that area. So as you can see from the slide that we have to double up this.

So at this moment, we need maybe to expand the factory space and others to accommodate with that change. So we say we need some CapEx there.

In case of [indiscernible] air conditioner motor, we have been sub primed on motor also, but maybe we are competing with so-called the Chinese competitor, but our Chinese competitor has to shift their motor from China to our customer in Mexico. There they have to pay some tariff.

If they are going to be using a so-called the Chinese-made component, because on the other side, more and more local content is required from any finished product import from Mexico to United States. So thereby, you know, our customer is looking for Asia-prior who can make motor, okay, or thereby we we're now trying to increase our production in Mexico.

So there they start -- trend continues, again for this one, we have to expand our facilities, thereby we we're now looking at the CapEx increase in Mexico. That's our current situation.

Right. So, on the CapEx, I think your original plan for H1 was something like ¥80 billion, if I'm not mistaken, and then you are coming in at maybe 57, so -- and then you are -- I don't think you are changing your full-year CapEx guidance either.

So are you actually cutting CapEx somewhere else, I mean, why if you have to invest more that you actually came in a little lower than you have thought you would spent on H1?

Okay. So, overall demand is increasing.

So we have to increase the CapEx up. When we talk about the ¥150 billion CapEx project, we are not planning to 150, but rather we were just looking at somewhere around 150, so the real so-called the bottom up number is not 150.

So we do have some rules to making any CapEx there in Mexico. So we are now so much a tight budget schedule for the company.

Okay, right. And so, just one last clarification, on slide 11, you have an automotive target of something like ¥700 billion to ¥1 trillion, and then separately on slide 19 I think the figure is ¥600 billion, if I'm not mistaken.

So what is the difference between the two?

Okay. We say, okay, the trend on the 11 is very -- the statement we announced for three year and a half ago, April 2015, okay?

So we haven't changed that. So still we are keeping that as a target, but ¥600 billion is somewhat like a forecast that we maybe achieving in 2020, because major difference comes a difficult of acquisition in this area.

So, as you understand that our major acquisition which is the Nidec Motor operation in Germany, which we acquired in February 2015, GPM, German Power Makers, okay? So after February 2015, we have not announced any major acquisition in the auto.

So this makes difficult to achieve our original target we announced in April 2015, because acquisition is much far less than the target we set three years and half of it. But still, the current business -- we can reach something like ¥600 billion.

Is it clear?

Thank you.

Okay.

Thank you very much. Next question please?

Okay, thank you. So we just concluded 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 representative at Mitsubishi UFJ Securities.

Thank you very much, and have a good day.