Jan 23, 2020
Masayuki Abe
[abrupt start] General Manager Institutional Sales Department Mitsubishi UFJ Securities. Before the meeting starts, please make sure all materials have been distributed.
If not, please download the files on Nidec's home page right now. Now, may I introduce Mr.
Akira Sato, Executive Vice President and Chief Performance Officer who will be speaking to you shortly. First, Mr.
Sato will make a presentation. After his presentation, we will move to the Q&A session.
Mr. Sato will now discuss Nidec's Third Quarter Fiscal Year 2019 results future outlook and management strategy.
Mr. Sato, please go ahead.
Akira Sato
Thank you very much, Mr. Abe.
Good day ladies and gentlemen and welcome to today's conference call. My name is Akira Sato, Chief Performance Officer of Nidec and the -- your main speaker today.
And joining me is Mr. Masahiro Nagayasu, General Manager of Nidec's IR team.
For the forward-looking statements, please see slide number 2 of our presentation material for details. Now, I will review the key figures.
Please see slide number 3 for the fiscal year 2019 accumulated nine-month results. As shown on slide number 4 the sales of both accumulated nine months and December quarter have achieved record high.
The accumulated nine-month operating profit went down by 24% year-on-year due to the additional R&D and start-up costs for traction motors which are in high demand and to the additional acquisition-related expenses and we have revised down our annual forecast. On slide number 5 and 6 you have pictures 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 upper chart on slide number 6, the net sales went up mainly due to an increase in automotive segment. And whereas the lower chart of the operating profit is showing decline principally due to the decrease in automotive and appliance commercial and industrial or ACI.
Despite this operating profit decline, as illustrated on slide number 7, operating cash flow has increased Q-on-Q and remains quite strong. As you see slide number 8 the annual guidance has been revised down.
The net sales in the March quarter is expected to be lower Q-on-Q and operating profit higher Q-on-Q. Please see slide number 11.
We have decided to build a new facility in Hanoi, Vietnam in addition to Chongqing and Kunshan in China in order to meet 5G driven cooling demand. This factory will be located in Hoa Lac Hi-tech Park in Vietnam and is expected to start production from April 2021.
We are aiming to achieve ¥ 100 billion sales in fiscal year 2022 in the thermal solution business by aggressively tackling the cooling demand in the automotive smartphone and IT-related areas. Please see slide number 12.
We forecast that as electrification of automotive progresses in 2030 internal combustion costs will be reduced to half of the entire market and the remaining half decreased with mild hybrid electric vehicle plug-in hybrid and hybrid vehicles. As all of those non-internal combustion costs require electric motors and precision DC a large market is expected to be created in favor us going forward.
Please see number 13. While Chinese EV market electric vehicle market is slowing down, mainly due to the government subsidy car Chinese automaker, GAC's electric vehicle Aion series, which is incorporating Nidec's E-Axle is increasing itself quite rapidly.
And the accumulated sales volume has already exceeded 33,000 units with December sales approaching 9,000 units. Please see slide number 14.
We formed a joint venture for traction motors with French automaker, PSA Group in May 2018. And PSA announced last November that this joint venture's plant in Trémery, France will start production of electric power steering.
This plant is expected to have production capacity of 120,000 units in 2020; 180,000 in 2021; and eventually able to have 900,000 annual production. Currently, there are only four electric vehicle models available from PSA Group.
However, all of the models will be available in all electric or plug-in hybrid version by 2025. Please see slide number 16.
OMRON Automotive Electronics that we acquired last October has been renamed as Nidec Mobility and the full-scale post-merger integration or PMI is underway. Nidec Mobility can offer four productive areas, which are active safety, electric power steering, power-supply control and body control.
And we can combine them with Nidec's automotive motors and our subsidiary Nidec Elesys' ADAS products to create new businesses through modularized and system products. Please see slide number 16.
We have renamed the Brazilian compressor maker, which we acquired last July to Nidec's Global Appliance Compressores e Soluções em Refrigeração. Our U.S.
subsidiary Nidec Motor Corporation is leading its PMI, which is making steady progress as we are already seeing improvement in their operating profit. Please see slide number 17.
Last December we completed the acquisition of 90% of ownership of Roboteq from its owners through Nidec Motor Corporation like in the case of investment [ph]. We are always trying to strengthen our presence in some key future growth drivers including amortization.
To become a global leader to -- in these markets, we are focusing on expanding our ability to provide packaged solutions to all our served markets as demand continues to increase for convenient modular operations. Roboteq is a leading designer of ultra-low voltage drives for the rapidly growing automated guided vehicle or AGV market.
Roboteq's products are used in AGVs for warehouses, security and cleaning agricultural use. Through the acquisition of Roboteq we will be able to act as a single vendor that can offer full motor control system support to AGV customers.
Additionally, the integration of Roboteq's engineering team into the existing Nidec's motion control and engineering, we have further strengthened our R&D capability. Please see slide number 18.
Our strategy for a decarbonized work focuses on design and manufacture of environmentally superior motor drive products that enable end applications to outperform the most stringent energy efficiency and carbon emission standards in any industry we serve. One such example is the development of E-Axle, a traction motor system designed to help electric and plug-in hybrid vehicles run with near zero direct emissions.
In addition, our home developed cooling system gives E-Axle extra compactness, allowing automakers to design lighter and less resource-reliant vehicles. We expect this issuance of green bonds whose proceeds will be used to invest in R&D activities and the capacity building associated with electric vehicle traction motors to generate an increasingly bigger source of funding necessary to diversify our investor base, and we hope to become part of a thriving bond market and sustainable society.
Lastly, on behalf of entire management team, I would like to thank our customers, partners, suppliers for their effort and commitment as well as our shareholders. At this time, we would like to open up the call for questions.
Thank you very much for your attention.
Operator
Thanks.
Masahiro Nagayasu
Thank you very much, Mr. Sato.
Now, we'd like to turn to the Q&A session. Mr.
Sato will be pleased to answer any questions.
Operator
Thank you. Today's question-and-answer session will be conducted electronically.
[Operator Instructions] And we now have one question from Aaron Rakers, Wells Fargo. Please go ahead.
Aaron Rakers
Yeah. Thanks for taking the question.
I know you guys don't -- over the last several quarters you haven't provided any kind of outlook commentary on the hard disk drive market. But given we're still talking about 10% of the business, I'm just curious of -- given the continued declines that we've seen in that business, I'm just curious of how you're thinking about the hard disk drive business going forward, what you -- what's the current demand profile look like.
And I guess in particular, as hard disk drives continue to mix, what you're seeing in terms of high-capacity near line hard disk drive demand in the market currently.
Akira Sato
Okay. So the total volume is coming down as you see in our shipment number.
We are now really putting on our shipment number on this slide, but our shipment ended for this December quarter 61.8 million. So, if we're going to be looking at the form-factor by form-factor December versus September quarter a 2.5-inch high-end increase and the near line increase, but 3.5-inch is also increased but 2.5-inch is down.
So, that's how we are looking at the volume. And especially, we thought the gaming console demand is clearly coming down in December quarter, because the next year or this year the major game console makers are planning to update their gaming consoles.
And as you understand that, they will be using the SSD not the HDD. But not just that, but because of the more change is expected for this year, the total sales of the game console was really down for this December quarter.
And that will be pushing down somewhere like a 6, 7 maybe – sorry, around ¥5 million out of a total of ¥7 million down in the market. So, clearly we saw the number in 3.5 and 2.5-inch is something down in the December quarter, and especially in the March quarter and onward, we are looking at the slightly slower – I mean, the lower number for 2.5 and 3.5.
So instead the near line that we are looking at very high growth and where Mr. Nagamori mentioned in today's meeting was something like a 30% increase from a December quarter to the March quarter.
Then at this moment that, we are looking at maybe that 30% growth in March quarter would continue into April quarter not the 30%. 30%, but the 30% higher range maybe kept into a June quarter.
So this is the – basically something that we can say about the trends on the HDD.
Aaron Rakers
Very helpful. Thank you so much.
Operator
[Operator Instructions] We can now take our next question from Yoko Sakai from Harding. Please go ahead.
Yoko Sakai
Thank you. Thank you for the call.
I have three questions. Could you give us an update on your progress in the Appliance, Commercial and Industrial motors?
I know that Mr. Yoshimoto is working on it.
I know, it's only been a quarter since you last talked about it but if you could share a little bit more there please?
Masahiro Nagayasu
Update on traction motor?
Yoko Sakai
No. The Appliance, Commercial and Industrial.
Masahiro Nagayasu
Commercials, ACI. Okay.
So, overall review of the ACI situation, right? Am I right?
Yoko Sakai
Yes please.
Masahiro Nagayasu
Yes.
Akira Sato
Yes. Actually maybe, let me explain first the operating profit margin in the ACI.
December quarter it was around 5.6% to 5.9%. It's coming down from 8.8% in the September quarter.
So, one biggest factor is decline of the sales in industrial area, which as you know, the industrial area that market has been declining anyway. And that's why we decreased the kind of the top line sales number to low-risk maker with turbo motor and also some industrial manufacturer with a motor or compressor.
That's kind of the biggest one. And in the March quarter, it's going to be up to around 8% to 9%.
One is of course, the sales that we would want, because we have the receiving the more the order intake in December quarter than last quarter. That's why it's going to be connected to system.
And on the other hand, we are now restructuring the -- fixed costs. And then we are now spending our money to -- for restructuring we are forming in the ACI area.
So that's a reduction of fixed cost that will materialize March quarter. That's why the operating profit margin will be up around 8% to 9% -- March quarter.
That's the current situation.
Yoko Sakai
Okay. Thanks.
Then also on the power origin. What was the -- where did you -- where did things come in below expectation?
Masahiro Nagayasu
Okay. What is the biggest reason we made a downward revision?
Yoko Sakai
For the second time, yes please.
Masahiro Nagayasu
[Foreign Language]
Akira Sato
Yes. The biggest the reason is we are now spending a lot of money for a -- R&D costs and also start-up costs for traction motors.
We are getting a lot of order intake from the -- our customers for the traction motor. That's why we are spending more buildup costs to accept this kind of order intake.
Yoko Sakai
Which is the same as the reason as the second quarter. So you're saying that you didn't expect -- I mean you had already changed your assumption three months ago but you're saying that this is a lot more than then or that you didn't foresee this?
Masahiro Nagayasu
[Foreign Language]
Akira Sato
Yes. We are getting more and more orders than we expected at CIMA [indiscernible].
Yoko Sakai
Great.
Akira Sato
And then as you already know the -- we have now accumulated backlog. That is ¥10 million traction motor by 2025.
Yoko Sakai
Sure. Okay.
Got.
Masahiro Nagayasu
Did you get that? So we said ¥4.4 million -- ¥4.45 million the last time that we mentioned the order -- total order backlog.
This time we said the total order backlog amounts up to ¥10 million and over. So clearly total order backlog is increasing even the market is weakening in everywhere in the EV.
So everybody is very bullish for the future of the EV. But the current market is something down as you understand.
So as the order delivery is coming up, then we have to spend more money for a future R&D and start-up.
Yoko Sakai
Okay. Thank you.
Thanks helpful. I'm sorry.
I'm loosing my voice. So I'm going to call Nagayasu San separately later, so, okay.
Akira Sato
Thank you.
Masahiro Nagayasu
Thank you.
Akira Sato
Thank you. Next question, please.
Operator
Next question comes from Jim Cocoa [ph] from MUFG. Please go ahead.
Unidentified Analyst
Hello.
Akira Sato
Hi.
Unidentified Analyst
Hi. Thank you so much for…
Akira Sato
Hello.
Unidentified Analyst
-- taking this question. Can you hear me?
Akira Sato
Yes, yes.
Unidentified Analyst
Can you explain about the China situation? Is it improving?
Or are you still having the difficulty? And then, another question is, OMRON acquisition.
How long would that take on amortization? It's such a large acquisition.
Will it take longer? Thank you very much.
Akira Sato
China situation, it's actually continuing very much so market, but on the other hand made a new market for electric vehicle or those kind of changes is bottom-up or bottom-up. That's the situation.
So it varies from market to market, even in China. But, overall, maybe average market trend is very much slowing.
Yes, that's the current situation. And OMRON, really at this point the OP margin is around 3%, which is lower than we expected.
But our -- we are expecting that OP margin will be up to be around 10% March quarter, mainly due to the joint procurement of electrical component or the other component they procure. That's -- really, it takes maybe six months or one year to come up with expected OP margin, even in OMRON Nidec Mobility.
Unidentified Analyst
Understood. Thank you.
Akira Sato
Is that fine with your question?
Unidentified Analyst
Yes. Well, may I ask one more question?
[Indiscernible] is joining. And then, can you give us what's going on, an update on the new joint venture?
Thank you.
Akira Sato
[Indiscernible] actually joined Nidec already. But still he is adviser, but his expertise is aircraft engineering, as you may know.
And maybe we are now increasing production capacity, even for traction motors or the other new product, which means we have to reorganize that increasing production capacity. And then we have to produce those new products with timely manner and also high quality, so that maybe we will get the big weapon to improve ourselves in the production engineering area.
Unidentified Analyst
Understood. Thank you very much.
Masahiro Nagayasu
Thank you. Next question please.
Operator
[Operator Instructions] And we can now take our next question from Brad Snyder from Egerton. Please go ahead.
Brad Snyder
Hi. Thank you.
Congratulations on the order book improvement. I was wondering if you could give an update on the phasing of the CapEx to implement that.
And then I had a follow-up question on OMRON please.
Masahiro Nagayasu
The number one question is how we're going to be looking at our CapEx in the next several years, right? And the second one is what to do with the OMRON?
Brad Snyder
Well for OMRON I was wondering on -- in the auto segment, you have the sales growth of about ¥20 billion. So I was wondering how much of that was from OMRON?
Masahiro Nagayasu
Oh. So the second quarter is -- I mean the third quarter results, okay?
Akira Sato
The CapEx this fiscal year 2019, we are expecting ¥150 billion. And probably we will continue that kind of level of capital expenditure maybe in a couple of years, because we are going to increase the production capacity for instance for traction motors and the reduction gears and also the motors for automotive.
Those CapEx is planned already. So that ¥150 billion of capital expenditure will be there in a couple of years.
Masahiro Nagayasu
So you're trying to know more about the CapEx we did into the traction motor? Or just the CapEx overall?
Brad Snyder
Both actually.
Masahiro Nagayasu
Can you say it again?
Brad Snyder
I was just wondering about both more longer term.
Masahiro Nagayasu
Oh, more long-term. So today, Mr.
Nagamori mentioned something like ¥500 billion for next seven years after 2025. Then as we mentioned that we are budgeting for this fiscal year like ¥150 billion.
Roughly the 40% of that is used by the auto. Then 80% of that auto budget will be now used by traction.
So roughly, 32% of the entire budget is used by the traction. So if you calculate how much of the ¥150 billion and 32% is something that a -- around ¥48 billion.
And roughly ¥40 billion, ¥50 billion is used for traction at this point. And if you're looking at the -- assuming, we are using roughly ¥50 billion per year for traction motor then Mr.
Nagamori mentioned in the next seven years, the total will be something like ¥500 billion. So, if you say ¥50 billion times seven is ¥350 billion.
But clearly, we are looking at the larger CapEx in the future years. So thereby seven years for not the ¥50 billion each is ¥350 billion, but rather we say ¥500 billion.
Those are the numbers that Mr. Nagamori mentioned as his plan to expand the CapEx in this traction or EV-related area.
Is that fine?
Brad Snyder
Yes. Thank you.
And I was just wondering, I think you said 3% margin. What was the sales contribution from OMRON for December quarter?
Masahiro Nagayasu
OMRON. Okay.
So OMRON is what is the sales number and what the OP, right? So, roughly for the December quarter which we just finished, OMRON was something like a 20 -- no ¥18.1 billion because, it just could be counting two months because OMRON joined at the end of October.
So November and December two months' portion is counted. And those number was ¥18.1 billion.
And roughly as Mr. Sato mentioned, the OP margin was 3%.
Okay?
Brad Snyder
Great. Thank you.
Masahiro Nagayasu
Thank you. Next question please?
Operator
[Operator Instructions] Mr. Abe, there are no further questions today.
So at this time, I would like to turn the conference back over to you for any additional or closing remarks.
Masayuki Abe
Thank you. We would like to conclude this conference call.
Thank you, very much for your participation today. Should you have any questions, please do not hesitate to contact Nidec Corporation or your sales representatives at Mitsubishi UFJ Securities.
Have a good day. Thank you very much.
Masahiro Nagayasu
Thank you.
Akira Sato
Thank you.
Operator
Thank you. That concludes today's conference.
Thank you for your participation and you may now disconnect.