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Edited Transcript of 6594.T earnings conference call or presentation 24-Jul-19 1:00pm GMT

Q1 2020 Nidec Corp Earnings Call

Ukyoku Jul 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Nidec Corp earnings conference call or presentation Wednesday, July 24, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Akira Sato

Nidec Corporation - Executive VP, CPO & Director

* Masahiro Nagayasu

Nidec Corporation - General Manager of IR Department

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Conference Call Participants

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* Aaron Christopher Rakers

Wells Fargo Securities, LLC, Research Division - MD of IT Hardware & Networking Equipment and Senior Analyst

* David Ryzhik

Susquehanna Financial Group, LLLP, Research Division - Associate

* Guillaume Chagnard

* James Pulsford

* Takashi Ito

ARGA Investment Management, LP - Global Business Analyst

* Trevor Wild

Ruffer LLP - Research Analyst

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Presentation

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Operator [1]

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Good day, everyone, and welcome to today's Nidec's Conference Call hosted by Mitsubishi UFJ Morgan Stanley Securities. Today's call is being recorded. At this time, I'd like to pass the conference to Mr. [Abe] at Mitsubishi UFJ Morgan Stanley Securities for the opening remarks. Mr. Abe , please go ahead.

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Unidentified Participant, [2]

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Thank you. Ladies and gentlemen, thank you very much for joining this conference call. This is [Abe], General Manager, Institutional Sales Department, 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 Performance Officer, who will be speaking to you shortly. First, Mr. Sato will make a presentation. After his presentation, we'll move to a Q&A session. Mr. Sato will now discuss Nidec's first quarter fiscal 2019 results, future outlook and management strategy. Mr. Sato, please go ahead.

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Akira Sato, Nidec Corporation - Executive VP, CPO & Director [3]

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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 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 #2 of our presentation material for details.

Now I will review the key figures. Please see Slide #3 for our first quarter results. As shown on Slide #4, net sales have decreased by 3% and operating profit decreased by 39%. However, the forecast for the first half and full year of fiscal year 2019 remains unchanged throughout the previously announced figures. Profit attributable to owners of the parent decreased by 91% due to loss on transfer of Secop, but there are no revisions to the full year forecast.

On Slide #5 and 6, you have step charts showing our 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 #5, net sales and operating profit of the most product groups declined year-on-year. However, the sales for small precision motors and automotive products increased due to acquisition of ACI and new business contributions, respectively. As you can see on Slide #6, both net sales and operating profit increased quarter-on-quarter. The profitability of the businesses has improved as a result of structural reform implemented since last year. And Slide #7 shows operating profit for this quarter recovered to the level of the third quarter of fiscal year 2018. We will continue cost-cut efforts and achieve a V-shape recovery. Our midterm strategy Vision 2020's targets on Slide #9 remain unchanged throughout April 2015, when they were set. We have made no changes to these targets since then.

Please see in Slide #10, as you see the graph on the left-hand side, the order intake for traction motors for fiscal year 2020 and fiscal year 2021 has significantly increased over the past 3 months. As a result, as shown on the right-hand side, the first traction motor factory, which is already up and running, cannot cope with the increased orders, and therefore we are planning to build the second and third traction motor factories. This will leave us with a traction motor production capacity in China of 2 medium units per year going forward.

Now see Slide #11, the four storeys has 66,000 square meters. Our first factory is -- was largest-level traction motor factory and is already in operation. Also as illustrated on Slide #12, this factory materialized vertically-integrated production where major components, such as aluminum die casting, housing and core pressing, precision machining and resin molding are all made in-house as well as the assembling. So that's high-quality, low-cost manufacturing and a stable supply insurance.

Please see Slide #13. Our automotive subsidiary, Nidec Elesys, is preparing extensive product lineup for ADAS, or advanced driver assistance system, incorporating newly developed radar systems from high end to low end, and it's receiving many orders and inquiries from both passenger and the commercial vehicles in Japan, Europe, the U.S. and China. Nidec Elesys is aiming to achieve ADAS-related sales of JPY 100 billion in fiscal year 2025 as well the first fiscal year's expected sales of JPY 12.5 billion, which means eightfold increase over the period.

Please see Slide #14. We are currently driving post-merger integration and sales expansion of Taiwanese company, CCI, which became our subsidiary last December. By becoming a member of Nidec Group, CCI has been able to be equipped with fans which were previously missing in their product lineup. With a strong support through our Nidec Group in such areas as production capacity, cost competitiveness and the synergy generation, CCI has gained huge advantage over our competitors.

Please see Slide #15. The sales of our subsidiary, Nidec Techno Motor, approves main businesses to provide fan motor for air conditions is recovering to a level close to the -- close to that of previous first quarter, while some Chinese customers' demand is still in 60% to 80% recovery.

Please see Slide #16. As you see the graph on the left-hand side, the sales of our subsidiary, Nidec-Shimpo, whose main businesses are press machinery and speed reducers, is expected to exceed JPY 80 billion this fiscal year, as well JPY 40 billion in fiscal year 2014, which means double in 5 years. In both of the main business areas, Nidec-Shimpo is aiming to continue high-growth by steady organic growth through new product launches and by product portfolio expansion through a series of acquisitions.

And lastly, on behalf of entire management team, I'd like to thank our customers, partners, suppliers for their support and commitment as well as our shareholders. At this time, we would like to open up the call for your questions. Thank you for your attention.

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Unidentified Participant, [4]

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today comes from James Pulsford of Eikoh Research.

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James Pulsford, [2]

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I've got a couple of questions, if I may. First of all, you're expecting a much stronger second quarter, and I wonder could you comment on which areas are going to drive that relative to Q1? And what signs have you seen so far of a recovery in demand? Because obviously that's been a problem for you over the last couple of quarters.

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Masahiro Nagayasu, Nidec Corporation - General Manager of IR Department [3]

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Okay. So in terms of the second quarter expectation, number one, the small precision motors, clearly we are looking at the better result for the hard disk drive spindle motors where near-line numbers are coming back, number one. And also as we have seen that we were seeing a big peak demand for a -- number one, a pop-up camera module where we would see some of the number this might drive. Also we are seeing a very big order for our subsidiary CCI in the thermal management modules, including a wafer chambers. So overall, we say September quarter is much better quarter for any smartphone business as our customer is usually selling [a new] smartphone starting in September, October.

And also as you see, still we do have some hard disk drive motors as well as the -- a -- our optical disk drive motors and power motors for the gaming consoles. And usually, the September would have a very high season for a gaming console event. So those are the small precision. And as we say, clearly we are gaining round in the -- a more number in the auto sector and also ACI. So overall, we say the situation there, we -- mainly from our own effort to cultivate the new markets, such as the vapor chamber or pop-up, we say we will expand our sales and then that's going to be leading to a higher OP. Is that fine?

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James Pulsford, [4]

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Right.

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Akira Sato, Nidec Corporation - Executive VP, CPO & Director [5]

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And yes, in addition the -- in ACI area, the negative impact from the -- some delays launching of a new model, which is Gen 3 that's -- we are going to levelize that production and then we will be able to ship the very big number of the unit to our customers in United States. So that -- it's going to be a positive impact in September quarter.

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Masahiro Nagayasu, Nidec Corporation - General Manager of IR Department [6]

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Yes. Also please note that we closed the deal to acquire Embraco on July 2. So we have already from July and onward throughout August, September, almost for 3 months that we could post the top line and the bottom line of the investment.

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James Pulsford, [7]

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All right. Okay. Whereas OMRON is -- comes probably October, yes?

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Masahiro Nagayasu, Nidec Corporation - General Manager of IR Department [8]

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Yes, we say by the end of September, we hope.

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James Pulsford, [9]

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Okay. Good. And can I also [as a little] follow-up, you had restructuring costs of JPY 2.5 billion in this quarter. Do you have any visibility in terms of what one might expect or what you see in your forecast for the rest of the year?

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Akira Sato, Nidec Corporation - Executive VP, CPO & Director [10]

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Yes, I don't think we have to recognize kind of big amount of the structural reforming expenses, very JPY 2 billion to JPY 3 billion every quarter. Now that's -- you're going to be...

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James Pulsford, [11]

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Okay. So this sort of level continues, yes?

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Akira Sato, Nidec Corporation - Executive VP, CPO & Director [12]

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Yes.

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James Pulsford, [13]

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Right. Okay. Good. And can I -- and sort of lastly, can I ask in the auto area, you had JPY 4.5 billion of development costs due to strong demand. Do you have any -- again, any visibility looking at the orders you've taken so far, which show a very sharp ramp up? Or are accelerated development costs likely to have quite a large impact again in Q2, Q3, Q4? Do you have any -- based on the level of business you have now, what's that situation going to be like?

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Akira Sato, Nidec Corporation - Executive VP, CPO & Director [14]

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R&D.

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Masahiro Nagayasu, Nidec Corporation - General Manager of IR Department [15]

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R&D.

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James Pulsford, [16]

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R&D, yes.

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Akira Sato, Nidec Corporation - Executive VP, CPO & Director [17]

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Yes, we are expecting around JPY 3 billion of R&D costs for 1 model, but it's going to be reduced because we are going to thus supply kind of a standardized total to the other customers. So it's going to be down from JPY 3 billion to JPY 1 billion or JPY 1.5 billion per model. That's why I don't see any kind of big amount of R&D cost, but we are now receiving a lot of orders from various customers, so that maybe we should be able to include those R&D costs.

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James Pulsford, [18]

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Yes, but can I ask, based on the orders you have in hand, in Q1 you had a JPY 4.5 billion development, if you like, charge, also calculation of the depressing factor. Based on the orders you have at the moment, what would happen in Q2, Q3, Q4, please?

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Akira Sato, Nidec Corporation - Executive VP, CPO & Director [19]

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It will probably be a September quarter, it's going to be, again, the JPY 3 billion for -- and the second half, it might be down to JPY 3 billion to JPY 4 billion or...

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James Pulsford, [20]

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It might down to what? Sorry. Down to JPY 2 billion to JPY 3 million, do you say, in the second?

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Akira Sato, Nidec Corporation - Executive VP, CPO & Director [21]

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JPY 3 billion to JPY 4 billion.

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Masahiro Nagayasu, Nidec Corporation - General Manager of IR Department [22]

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JPY 3 billion to JPY 4 billion in the second half, yes. In the second half, yes.

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James Pulsford, [23]

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Yes, yes.

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Operator [24]

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Our next question comes from Guillaume Chagnard of Indosuez.

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Guillaume Chagnard, [25]

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I have 2 questions. The first one is on the fact that you have no change in full year guidance, neither on revenue, neither for the profit attributable to the parent company, so -- which is quite bold. So what assumptions allow you to remain confident for the full year guidance, especially given the environment in China? That's the first question.

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Masahiro Nagayasu, Nidec Corporation - General Manager of IR Department [26]

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Okay. So the key thing is, as we say the first half and second half, we did have a completely different and new business. Number one is the acquisition of Embraco, which we just mentioned, we acquired them in July. And in the second half, we have another acquisition, OMRON, which we expect to be closed by the end of September. So those new business which we acquired would be a -- getting us a higher total top line as well as a bottom line. So those things that we will see a second half is much better. So we are not really saying anything is going to be getting better in China or rather even keeping the current situation in China, we would have a higher top line, higher OP, by our own effort. That's the number one thing that we mentioned.

And on top of this -- a acquisition, we have been talking about our new business, maybe there are 2 or 3 things we mentioned here is the traction motor business. It may not contribute so much to the bottom line this year, but clearly we are now in the midst of the very high order of our traction motor. Then second one is, as we have been saying the pop-up, the pop-up is now getting a little bit -- maybe losing some of the stream there, but still it's a new business compared to the same quarter last year, with the second half of the last year. Clearly, we would have a higher top line and higher OP. And also in the smartphone business, we are now getting into the more like a thermal management solutions, including a heat pipe, heat sink and the -- a vapor chamber. So our newly acquired subsidiary, which we acquired December last year, CCI, is growing the top line as well the bottom line. So all that, we say we would have some confidence in making a second half a much better second half, thereby we would be catching up of any shortfall in the first half. That's what we said.

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Guillaume Chagnard, [27]

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Okay. And regarding the fact that 40% -- I understand about the new business and the acquisition, et cetera, but 40% of your end demand of the core business is linked to China, especially for the air conditioners, the automotive and the HDD. Do you see also any improvements on your business which linked to China already or do you have any signs of improvement in China?

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Masahiro Nagayasu, Nidec Corporation - General Manager of IR Department [28]

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You might be misunderstanding a so-called -- so our exposure to China. Okay? We say, we are providing a motor and motor component to the various business, including the IT product like a smartphone, PC and others and also the home appliances, okay? So if you're looking at the end demand of those IT products, maybe 30% to 40% China. Now if you're looking at the global home appliance market, nearly 40% of air conditioner in China. That's why we say 40%, right? So clearly, the 40% is not coming up. It might be a little bit difficult, but still 60% is out of China, then we are providing our component there. Okay? So if you -- I don't know what is your assumption for a Chinese demand for in these area, but still the smartphone is not really coming down so much. It's not so great, but still, for example, we have shipped more than we expected for our component to the smartphone in the haptic, for example, in the first half. So the real sales number is not tied to the -- whatever you talked about the...

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Guillaume Chagnard, [29]

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I understand. But when you were in Geneva, Sato-san gave us the 40% end layer of end demand into China. My question is on the -- specifically what I ask is about the air conditioner business. Also -- and I know that your clients -- your main clients for automotive are European carmakers, but some of the demand is linked to Chinese. So that's why I ask, do you see any improvements in the environment? I know it's not direct, it's all indirect, but any improvement in China?

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Masahiro Nagayasu, Nidec Corporation - General Manager of IR Department [30]

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So Slide #15, can you see the Slide #15? So clearly, we mentioned there and so-called in air conditioner demand in the global. So we have talking about Europe, Asia and Japan. And also we mentioned about China. Okay? So clearly, we mentioned here in this slide that still a Chinese demand is under recovery. But maybe Japanese air conditioner maker is clearly make a good recovery, but some Chinese air conditioner maker is a little bit behind that schedule. But so far if you're looking at the number here, then you can see what is the impact of that market to our air conditioner appliance of our subsidiary, Techno Motor, which is in charge of the air conditioner business in Asia and Japan.

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Guillaume Chagnard, [31]

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Okay. And last question, can you update us on the profitability at Emerson? I know that the plan of the profitability improvement has been delayed, so the target for this year is 5% for PM and 12% or for 27% in '20. Any update on that front?

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Masahiro Nagayasu, Nidec Corporation - General Manager of IR Department [32]

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Did you mean the Emerson Europe?

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Guillaume Chagnard, [33]

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Yes.

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Masahiro Nagayasu, Nidec Corporation - General Manager of IR Department [34]

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Emerson Europe.

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Akira Sato, Nidec Corporation - Executive VP, CPO & Director [35]

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Yes, the target of the OP margin is still there. But we are now refracturing the factories to reduce the fixed cost, so that in fact would be coming as well in the December quarter. So that it's going to be up along to then 10% December quarter or March quarter this fiscal year. And still 12% of OP margin in 2020, that's still intact in our plan.

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Operator [36]

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We will now take our next question from Aaron Rakers of Wells Fargo.

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Aaron Christopher Rakers, Wells Fargo Securities, LLC, Research Division - MD of IT Hardware & Networking Equipment and Senior Analyst [37]

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I want to go into the hard disk drive motor. I know that your presentation didn't provide some of the details that you've provided in the last couple of quarters or several quarters, I should say, on a outlook basis. But maybe to start, if you can help us understand the breakdown of what looks to be right around JPY 62 million of motor shipped in the current quarter between 3.5-inch desktop CE and 2.5-inch and then also enterprise mission-critical and near-line. And then if you wouldn't mind also providing that detail as far as the forecast into the current September quarter?

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Masahiro Nagayasu, Nidec Corporation - General Manager of IR Department [38]

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Okay. So before answering your question regarding HDD numbers, I would like to make an announcement. Our disclosure policy for hard disk drive numbers have been changed. We no longer announce a HDD numbers of the past and the future forecast. So that means the hard disk drive number means the TAM number. And also we will no longer make forecast of our spindle motor numbers. But still we will keep disclosure of the spindle motor number in the current quarter, meaning the finished quarter and the past quarters. Okay? So if -- when coming back to your question, maybe the last one that I would answer to your questions, right? Number one, that you asked what is the breaking down of JPY 62 million spindle motor we shipped during a June quarter, okay? 2.5-inch high-end, 1.6, near-line 12.0, 3.5, 21.3 and 2.5, 27.3. And overall, ASP was $5.55, which is around 7% higher than the previous quarter, that's going to cover a smaller shipment number and the total revenue is a little bit higher even looking at the foreign exchange number that we do report a higher top line sales number on the HDD. Okay?

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Aaron Christopher Rakers, Wells Fargo Securities, LLC, Research Division - MD of IT Hardware & Networking Equipment and Senior Analyst [39]

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Okay. And just to be clear, so on a forward basis you're not providing any forecast. Has your forecast changed relative to what it was 3 months ago?

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Masahiro Nagayasu, Nidec Corporation - General Manager of IR Department [40]

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So clearly, at this moment, we are no longer making forecast. So the previous forecast still stands in that sense, but please note that those are 3-month old.

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Aaron Christopher Rakers, Wells Fargo Securities, LLC, Research Division - MD of IT Hardware & Networking Equipment and Senior Analyst [41]

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Fair enough. And then maybe just a kind of final question, if I can. As the industry moves forward, and it sounds like you guys expect to see a continued recovery in the near-line business going into the current quarter, does anything as far as Nidec's business in near line spindle motors change as the industry moves to kind of next-generation technologies such as like energy-assisted or heat-assisted magnetic recording? Is that something that changes your -- the type of motor or the ASP of the motor that you ship into those type of drives?

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Masahiro Nagayasu, Nidec Corporation - General Manager of IR Department [42]

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We don't think so.

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Aaron Christopher Rakers, Wells Fargo Securities, LLC, Research Division - MD of IT Hardware & Networking Equipment and Senior Analyst [43]

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Okay. Fair enough.

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Masahiro Nagayasu, Nidec Corporation - General Manager of IR Department [44]

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So the new technology you mentioned, heat-assisted or microwave-assisted, is something to do with more of the head and the median, right? So -- but still the motor is needed and maybe there will be more additional requirement of motor to assist or to provide the -- those median and head combination. So at this moment, we don't think that the ASP might be affected, the body might be affected. The total volume in terms of the near line, okay? If the volume is going up, then one-to-one relationship, the motor need it. Okay?

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Aaron Christopher Rakers, Wells Fargo Securities, LLC, Research Division - MD of IT Hardware & Networking Equipment and Senior Analyst [45]

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Okay. I'll slip a final one in. I mean has your market share changed at all? Or maybe put another way, in near line, what do you think the near line drive shipment's in total? I'm trying to think about production levels versus what you think shipment levels were for the industry in the June quarter.

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Masahiro Nagayasu, Nidec Corporation - General Manager of IR Department [46]

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Well, the helium ratio is coming up in our number. So in the March quarter, the helium motor, part of the total near line motor in March quarter 42%, but now 54%. So clearly, the helium ratio is coming up, suggesting the high-capacity drives are shipping more in this June quarter. Then as you understand that helium is something that we do have a very strong technology [pro based] there. So overall, we believe that the overall share of hard disk drive, maybe we do have a higher share in the near line over the overall share. So whatever share, we say around 85%, maybe 90% or higher in the helium drive. That's what we can see. Okay?

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Operator [47]

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We will now take our next question from Mehdi Hosseini of Susquehanna Financial Group.

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David Ryzhik, Susquehanna Financial Group, LLLP, Research Division - Associate [48]

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This is David Ryzhik for Mehdi Hosseini. Just a quick question on the hard disk drive market. What is your perspective of inventory levels at your customers and as well as in the supply chain?

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Masahiro Nagayasu, Nidec Corporation - General Manager of IR Department [49]

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Yes, as I first mentioned in the announcement, we will no longer comment on the HDD.

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David Ryzhik, Susquehanna Financial Group, LLLP, Research Division - Associate [50]

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Understood, understood. Any sense on how they were in the -- exiting the June quarter?

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Masahiro Nagayasu, Nidec Corporation - General Manager of IR Department [51]

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The June quarter so far, our number is, as we mentioned, very flat, flattish. JPY 64 million in March quarter and JPY 62 million in June quarter. And also as you heard in the previous call presentation, we already mentioned maybe June quarter will be lower than the March quarter. Right? Then at that point, we made a much better number for a September quarter forecast and the December quarter forecast from -- compared with this a June quarter number. Then as I answered, we are no longer giving other guidance and those guidance is 3 months old, but still it stands. It still stands out. Okay?

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David Ryzhik, Susquehanna Financial Group, LLLP, Research Division - Associate [52]

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Okay. Great. Understood. And you made a previous comment on overall Nidec targets for the September quarter, saying near line numbers are coming back. And I know you mentioned you no longer are providing HDD forecasts, but is that -- the near line strength within your overall target, is that consistent with seasonal norms? Or would you consider that stronger or weaker than typical?

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Masahiro Nagayasu, Nidec Corporation - General Manager of IR Department [53]

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Well, if you're looking at our numbers, which we suggested in the previous half guidance, clearly it's going to be strong. Like a June quarter and September quarter last year. So we say, a December and March quarter was a little bit down, but now we are coming back to the normal. So it's not really something like a new high-level, but coming back to the -- overall the June quarter or September quarter last year. Okay?

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Operator [54]

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We will now take our next question from Takashi Ito of ARGA Investment Management.

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Takashi Ito, ARGA Investment Management, LP - Global Business Analyst [55]

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I just wanted to ask about the costs at Nidec. So given all the charges that you have taken, I guess we did not see the benefit of those charges so much because you had extra costs in the -- probably in the -- because of the very strong demand in traction motor. So I just want to confirm that the extra costs in traction motors, et cetera, was unexpected. So in that sense, these costs were not in the original plan, and so you basically use some of the benefit on the cost side from your restructuring charges until now to use for that. So just wanted to understand how to think about the cost control at Nidec? That's one question. And then just want to confirm for the full year guidance, is the fact that you are consolidating Embraco and OMRON, which usually is very fast at turning around these businesses, but it will take a bit of time for their margins to I think reach the normal Nidec level. So are these acquisitions diluting your OP margin in your guidance? And that's something that, if we did not have, maybe your revenue will be lower, but your margins will be higher? Just want to understand how to think about that.

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Akira Sato, Nidec Corporation - Executive VP, CPO & Director [56]

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The first question, R&D cost for the traction motors, of course we have budgeted some R&D cost from the beginning of this fiscal year. And after that, we have received more order intake from the other OEM. And that's why we have to spend more R&D costs, which is JPY 4.5 billion June quarter. That's we are saying.

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Takashi Ito, ARGA Investment Management, LP - Global Business Analyst [57]

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Okay. Okay.

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Akira Sato, Nidec Corporation - Executive VP, CPO & Director [58]

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So that's not only related to the structural reforming expenses. We recognized that in March quarter and the June quarter. That's very nicely defined. And the second one is a -- some dilution of OP margin by the acquisition of the Embraco and the OMRON Automotive Electronics. Of course you're right, maybe their OP margin would be probably 3% to 5% after PPA depreciation. That's why our standard is 15%, so that its OP margin would be diluted by the acquisition. But absolute number would be increased as you understand.

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Takashi Ito, ARGA Investment Management, LP - Global Business Analyst [59]

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Okay. Okay.

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Masahiro Nagayasu, Nidec Corporation - General Manager of IR Department [60]

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So one of the things we can say is, number one, for Embraco, in today's so-called announcement meeting, our CEO mentioned that still we are looking at around 10%. Still current Embraco is around 7% before PPA, but still we are looking at 10% after PPA in a year or 2. And also a -- OMRON, 3% and a OMRON management, but OMRON business is very similar to a -- Elesys business, which we acquired from Honda. So we are expecting a similar, very short-term improvement of the OP margin from 3% to 4% up to 15%. That was the case of a -- Elesys, when we acquired them from Honda. And as the cost structure and the business is similar, so we are looking at the -- a similar recovery or improvement of the OP margin of the OMRON. So if we're going to be -- if we can succeed in making their profitability higher, maybe September quarter, maybe it might be only Embraco, but December to March quarter, then we would have some support from a newly acquired OMRON there. That's the idea that we were talking about. The -- we are going to make a higher OP in the second half.

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Takashi Ito, ARGA Investment Management, LP - Global Business Analyst [61]

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Okay. Sorry, if I could just also ask about the traction motor business in China, given that there's so much demand and there would be a lot of upfront cost and launch cost. I know that you cannot immediately make a target margin on the business, but if you can give us a time frame, that would be useful. So do you think because of the big ramp up it will become profitable next year or actually faster than that? So just sort of a time frame on how long you will take for the traction motors to become profitable because there's so much upfront costs coming from the huge increase in demand?

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Masahiro Nagayasu, Nidec Corporation - General Manager of IR Department [62]

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So in there, you have to distinguish entire traction motor business or the motor business we are now engaging. So we do have a 2 major customers in China that we are ramping up. Then if we are making a tracking of the profitability of these current customer business, then for that business the number is coming up in -- as you saw in Slide #10. So for that business, our CEO mentioned that it could be profitable within the next 2 or 3 quarters. Maybe he said that he hoped to make a breakeven in the fourth quarter of this year. That's going to be talking about the current customer business. Okay? Then we do have a second customer, we do have a third customer, we do have a fourth customer. Each customer then there is a startup cost and the profitability is different. Then when we are looking at our entire traction motor business, it's a firstly, secondly or thirdly or fourthly a different customer, then we have to talk about what the profitability of the entire traction motor business. Do you understand what I'm saying?

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Takashi Ito, ARGA Investment Management, LP - Global Business Analyst [63]

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Yes, yes. I understand.

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Masahiro Nagayasu, Nidec Corporation - General Manager of IR Department [64]

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So as you will see that we are -- for the current customer, number one, so auto we will be disclose the name of our customer, then we are going start the ship, then our number will be growing up from 100,000 to 200,000. Then maybe a little bit over 200,000, we are going to be keeping in '19, '20, '21, '22. Okay? So if that is the case, we have to make money at minimum second or third year of this business. But for the next customer, they have some different number. Maybe the next year is something like a 200,000, but next year is 300,000, for example. So if this is the case, and maybe next year is 100,000, but the '21 will be 300,000. So 1 year we have to ramp up 3x for that customer then the total profitability of our traction motor for that customer might be a little bit delayed compared with that one. So overall, we have to further delaying up all these different business, so if we then have another customer, which is not yet there but coming in the 6 months, 1 year, the profitability change. So it might be a little bit difficult to say when we are going to make a breakeven for the traction motor business. Can you understand what I'm saying?

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Takashi Ito, ARGA Investment Management, LP - Global Business Analyst [65]

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Yes, yes, I understand.

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Operator [66]

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(Operator Instructions) We will take our next question from Theo Wild of Ruffer.

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Trevor Wild, Ruffer LLP - Research Analyst [67]

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So this is just on your air conditioning business. So I understand that with Embraco you'll be able to hopefully sell a sort of a compressor plus motor module to the air conditioning manufacturers, just wondered how many of the air-conditioning manufacturers currently make that module in-house, i.e., how many will you be competing with directly and how many will be purely -- will you be purely a supplier to?

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Masahiro Nagayasu, Nidec Corporation - General Manager of IR Department [68]

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You mean the compressor business for the refrigerator?

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Trevor Wild, Ruffer LLP - Research Analyst [69]

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No. For -- looking longer term, the plan to enter the air conditioning compressor business market?

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Masahiro Nagayasu, Nidec Corporation - General Manager of IR Department [70]

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Air-conditioning?

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Trevor Wild, Ruffer LLP - Research Analyst [71]

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Yes.

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Masahiro Nagayasu, Nidec Corporation - General Manager of IR Department [72]

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Air conditioning we say 70%, 80% of who is a compressor is made in-house. So most of the major meeting air conditioner makers are making those compressor in-house air conditioners. Maybe 80% or a little bit higher than that. Then the refrigerator, on the contrary, around a 50%. That's what we understand. Does this answer your question?

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Trevor Wild, Ruffer LLP - Research Analyst [73]

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Yes, partly. So if...

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Masahiro Nagayasu, Nidec Corporation - General Manager of IR Department [74]

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So because of that difference, it is also easy for us to get into the compressor business for air conditioner. Or rather it might be a little bit more easier for us to get into the refrigerator business because the in-house production is only 15%, then we are expecting that ratio is coming down into the future. So thereby a outsourcing market will expand, then our subsidiary Embraco will be taking advantage of that. That's one reason to acquire Embraco.

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Trevor Wild, Ruffer LLP - Research Analyst [75]

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Yes. So what about the compressors plus the motors, i.e., how many are making both of those in-house. Yes, in air conditioning. Yes.

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Masahiro Nagayasu, Nidec Corporation - General Manager of IR Department [76]

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Okay. So air conditioner business mainly as you understand, we are doing through the Nidec Techno Motor, which is Slide #15. So for -- at this moment, we are providing mainly the fan motor for those air conditioners, then we were planning to extend our business. But as I say, the market is not so much open. So it's a little bit difficult task to get into the compressor business for the air conditioner. But we have been trying to do this in the past and maybe we will do in the future. Okay?

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Trevor Wild, Ruffer LLP - Research Analyst [77]

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Okay. But -- sorry, what about the roughly 40% of the fan motors that isn't supplied by Nidec? Are they all also in-house from the air conditioning manufacturers?

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Masahiro Nagayasu, Nidec Corporation - General Manager of IR Department [78]

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Okay. The fan motor is clearly depending on the -- what kind of farm motor. There are 2 kinds of air conditioner. Okay? So inverter or no inverter. Okay? So inverter air conditioner is more energy efficient. Then thereby they would like to use more energy-efficient fan motor. Then our share is very high there. But the noninverter air conditioner is not so much energy-efficient, then usually they will not use so much of the energy-efficient brushless DC motor for the fan motor. So what we say is, if you're looking at the market in China, mainly China, and the other areas of global market, the inverter air conditioner is taking more share. Maybe around 60%, 65% in the global. Okay? Then if this is the case, then they will be getting a more energy-efficient fan motor to save the energy in these air conditioner. That's going to be a driver for those air conditioner maker to adapt more energy-efficient brushless DC motor. In that market, we are maybe somewhat around 50%, 60% share in that market. Okay?

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Operator [79]

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We will now take our next question from [Andy Gibson] of [Antipodes Partners].

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Unidentified Analyst, [80]

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I'd like to ask about the contribution from M&A from Embraco and OMRON that you identify in the second half. I think the -- if my notes are correct, you've been reasonably clear as recently as May that those businesses would have no operating profit contribution in the year on a post-PPA basis. That seems to have been revised to saying that they will now be 3% to 5% margin businesses. What's changed in the way that you would account for those businesses, please? That's allowed that to transition in the recognized margin?

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Masahiro Nagayasu, Nidec Corporation - General Manager of IR Department [81]

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Okay. Number one is on the conservative basis, we say it's somewhat the past cases suggest the PPA is especially the first half. I mean the first full year will be very high, thereby we are saying we are not assuming any OP contribution. But in a real case, it's maybe the inventory step-up might be finishing in case 1 or 2 quarters depending on the business, then the third quarter, the fourth quarter, that inventory step up is gone then, we could make some contribution there. And also as we mentioned, like OMRON case, if OMRON is same as Elesys as we acquired them in the March 2014, then the third quarter they made a contribution. So if you apply the real case in the past, then the situation may be different. So when we are looking at more general terms, and the more conservative basis, maybe we say there is no OP contribution from this. But if you're looking at the real case, then we are looking at something that could be a contributing OP, even maybe from the third quarter from the closing of the deal. Do you understand what I'm saying?

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Unidentified Analyst, [82]

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I do.

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Operator [83]

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Mr. [Abe], there are no further questions today. So at this time, I'd like to turn the conference back over to you for any additional or closing remarks.

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Unidentified Participant, [84]

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Thank you. We would like to conclude this conference call. Thank you very much for your participation today. Should you have any inquiries, please do not hesitate to contact Nidec Corporation or your sales representatives at Mitsubishi UFJ Securities.

Thank you very much, and have a good day.

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Operator [85]

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Thank you. That concludes today's conference.

Thank you for your participation, and you may now disconnect.