Nidec Corp Adr

Dear all, thank you very much for joining NIDIC's conference call. I am Yoichi Orikasa, General Manager for the branch of Mitsubishi UFJ Morgan Stanley Securities. As we kick off the conference, I'd like to ask you to make sure all the materials are ready in front of you. If not, please download the files on NIDIC's homepage right now. Please note, This call is being recorded, and the conference materials will be posted on the company's homepage for the coming week for investors and analysts who are not able to join today's call. Now, I'd like to introduce today's attendees from EDEC Corporation. Mr. Junseki, Representative Director, President, and COO.

Hello, everyone.

Mr. Hidetoshi Yokota, Senior Vice President and Chief Financial Officer.

Hello, everyone.

First, Mr. Yokota will make a presentation. After his presentation, we will move on to a Q&A session, and Mr. Seki and Mr. Yokota will answer your questions. Mr. Yokota now presents NIDX Q4 fiscal year 2021 results, future outlook, and management strategies. Mr. Yokota, please go ahead.

Thank you, Urikasa-san, for the introduction. Good day, everyone, and welcome to today's conference call. My name is Hidetoshi Yokota, Chief Financial Officer of NIDIC. Today, Mr. Junseki, Representative Director, President and Chief Operating Officer of NIDIC, and myself will be your main speakers and answer your questions. Joining us also is Mr. Masahiro Nagayasu, General Manager of NIDIC's IR team. For a well-looking statement, please see slide 2 of our presentation material for details. Now, I am going to review the key figures. Please see slide 3 for the fiscal year 21 full-year results. As shown on slide 4, the 12-month net sales stood at a record high of 1,918.2 billion yen, 18.5% higher year-on-year. The operating profit and profit before income tax increased 7.2% year-on-year to 171.5 billion yen and 11.9% year-on-year to 171.1 billion yen, respectively, and both were record high. The profit attributable to owners of the parent stood at record high of 136.9 billion yen 12.2% higher year-on-year. On slide 5 and 6, you have a step chart 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 the upper chart of slide 6, the sales of small precision model declined sharply Due to the lockdown measures implemented in China, however, the sales of automotive, appliance commercial and industrial, or SCI, and machinery made an increase. Regarding the operating profit in the lower chart, small precision motor declined due to reduced sales and automotive went down due to structural reform expenses and R&D expenses of traction motor systems. However, the other segment increased despite the adverse climate in the market. Please see slide 8. For the fiscal year 2022 forecast, we are aiming for net sales of 200 billion yen, operating profit of 210 billion yen, and operating profit ratio 10%. Please see slide 12. We are aiming to become number one automotive hardware company by anticipating the strong electrification demand boosted by CASE, which means connected, autonomous, sharing, and electric. In the EV traction motor-related business, mass production of e-axle by the joint venture with Stellantis is expected to start in the second half of fiscal year 2022, and orders increasing backed by the tailwind of a strengthened environmental regulation in Europe. In China, in addition to the two existing major customers, we are going to focus on the resources on the five customers, including the three new ones. In other motors and auto parts, as the market in fiscal year 2022 is expected to recover gradually while the increased raw material price is expected to continue. We are accelerating the improvement of profit structure by passing high raw material costs to our selling price and by reducing manufacturing costs, and we are aiming to achieve 1 trillion net sales organically and 300 billion yen additional net sales through M&A in fiscal year 2025 in the automotive segment. Please see slide 13. NYREC is ranked as number one third-party supplier in e-axle in the Chinese battery EV market, as you see the right-hand slide of slide 2. 2.91 million battery EVs were sold in China in calendar year 21, of which 1.45 million were assumed to be installed with e-axles. We estimated 840,000 e-axles were manufactured in-house by OEMs, and 610,000 e-axles were supplied by third-party suppliers. In this market, NYREC has 27% share, which is almost double compared to second-largest suppliers. Please see slide 14. The cumulative number of vehicles using our e-AXO exceeded 335,000 units, and the number of EV models has reached 11, despite the February decline due to Chinese New Year. much so the highest shipment volume and fiscal year 21 sales increased 140% year-on-year. Please see slide 15. We are going to solidify the outlook for e-AXO business monetization for post-tuning point by introducing mass-produced Gen 2 e-AXO in fiscal year 22. The first-generation e-AXO Gen 1 prioritize speedy entry to the market and expansion of the market share. However, Gen 2 is designed to achieve higher performance and a further cost reduction of 30% lower than Generation 1. By introducing Generation 2 e-AXO in the second half of fiscal year 2022, we are going to tackle to monetize earlier than originally planned. We have also started to develop Generation 3 already, whose theme is to gain overwhelming competitiveness to win through the high growth period. Please see slide 16. Our OEM customers are classified into Type A, who manufacture a traction motor in-house, Type C, who outsource them, and Type B, who sit in the middle. This entry, we are seeing increasing order from Type A dash, who are Type A customers, but they buy parts from traction motors from outside. At NYDEC, E-Axle for Type A and C are looked after by Automotive Motor and Electric Control Business Unit, or AMEC. Type B customer, Trantis by NYDEC PSA E-Motors, or NPE, and motors for small EVs and the 30 kilowatt as well as the motors for electric motorcycle by newly created small automotive motor and the solution business group of small platform motor and solution business unit. Please see slide 17. While rising raw material price squeeze quarter for profitability, we are going to prepare for the demand recovery with passing into increased material price onto the selling price and reducing cost in fiscal year 2022. Please see slide 18. Paradigm shift from ICE or internal combustion engine vehicle to EVs is rapidly accelerating into two-wheel and small car as well. We are focusing on two largest markets of India and China in both electric two-wheeled vehicles and small EVs. We are planning mass production in fiscal year 22 for 11 projects, including six related to electric two-wheeled vehicles and five related to small EVs. Please see slide 19. NYDEX Ultra Flow FDB, or UFF, Ultra-thin and ultra-small fan developed with technology accumulated through hard disk drive motor production is supporting the solid demand for PCs and its shipment is increasing. As you see on the right-hand side of the slide, the quarterly shipment volume exceeded 7 million units in Q3. Please see slide 20. NYDEC is launching ultra-small and ultra-thin products by applying our magnetic circuit design technology qualitative in the design of HDD motors. CACD's linear vibration motor of the left-hand side has approximately one-fiftieth of power consumption compared to our conventional product, and its diameter is ultra-small, 3 mm. With these models installed in stylus pens, they recreate the tan-style sense to market users feel as if they were actually writing on paper by replicating the way the pen tip vibrates when writing words. The volume of slider linear vibrator motors of the right-hand side has been reduced by 40% compared to our conventional product, and the thickness is ultra-thin, 2 mm. With this installed as smartphones and smartwatches, they function to control vibration to make users feel as if they were pressing the button and vibrate the synchronization with the video. Please see slide 21. In the small precision motor segment, we are implementing business portfolio transformation and HDD motor market structure change. In ACI, we are executing structural reform in overseas business and looking to enter a new phase of growth. While gaining market share outside Europe, which is shaken by the conflict, we are going to accelerate top-line growth through three new strategies focusing on the field and the logistics and the material handling and to prepare for expansion into the field in India and other Asian air-conditioned markets. Assuming higher low material costs continue for the time being, The same as in auto business, we will accelerate improvement of the profit structure through passing that on to setting plies and reducing manufacturing costs. Please see slide 23. NYDEC's innovative battery energy storage solution are used in prominent projects worldwide. SCI is also entering solution business such as EV charging station and circular economy related products. Please see slide 24. While struggling temporarily due to demand decline in Europe and higher material costs in the second half of fiscal year 21, ACI is continuing to aim for operating profit ratio of 15%. Please see slide 25. In other product groups, The operating profit ratio for fiscal year 21 is keeping high level of over 15%. Please see slide 26. The machinery segment has been successful in achieving high growth in expanding the improving product portfolio through the steady organic growth in M1 day. And especially in the machine tool business of our subsidiary Nilex Shimpu, We are going to explore a global market with organic growth and M&A, replicating a successful method in the press machine business. Please see slide 27. We have completed the purchase of stake in OKK Corp., their third-party share allocation. We are aiming to become highly profitable and comprehensive machine tool manufacturer by creating synergies with Nidec machine tools. Last but not least, on behalf of the entire management team, we would like to thank you, 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 any questions.

Orika-san, sorry. This is a six speakings. This doesn't include it in this presentation package, Prior to today's financial announcement in Japan, it's five hours ago, Mr. Nagamori announced that he came back to CEO positions, while myself, I was CEO by today's morning times. I moved back to COO. So we still control this company by two top managements, but just Nagamori-san come back to CEO and I go to CEOs. I think probably many question is waiting, so I avoid to tell more detail, wait for questions.

Thank you very much, Mr. Seki and Mr. Yokota. Now we would like to turn to the Q&A session. Mr. Seki and Mr. Yokota will be pleased to take your questions. Today's question and answer session will be conducted electronically. If you would like to ask a question, please press the star key and 1 on your touch-tone phone. Again, please press star and 1 if you would like to ask a question. If you would like to cancel your request, please press star and 2. Again, if you would like to cancel your request, please press star and 1 and 2. We've now paused for questions. for a moment for questions from the participants. Again, if you would like to ask a question, please start and run on your touch-tone phone. Okay, our first question today is from Ramzei Neelam of State Street Global Advisors. Can you hear me fine?

Yes.

Yeah. So my first question is on the inflation pressure. So how much of the price increase is required to completely offset the raw material cost inflation that you're anticipating in 2022? And also, How much is already passed on? Can you give us more color on the raw material inflation cost and the pricing?

Okay, maybe I will break it up by maybe quarter size for everyone to better understanding. So every quarter, similar level of inflation have been observed recently. Of course, a mix of materials changed from time to time. But recently, especially after the Ukraine-Russia crisis, most of the commodity is stabilizing again. So recently, magnetic steel, resin, copper, aluminum, everything is going up on the rare metals. So I would say for per quarter, the gross impact of material inflation is roughly more than 10 billion yen per quarter. And we are offsetting those by increasing price or putting some engineering effort. So every quarter, normally, 4 billion is left over. So if we completely offset 100, no impact. But there is a time lag or sometimes negotiation with customer is prolonged. So that's why we can't offset everything in the same quarter. So as we promised in the previous quarter, quarter three, we are a bit behind in the price reflection in quarter three, especially ACI. So this quarter, quarter four, ACI was very aggressive to recover the price. So actually, ACI is getting more than their impact in quarter four. But in general quarter three, So impact growth is roughly 100 to 120, sorry, 10 billion to 12 billion Japanese yen. And we offset maybe 60% of it or 70% of it and the 4 billion left over. So that is a mechanism per quote. And in fiscal year 22, of course, nobody knows what's going to happen in the material situation. But if a similar thing happens, Even we try to be very aggressive to squeeze this left over, this impact is still, how shall I say, there's a time lapse to be carried over to next quarter.

My other question is on, since you mentioned Russia conflict. There is also an environment of 1.6 billion in auto segments. So can you give us the demand side of the equation? So how is the demand in Europe and in China because of the COVID-19? So can you give us the demand side? Are there any changing trends in various segments?

Okay. So this is six speakings. Regarding automotive divisions, we have a direct impact by this Ukraine for customers' demands. Actually, we don't clearly know if market demand is dropped or just automotive OEM cannot produce. But as a parts supplier, we are suffered by 15% less volume than original estimations. And then for China, so far, maybe less than 5%. It's just started. So it's depending on how long this lockdown continues. Let's say if it's continued till the end of May, probably impact become at 15 to 20%. That's we are estimating. But we are not seeing actually slowdown from market itself. So it's a pure delivery program.

Thank you. And the demand in other segments, like ACI and small patient models, how is the demand there?

For ACI side, for the Ukraine, we have an impact from two divisions. One is general appliance. We have a pure customer in Los Angeles. And the other one is like energy control segment. And those are roughly impacted by like 20 to 30 million euro sales, maybe around 10 million euro profit impact. But instead, we are seeing better demand from North American side. So I think we can mitigate this, but the impact is, as I said, in Europe. For China, we are still watching what is the real impact. So far, direct impact is happening for inventories because we can't ship, and also a very high logistic cost because many ports are stopped. Other than that, we are not seeing actual demand drop. even from our customers. That we are seeing.

And then last question for me is, in Excel, can you give us the latest reported financial year sales and operating loss, and also what you are in building into your forecasting for the coming financial year?

Thank you, Ramze. So far, when we're talking about e-action, our sales is only happening in China. And then if you go page 14, accumulated total sales is $335,000. And then in fiscal year 21, our sales was about $250,000. And then this is, of course, record high for us. And then before answering to your questions, let us advertise again. If we go page 13, and please look at the donuts graph on the right-hand side, green color is ours. So in China, still there are a mix of like enhanced motor and purchased motor. This is a market share for pure purchased motor from third parties. And then we are outstandingly high market share already. And then we are receiving a lot of RFQ and actual order takings. So we are expecting that this market share will expand. Then in 2022, from April to March, we are expecting about 600,000 to 700,000 units. Customer demand is over 800,000, which we don't believe they can build. So we set our business plan based on 650. And then accumulated e-action, which page 14 said 330. Actually, we already sold over 60,000 for LCB side through the ACI. So the result is already 400,000. If we sell 600,000 to 700,000 in this fiscal year, we easily reach 1 million sales. You are not asking our total sales, but let me advertise it, because 1 million is so important for me. And then if you go page 15, sorry, page 15. Upper chart showing our growth. Vertical axis is the sales amount, and the horizontal axis is year by year. And then lower part is our introduction strategy of our e-AXIS. Currently, we are selling, building and selling Generation 1. And then it will move transferred into Generation 2 from the middle of this year. In terms of Generation 1, our object of Generation 1 is an introduction to the market because no one believed us. Naturally, we had very gorgeous specifications. Also, we intentionally lowered our price to grow up faster. So generation one, in short, it's not profitable at all. So each time I sell, we lose money. And then that level is getting better and better. So far, I want to be very straight. Our marginal profit is minus 10%. It used to be minus 60%. So I think we can make this minus 10% to break even within this H1. Hopefully I can do that by June. Then we don't lose any money after that. And then our original commitment by this chart showing that we make a profitable business in 23. Model by model, profitable model, introduced much earlier, but because we have remaining old models, 23 is the target to make it break-even. But today, I said I'm aiming to pull ahead at least six months to be profitable. So that is our forecast and then challenges.

If I missed this, so can you give me the operating loss in the segment in the financial year 2021, and also what is projected for 2022, if you can.

Just a moment. Okay. So let me be very frank, okay? Usually I don't announce this outside. I lost over 200 by this business. It's not only a loss from sales, but also loss from R&D budget. So, roughly, I lost probably 60 of them from business, 144 like a fixed cost related to R&D budget. Thank you, Professor. Okay. Again, time by time, loss per car getting smaller. But meanwhile, we are selling more. So that's very difficult for the path. I'm very confident we completely turned around by Generation 2, which already almost, let's say, 94% completed for that development.

Yeah, actually, 20 billion yen of deficit is mentioned by Mr. Nagamori during the earnings call. So what he said was if we turn into break-even, we will gain 20 billion. And then if we can pile up another 20 billion, that is going to be 40 billion increase from now. So that's why we want to eliminate this 20 billion Japanese loss as soon as possible by accelerating the launch of GEN2. So that's our strategy for now.

Thank you. I'll get back to you. Thank you. Ramzi, thank you very much. Next question is from John Ho of Genco Partners. John, please go ahead.

Hello. Hi, good evening. Can you hear me?

Yes, we can hear you clearly.

Excellent. I just wanted to follow up on the EXO question. Did you say that in June quarter this year, we will be gross profit break-even from minus 10%? Did I hear that correctly?

Yes, that's exactly what I said. But that is my challenge. I cannot commit to you because, you know, I can commit you if market price doesn't move. But day by day, I'm seeing rare metal is going up, copper going up, and aluminum going up. So I have to offset all of those. And then, plus, I have to delete minus 10%. Let's say my confidence level is 85%. Sooner or later, I think it will break even.

I see. Can I also ask, you know, on your page 13, you show the donut market share. We are clearly number one market share. Do you think that some of these other competitors, ABCD and others, are they also losing money? And do you expect them to exit the business in the coming one or two years?

Yeah. Let me reply two way. Okay. First, officially, we don't know. Yeah. But, of course, we communicate very closely. At least A is much breathing than us, and B may be similar to us. C, D, we don't know, but probably breathing.

I see. I see. And, you know, we will have very good growth this year. You mentioned 650,000 units. how much of that is the models that you show on page 14, and how much of the 650 are new models that will be launched that will use our EXO traction motor system?

Since we say traction motor EXOs, those are all EXOs which are motor, inverter, reducer combined. I'll ask you a little question.

Are you asking the mix of Gen 1 and Gen 2 out of 650,000 units, right?

No, sorry. What I meant was you show on page 14 the OEM models that use our EXO system. So out of the 650, how much is from this list and how much is from additional OEM models? that will use our system this year, yeah.

Okay. We didn't observe that way, so it may not be accurate, but I think this group of 335 will grow to, let's say, 500,000, and 150 are like additional models from other brands.

Yes, makes sense. Thank you. And I also wanted to ask to clarify on your page 16, at the moment, we are doing business with OEMs that are outsourcing the motors. And what you're saying is in the future, towards 23, 24, 25, those that are making this traction motor in-house will start to outsource. Is that your thinking for the next few years? And therefore... our addressable market will grow because there will be more outsourcing?

Yes, that's exactly what we are seeing. John, actually, we are working with Type C and Type B. Type B is typically they request us to have joint ventures. So Ganjo Motor in China is so, and then we have a joint venture with Stellantis in France. And that will start production from this H1. And then those are no hesitation to ask next model, next model. So your question is type A. We start receiving RFQ from them. Sometimes they request only motor, motor assemblies. Sometimes they request us to deliver like a rotor assembly or a stator assembly, like a module of motors. So time by time, they are finding our quality, speed, cost is much better than their in-house. But since they are insisting those need to be in-house, so while they are abandoning a very detailed assembly, They stick for final assembly. That we are seeing. And then that starts from low-cost models. They insist they keep an enhanced motor for their high end. But this invasion will continue towards 2030. I think 2030, no one making a motor by themselves. Because finally, scale merit is everything for this cost.

Yes, yes. So you don't think the OEMs think of this e-axle traction motor system as strategic, that they have to, like people like Tesla or Ford or GM in the West, when they make EV, you don't think they will want to keep it in-house. You think all of them, including the Chinese ones, will want to outsource. That's your expectation. Is that right?

Yeah, I am 100% sure they want to keep it in-house. at least next five years, yeah. But they will find their in-house cost is too high. While performance is safe. Particularly, you know, this electrification only occurring high-end or very low-end, not for medium-end. So when those electrification introducing to like B segment car or C segment car, I think their electric powertrain, in-house electric powertrain is too expensive. We already tested two OEMs with ours, and roughly 60% to 120% high, because of very high fixed cost, because they don't have enough volumes.

Yes. One more question on traction motor. You mentioned when we introduced second generation, sometime in this fiscal year and definitely by next fiscal year, we will be able to make a profit because the product has lower cost, and also we can charge more. Is that right? Or it is more the cost lower. We will charge the same, and we will make a profit because of that.

Thank you, John. It's pure less cost than Generation 1s. And actually, we are going to provide some price discount to customer as well. We share this lower cost with customers, not fully, of course. And then one thing I have to tell you is that currently for the Gen 1, we are facing a very rapid material increase, particularly like rare metal. for magnet materials, then let's say until middle of last year, none of Chinese automaker listened what supplier said. They completely ignored to absorb price up. But since they need volumes, and then they know we need money to get the parts, So lately, brand by brand, they start listening. And actually, they are paying additional costs for this material increase. So this Gen 1 price is increasing. So starting point for Gen 2 is increasing, too. But it's pure incremental distance. And we are not going to compress, because we need competitiveness anyway. So straight answer to your questions, we gain the profit because of cost, but we don't occupy that cost. We also share that to customers. By the way, this graph may not be so clear, but we introduce the first model of this Generation 2 in the middle of this fiscal year, like September, October period. And then we expand those to other models.

Thank you. Maybe one last question on the financial model, the financial question. I know three months ago when we gave the previous quarter results, we reiterated guidance for operating profit at $190 billion. That was about three months ago. And then obviously we only reported $171 billion. Is the main difference because of unexpected raw material cost increase, or there were some other things that are temporarily hurting us that we will get back this year?

Yeah. Actually, you're right. We are short by 18.5 billion Japanese against our guidance. The vast majority of the shortfall comes from small position motor and automotive. maybe half and half. Yes, there is an impact of material cost high, but as I said, they are suffered by material cost, but for example, HCI business, they are so aggressive to recover the material cost they suffered from previous quarter. So actually, they are positive in the material. So all portfolio or material cost hack and offset impact in quarter four, actually the impact is not much in a single quarter. The majority of the shortfall comes from maybe unexpected volume drop in small precision motor and lower than expected volume growth in the automotive and also some continuous investment in the traction motors. For example, the small precision motor, as we mentioned during the call, there was a big impact from the China lockdown at the end of March because we have to close the factory for almost a week. And also our shipment supply chain completely freezed due to this. And we couldn't make many, many last-minute sales in March. That was very big. As I mentioned during the call, we estimated the impact of lost sales of a small precision motor is about 6 billion Japanese for the China lockdown impact in the sales. And also, maybe Nagaya-san will explain a little bit more in the market situation. Our HDD business, HDD spindle motor business, is keep declining in the quarter four. As you know, the HDD spindle motor business is the cash cow for us. And the volume reduction by previous quarter, about 25%, is a significant hit in our small precision motor. And on top of that, other small precision motor products, such as fan motor or servo motors or thermal solution and so on and so forth, severely impacted by tip shortage by customer. This quarter was a big disaster for us. So this kind of a combination hit our top line in small position motor. And automotive, as I said, we are anticipating more sales recovery, especially in Europe, but that was not happening, actually, lower than expected. And also, traction motor businesses, we keep investing to accelerate some of the development. So all of this impact comes to the shortfall of $18.5 billion against the outlook that we announced at the end of the second half.

Then, by the very last moment, we had a Ukraine and zero-corona strategy policy from China.

Do we make that $18.5 billion back this year, meaning whatever we were going to get this year we would get plus what we lost? Because those are mostly delayed. Is that fair to say those are mostly delayed as opposed to permanent loss?

No, it's definitely not permanent loss. We can recover. As Yokota-san said, we are strongly negotiating with customers. we don't make them, you know, afraid. We got very patiently asking help because, you know, we are losing lots of profit. And then, as I explained for the traction motor examples, Chinese OEM never listened to this type of, you know, price increase because of materials. But they start to acknowledge that this is extremely unique from before. So they are listening and accepting for price increase. And then timing-wise, it's delayed. So we're expecting those are effective from Q1, many. And also for the traction motor side, we lost over 200 okay last year. As I said, time by time, it's getting better. So we are expecting a much less loss in this fiscal year. Also, if war and China COVID continue through this year, probably it's a disaster, but we're estimating those who will finish by somewhere in this H1.

Right. It's a $210 billion forecast incorporating some disruptions already?

Yeah. I think it's really that those situations have been deflected in $210 billion, right?

Yes, exactly. Because it is continuing a little bit in April and maybe a bit of May.

Yeah, I think it's a really difficult question for us because as Mr. Seki explained several minutes ago, our direct business with Russia and Ukraine is quite limited. The indirect economical impact over the Europe market is quite significant in the automotive business and the ACI business. It's really hard to foresee how much risk to be reflected in 210 billion hour forecast or how much should be forget. What we can do is if this kind of risk realized during the operation day by day, we will find a solution to mitigate the risk or offset the risk. We have a big opportunity in other areas such as North America or Southeast Asia or even China If Europe's risk is realized to be bigger and deeper, we will take immediate action. That's what Mr. Nagamori said, agile action by NIDIC spirit. But to answer your question, we don't have crystal ball to see how long does it take to complete this kind of a crisis. We think the impact to be the current level or no deeper than current situation. That's what we believe.

Thank you so much. We know you guys are working very hard. We appreciate it. It is an uncertain world. Thank you.

Sorry, John. My CFO is very conservative. Usually, we don't disclose these numbers. without some margins. Our internal plan is much higher than this. So, of course, we have some solution to go higher and stretching out everywhere as needed. I think performance in 21 is very miserable. Although we made a new record by four years' time, but I expected much higher landings, as you said, at least like 1,900 tokens. So this year, as a pride of NIDEC, we really have to make this happen. So we have a margin in back of this. And then, to be honest, straight answer to your questions. We embedded some impact of Ukraine and China in Q1 a lot, and Q2 much less. And we are not embedding any impact for Q3 and Q4. Intentionally, we are being optimistic for that point. But if it continues, we have to bring us other solutions, as Yokota-san said.

Thank you. I'll go back to the queue. Thank you very much. Seki-san.

OK, John.

John, thank you very much. We have a few more minutes to take questions from participants. And for the benefit of all participants, please let me repeat. If you'd like to ask a question, Please press star key and 1 on your touch-tone phone. Again, please press star and 1 if you would like to ask a question. OK. We will take additional questions from Ramzi. Please go ahead.

Thank you again. So when looking at the balance sheet, the inventory is almost increased 50% compared to last year. So is it that the accumulation of the raw materials or some of the products for the future manufacturing, or can you explain the inventory and the balance sheet?

OK. This is speaking. Let me answer your question. We can break it apart in three pieces for the inventory increase from previous quarter end to this fiscal year end. Three pieces mean the first piece, first block, is a proportional increase by our turnover. As you remember, our turnover increased from 1.6 trillion Japanese to 1.9 trillion Japanese. So naturally, our inventory increased by this. And the second is exactly what you said. We call it strategic stock. Strategic stock means any material shortage or material price hike or supply chain congestion. In order to prepare for this kind of situation, we pile up. the inventory, how should I say, intentionally. That's, we say, a strategic stop. And the third piece, this is what we should eliminate. We did not anticipate such increase, or we should take more control over this situation, but actually inventory increased. So I would say those parts is roughly one-third each. Let's say one-third each. So the last box I mentioned should be eliminated. And that is also including the impact of a portal lockdown or China lockdown or, how should I say, not expected, you know, the sudden cancel by the customer at the end of fiscal year. This fiscal year end, we suffered this situation based on the China lockdown and also maybe other areas as well. Also, some inefficiency in our supply chain control and we're piling up stock in our production line or supplier parts or finished goods. I would say out of total inventory increase, we will surely try to eliminate one-third, which is bad inventory, we consider. And we will clean up as soon as possible, especially quarter one. So how fast we can eliminate in quarter one is the key for our action.

And then, Ramzi, of course, while we see a settle down of Ukraine's zero corona from China, a material hike, logistic congestions, we can eliminate at the box, which is strategic inventory, which usually we don't need. We need it. very special because of current situations.

And somewhat relevant question. So I'm hearing, we're reading something around the supply chain issues in the industry, especially in Europe. So are you facing some supply chain issues in procuring some of the raw materials from China or some other parts of the world?

Hmm? Ramsey, you're asking the supply chain issue in Europe due to what kind of incident? Ukraine-Russia crisis or other?

In general, it may be shipping related or it may be related to Ukraine issue.

Okay. It's difficult to tell you overall situations, but At least we are seeing a longer lead time from Shanghai to Germany and with more costs. What we are hearing is Koreans shipping lots of products to Europe from Korea. Usually they use the Russian railway Now it's banned, completely blocked. So all Korean baggage coming into sea freight. So sea freight is extremely congested because they're coming into the seaside. That makes sea freight days for longer and more cost. Actually, port by port, the situation is different, but as average, We are seeing a 30% to 40% increase for the logistics, and maybe 10% to 15% longer returns. That's very big impact, but more impact is energy side. I don't know, Ramzi, where you are living, but our colleague in Germany and Italy, they said that energy costs are becoming double to triples. So that's impacting heavier than logistics.

Especially the gas price is crazy high in Europe right now due to the impact of current conflicts.

And last question is on China. So recently China is somewhat, I mean, they're reducing the restrictions, I mean, They're allowing some economic activity and allowing companies to re-open their industrial activity. So have you seen an improvement in the chain of economic activity for NYTEC in the recent weeks?

Again, area by area it's different, but fortunately we don't have actual manufacturing operations Shanghai, which is most severe lockdowns. But nearby Shanghai, it's a one and a half hour drive to the southwest. We have a PINFU, which is biggest our operations. And then in a PINFU, we have a very strong collaboration with local government. And at this moment, Time by time, we have a short lockdown, but we have not experienced a long lockdown, fortunately. We don't know tomorrow. And then we have an ASIM in Fuzhou or other areas. We have a traction motor operation in Guangzhou. So far, all of those are operating. Time by time, we have some parts delivery shortage because Supplier side is locked down, so we don't say no impact. We are receiving an impact, but for our operations, all are working, not completely locked down. Of course, Shanghai area is different. We have a big sales office in Shanghai, and then all of them are staying in their apartment. They cannot go out from their rooms. that they can work from .

Thank you. Thank you very much. And we are running out of time, and next will be today's last question. That is from . Please, go ahead.

Thank you for giving me a chance to ask one last question. The other variable that's moving a lot is the yen very quickly in the last two, three months. Can you talk about the impact of this very fast moving yen on our operation if there's anything to call out?

Actually, we have shared the impact or dollar and sensitivity in the page three, in the bottom. But overall, what I can say is maybe you can imagine the big, heavy industry automotive type of company in Japan. Their profit currency and the cost currency is different. They are exporting a car from Japan, for example. Their cost currency is Japanese yen, and their revenue currency is the U.S. So their U.S. revenue is boosted because of a rapidly weakening end. They get a lot of benefit. As you can see, our sensitivity in sales is big because we have a big, big revenue from U.S. dollar currency or euro currency. But our production policy is based on the local production, local sales. So our cost currency and revenue currency is matching in most of the cases. So that's why our sensitivity in revenue is quite limited. Of course, we will translate the local currency into Japanese by using the currency exchange. So, of course, we will get the benefit of weakening yen by converting this. But you can imagine the impact on any exporting the company from Japan is getting the benefit of weakening yen, while we are quite limited impact on profitability side because of cost currencies and revenue currencies matching. In most cases, not all of them.

It's a shame, you know. Many of Japanese industry enjoying this weak yen, but we can't because we are much healthier than them.

Yes, this makes sense. So as investors, we shouldn't worry about it. I mean, I can see you're saying 1.1 billion yen of OP impact. So even the yen was 120 yen. we are only going to increase our profit by about 11 billion yen. It doesn't change it that much. That's right. I see.

And there's no... Even if it goes up to like 100 yen per dollar, you don't have to worry about this. Yes.

There's no hedging issues either, right? There's no hedging issues either because we've matched our operations.

Right. Yeah, we don't have such impact in operation side, and this situation is making Toyota keep smiling. So that's what we can say.

Yes. So overall, it sounds like it is a very challenging time now. It sounds maybe as challenging as you've ever seen, but you feel reasonably good that you are managing well. Is that a fair summary qualitatively?

Yeah, what I can say is the revenue currency, cost currency, based on our production policy, local manufacturing, local sales, the impact is quite limited. But a rapidly weakening end will also affect Japanese economy and some cost increase in Japan. So that may have indirect impact on our side. So we are not quite risk-free from that situation. But what I can say is exposure is quite limited.

Thank you.

Thank you.

John, thank you very much. Now we would like to conclude the conference call.

Sorry. I expected someone to ask me, but because no one made a question, so let me share what Nagamori-san explained for the CEO replacement. And then basically he said that, you know, under current situations, you know, time by time, you know, unexpected disaster comings. If we look back last year, material is keep increasing and Southeast Asia attacked by pandemic. And then now we are seeing a war and severe lockdown in China. So this is very much against to our business. Under these situations, he believes Midek need a more rapid decision times, decision speed. So of course, I thought I have a good speed, but the reality is he know much better than Midek from corner to corners. While I know many for automotive side, some for ACM, but not so much for group company or . So now he said that for limited time, like three years, it's better to take back the CEO to him, and he can make a rapid decision under these circumstances. And meanwhile, traction motor is so important for our futures. And then at this moment, while I'm doing CEO jobs, I don't have enough time to take care of them. So while Nagamori-san take this role, I can spend more time for traction motor to pull ahead this business profitability. And then... He said the target is three years. Within the three years, if our share price going back, business settles, I'm grown up, and then I make a result from traction motors, let's go back to original situations. And at the very last, he clearly said that all analysts and medias, he's 77 years old, don't think he's, you know, Aging's he said he has a full of energies. Of course. He can't do 24 hours seven days work, but he is good enough to run these companies.

So messages don't worry And I'd like to appreciate all of your motivation Should you have any further questions, please do not hesitate to contact night a corporation on your sales or support your sales representative at Mitsubishi UFJ Morgan Stanley Securities. Thank you, everyone, for joining the conference call today, and now you may disconnect.

Thank you, everyone. Thank you. Thank you. Bye-bye. It's a good chance to purchase our share now.