Nidec Corp Adr

Dear all, thank you very much for joining NIDEX Conference Call. I am Yoichi Orikata, General Manager, Kyoto Branch of USBC UFJ Mogast and E-Security. 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 NIDEX's homepage right now. Please note, This call is being recorded, and the conference material 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 Nidex Corporation. Mr. Akinobu Samura, Senior Vice President and Chief Financial Officer, and Mr. Masahiro Nagayasu, General Manager, Investor Relations. First, Mr. Samura will make a presentation. After his presentation, we will move on to a Q&A session, and Mr. Samura and Mr. Nagayasu will answer your questions. Mr. Samura now presents NIDEX Q2 Fiscal Year 2022 Results, Future Outlook, and Management Strategy. Mr. Samura, please go ahead.

Good day, everyone, and welcome to today's conference call. My name is Akinobu Samura, Chief Financial Officer of NIDIC. I'll be your main speaker today and answer your questions with the help of Mr. Hiro Nari-Noguchi as an interpreter. Joining us also is Mr. Masahiro Nagayasu, General Manager of NIDIC's IR team. For the forward-looking statements, please see slide 2 of our presentation materials for details. Now I'm going to review the key figures. Please see slide 3 for the first half's results. As summarized on slide 4, the net sales stood at a record high of 1,130.8 billion yen. a 24.2% higher year-on-year. The operating profit increased 8.1% year-on-year to 96.4 billion yen, marking a record high. The profit before income taxes and the profit attributed to owners of the parent increased 35.9% year-on-year to 118.4 billion yen, 30.1% year-on-year to 86.6 billion yen, respectively. Both stood at record highs. The quarterly net sales, operating profit, profit before income taxes, and profit attributable owners of the parent recorded all-time highs. On slide 5 and 6, You have step charts showing the net sales and operating profit year-on-year and quarter-on-quarter, respectively. By-product groups with exchange rate effect eliminations and structural reform expenses. As you see the upper chart of slide 6, the quarterly sales of small precision motors and appliance, commercial and industrial, or ACI, declined due to the reduced demand in home appliances. However, overall sales increased due to the remaining segment's increased sales and weaker yen. The overall operating profit on the lower chart increased, as the decline in small precision motors was more than covered. by all of the remaining segments increased operating profits. Please see slide 12. We are estimating that the global ratio of NEV, or New Energy Vehicle, which is including EVs and PHBs, is going to reach 20% in 2025 and 37% in 2030. Regarding the NEB ratio in China and Europe, which are the two advanced NEB regions, China is expected to hit 37% in 2025 and 55% in 2030, while Europe to reach 32% in 2025 and 81% in 2030. Please see slide 13. The cumulative number of EVs using our e-axles exceeded 547,000 units since the beginning of the sales in May 2019. Each month in the September quarter exceeded the previous high, and the total sales in the latest quarter increased 188% year-on-year. Please see slide 14. As you see on the left-hand side, we have classified EV OEM customers into three types, namely Type A who manufacture motors in-house, Type B who sit between Type A and C, and Type C who outsource motors, and we have been prioritizing Type B and C customers over Type A. We estimate it will take more time to shift to outsourcing. However, we are beginning to see the sign that Type A customers in Europe could shift earlier than expected. As we have been contacted by a Asia-European OEMs for possible outsourcing. The background of this is considered to be, number one, a fierce price competition for EVs with Chinese OEMs who are exporting their EVs increasingly. And number two, e-access manufactured house by European OEMs are relatively costly We are going to capture this opportunity and aiming to win orders of traction motors. Please see slide 15. We created NIDIC PSA eMotors, a joint venture with Stellantis back in May 2018 as our strategic core in the European e-axle businesses. and they started the first mass production just last month. As you see on the right-hand side, they are expecting to produce more than 1 million units of e-axles in 2025 and more than 3 million in 2030. Please see slide 16. A conversion to e-axle 10-2 has started from 100 kilowatt, and 30% of conversion is expected to happen in the December quarter. We are aiming to complete the whole conversion in the March quarter of financial year 23. And as originally planned, we are aiming to realize the profit in financial year 23 on a single fiscal year basis. and recoup cumulative losses in financial year 2025. In R&D, we have already started to tackle the fourth generation of e-access. The theme is magnet-free, and this has been adopted by Green Innovation Fund project of NEDO, namely New Energy and Industrial Technology Development Organization, a national research and development agency in Japan. Please see slide 17. As you see on the left-hand side, the total production capacity of the seven factories and other areas is going to be 7 million units in financial year 2025, and we are going to prepare almost double the capacity of the 4 million orders in the turning point of financial year 25. Please see slide 18. As higher raw material prices and lockdowns in China pressurized profitability, all results are recovering after the profitability bottomed out in the March quarter of financial year 21. Please see slide 19. Power time shift from ICE or internal combustion engine vehicles to EVs is rapidly accelerating in two-wheels and small cars as well. We are focusing on the two largest markets of India and China in both electric two-wheeled vehicles and small EVs. We are applying mass production in financial year 22 for 11 projects, including six related to electric two-wheeled vehicles and five related to small EVs. We have added in four motors for electric motorcycles in India. And with regards to production, we have converted the former HDD factory in the province of Zhejiang, China, to that of micro-mobility. And we are planning to double the flow area of our Indian factory. Please see slide 20. In the small precision motor segment, we are implementing business portfolio transformation amid HDD motor market structural change. Please see slide 21. In HCI, we are executing structural reform in overseas businesses and looking to enter a new phase of growth. While gaining market share outside Europe that is shaken by the conflict, we are going to accelerate top-line growth through three new strategies in the fields of generators, battery energy storage system, battery charger for EVs, etc. And for the air conditioner market, we are going to expand the businesses globally, mainly for industrial use. Assuming higher raw material cost continues for the time being, like in the oat business, We are going to accelerate the improvement of profit structure, surpassing that onto selling price and reducing manufacturing costs. Please see slide 22. Neelix signed a joint venture agreement with Flyer Badri's SA. Norwegian Semi-Solid Lithium-Ion Battery Manufacturer. NEDEX Battery Energy Storage Solution, or BESS, provides services to the grid that enable accelerated adoption of renewable power generation, which contributes to the realization of a carbon zero society. Meanwhile, WIRE has innovative same-solid lithium-ion battery manufacturing technology in terms of quality and manufacturing process. And it's planning to manufacture eco-friendly same-solid lithium-ion batteries using 100% renewable energy through a dedicated power purchase agreement with STATCLOUD. which is Europe's largest renewable energy producer, based on 100 hydroelectric power. Our partnership with Friar will ensure stable procurement of competitive and clean semi-solid lithium-ion batteries for NEDEX BESS solutions. This will help reduce CO2 emissions significantly throughout the entire process, from the battery manufacturing process to the use of our BESS solution by our customers. Through this strategic alliance, NIDEC will provide innovative storage battery and power management technologies to the world. thereby contributing to the promotion of renewable energy and the realization of a decarbonized society. Please slide 23. NERC's innovative battery energy storage solutions are used in prominent projects worldwide. SEI is also entering solution business such as EV charging stations and circular energy economy-related products. Please see slide 24. Despite headwinds posted by demand slowdown in Europe and low material price high, we are going to continue efforts to achieve operating profit ratio of 15%. Please see slide 25. In other product groups, the operating profit ratio since financial year 21 is keeping a high level of over 15%. Please see slide 26. Nidex Sankyo, Nidex Read, and Nidex Simple are the three major group companies in the machinery segment, and they are going to contribute to vision, 2025 target as growth drivers with high profitability by expanding such respective businesses. As industrial robots, a printed circuit board inspection system, a surprise for inspection system, automated optical inspection equipment, inspection system for parts of traction motors, machine tools, press machines, and reducers. Please see slide 27. Index established sustainability committee, which makes a decision on sustainability within the board of directors. We will find the challenges to be the ideal company, a company growing for the next 100 years and beyond. and promote our sustainable management in a longer term and broader perspective through the committee's activities. Lastly, on behalf of the entire management team, we would 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 questions.

Thank you very much, Mr. Samura. Now, we'd like to turn to the Q&A session. Mr. Samura and Mr. Nagayasu will be pleased to answer your questions. Today's Q&A session will be conducted electronically. If you'd like to ask a question, please press the star key and 1 on your touch-on phone. Again, please press star and 1 if you'd like to ask a question. If you would like to cancel your request, please press star and two. We will now pose for questions from the participants. Okay, our first question today is from James of Arma Capital. James, please go ahead.

Thank you. Sorry, this is Tom, James's colleague. James is unavailable. But can I ask about the machinery sales, which are very strong? I know that you have a contribution from OKK, the acquisition contribution of about 16 billion yen. But even excluding this, sales are very strong, again, both in Q1 and also again in Q2. So could you comment on this and then also how sort of sustainable this trend is, please? Thank you.

James is not here, but his colleague, Tom, is here. I would like to hear your opinion on the fact that the price of equipment is very high and the price of close equipment is very high. I think OKK is contributing a lot, but I think they are contributing about 16 billion yen. Not only Q2, but also Q1, I think the sales of machines and equipment have increased considerably. I would like to hear your comments on that.

In the field of equipment cleaning, we have added a new field of engineering equipment for the previous year. The impact of this is about 2.5 billion yen in sales compared to the previous year. The 16 billion yen that I just mentioned is not OKK, but the machine tool, which is a part of the Mitsubishi High School Association. This is now up to 12% of the profit. As for OKK, it has been in the black market since the red market last year, but it is still on the rise.

When it comes to machinery, the machine tool businesses are making very good contributions on a year-on-year basis, and the sales have been $25 billion. And when it comes to the figure that you have mentioned, 16 billion yen, this comes from not OKK buff from the Nideko Machine Tool Corporation, which was carved out from Mitsubishi heavy industry. This group company's operating profit ratio is more than 12%. When it comes to Nideko OKK Corporation, it used to be in a deficit. It's now making a profitable business, but it's still within the process of recovery at this moment. we can expect a lot more contributions from our machine tool businesses in quarter three.

When it comes to our machine tool businesses, we are planning to have additional acquisition of other companies or businesses.

Therefore, we like to raise these new businesses to be our cash cows.

Okay, I understood. Okay, so for the 16 billion yen from Nidec machine tool, I understand that. In terms of like organic non-M&A contributions to the growth in sales this year, are you able to guide me on that?

I understand. are contributing about 16 billion yen. I would like you to comment on the organic growth other than M&A.

Yes, regarding the high-tech industry, there is no Japanese mass production group such as MACHINE TOOL and OK-K. Currently, we are in the middle of receiving direct PMI guidance from Nagamori. In this case, we have specifically strengthened the business side and ordered all the orders. After ordering, we lowered the cost. We have increased profits in this way. Therefore, the situation has changed significantly since before the Japan Electricity Group.

When it comes to these machine tool businesses, which are Nidec Machine Tool Corporation and Nidec OKK Corporation, they are currently under the post-merger integration process under the direct supervision of Mr. Nagomori, the chairman of the Nidec Group. They are trying to improve and strengthen their sales capabilities by trying to obtain as many sales inquiries as possible. And after that, they are trying to reduce the cost and thus trying to make their businesses as profitable as possible. That's how these two companies are doing business within the area of machine tool business.

Okay. But other than these two businesses, not just these two, not these two, but the rest of the machinery segment, how is that performing?

Other than these two, what else do you have in mind? Machine tool business, machine work business, machine work business, machine work business, what else do you have in mind?

If we talk about other fields other than work, there is a company called Nihon Densan LEAD. When it comes to the areas outside the machine tool business, we have one of our group companies called Nidec Reed Corporation.

They are making and selling the semiconductor inspecting machines, and they are doing extremely profitable businesses. And the profitable ratio is very high when it comes to this NIDEC read cooperation.

In the slide, you can see the 26 pages. In addition to NIDEC, we also have NIDEC Shinko, Press Kikai, Gensokki, And other detailed information can be found on slide 26.

And other than NIDAC reader cooperation, we have NIDAC simple cooperation, which makes pressing machines as well as and when it comes to reducers in particular, they are going to be installed in robotic equipment, et cetera, so we can expect significant growth in the business.

Understood. Okay, sorry, and my last question is just if you look at the outlook, you said that you're positive for Q3, but if we look into next year, Obviously, many people are expecting a downturn in general CapEx, and I think the semiconductor market and machinery market, people are pricing in quite negative assumptions. And I was wondering, what is your view for your businesses if they're exposed to these areas? What's your view into next year about the environment?

As far as Q3 is concerned, I bought CapEx in 2023. CapEx is quite depressed. I understand that there is a negative view of the technology crisis. What is your opinion on this, Mr. Samura? What kind of view do you have of the technology crisis?

The market is in a very negative state, and it is expected that it will be very difficult from now on. However, I would like to say that the market that has not been used in the past, for example, the gear machine, which is a specialty of machine tools, is expected to expand significantly from now on. It is a market that is provided by Chinese local manufacturers. It was not used in places like this in the past. We will build a factory in China Currently, the market is hitting a plateau, I believe.

And I believe some people, we could expect some harsh conditions going forward. But when it comes to machine tools, For example, we are thinking about entering into a market we have never entered before. When it comes to NAIC machine tools gear businesses, we could expect the enter into China's local market, which is not something we have done a business before. And when it comes to China, we are building factories and the production is about to start at our factories in China. Therefore, by entering into China's local market, we could expect to enlarge or expand our business, scale of business.

I would like to add one more point. In the industry, there are many types of industry. In the past, especially with regard to machine tools, we have been working on a two-step strategy. From now on, through M&A, we will be able to respond to almost all types of machines. Depending on the type of machine, the timing of the mountain range will be very different. Through these activities, we will be able to improve the harmony of the mountain range. We are currently working on these things in parallel.

And if I may add one more thing, when it comes to machine tool business, we are trying to cover as many models as possible. And so far, Nidec Machine Tool has had this strategy of going into niche markets. But as we move forward, we are trying to have this company, Nidec Machine Tool, cover all the possible models. And depending on these models, there are some ups and downs in the market, good conditions and bad conditions occur at a different timing, depending on these models. But by handling, being able to handle all the possible models, we would like to mitigate such fluctuations of business.

Okay, understood. Thank you very much.

Thank you very much.

Tom, thank you very much for your question. Next question is from John Hall of Junker Partners. John, please go ahead.

Hi. Hello, hi. Can you hear me properly on this line?

Yes, we can hear you.

Perfect. Thank you very much for making time in your evening to talk to your investors. I just want to first ask about the exchange rates. Obviously, the exchange rate has been very favorable to us, I think. Can you just talk about the positives and the negatives with these very weak yen exchange rates? And also, why do we still assume, you know, a far different exchange rate to what is very likely from this point on, and if the exchange rate sensitivity still holds to profit?

Thank you. Thank you for taking the time for us today. My question is about the cost rate. Currently, we are in a situation where the wind is blowing very well, but we are in a situation where we are in a situation where we are in a situation where we are in a situation where we are in a situation where we are in a situation where we are in a situation where we are in

Compared to other companies, it is difficult to be affected by the exchange rate, and it is very global. The actual exchange rate is very high, so the influence of the exchange rate is very complex, but the overall influence is not great. Therefore, even though we are in a situation where the dollar is at its peak, as a whole, it is a sale that exceeds the cost, so there are advantages and disadvantages in terms of profit. However, we do not think that this is a normal situation, so we think that the current price-to-earnings standard is much higher.

As far as NIDIC is concerned, our policy is to produce our products locally and have these products consumed locally as well. Therefore, compared with other companies, we are not so prone to the current exchange rate situation. We are doing business very efficiently. on a very global basis, and the currencies that we handle vary from one after another. This is a currency exchange where the situation is very complex, as far as NIDIC is concerned. In the overall situation, we are not really being seriously affected by the current depreciation of the yen. and currently the U.S. dollar is being truly appreciated against the Japanese yen, and we are generating sales more than our cost. Therefore, in that regard, we are enjoying the merits of the current depreciation of the yen, but we do not necessarily think this is a very normal situation. I believe this current depreciation of the yen is rather significant, very abnormal and extraordinary. Therefore, going forward, we believe that there may be some flashback or we may have some returning effect of this current depreciation of the yen, pushback of the depreciation of the yen.

I see. Thank you. Can I ask about our EXO business in China that we talk about on the slide? Overnight, there was some news that Tesla is going to be cutting their prices in China. presumably because demand has been somewhat challenging. Do you think that this will affect the market? Do we have a view if the EV market in China might be slowing because of perhaps higher penetration? And does that affect us? Thank you.

Next, I would like to ask about the situation in China. As you can see on the slide, I don't know. What is the penetration rate? Can you tell us about it?

Regarding China, as well as Europe, the demand is growing more and more than expected. Therefore, in the past, Even though the price has gone up, we haven't been able to increase the price. However, the situation is getting stronger and stronger, and the price is gradually increasing. So, I think that slowing down is in the opposite direction.

My opinion about the Chinese market, EV market in China, and China as well as the European market are concerned. They are not really slowing down. It's rather the demands are growing in both of these two markets. And raw materials prices were increasing more and more. It has been very difficult for us to pass up the price increase over to our product selling markets. But currently, the situation is more quantity-oriented, and this situation is gradually intensifying. Therefore, rather than slowing down, we believe that the opposite case is happening when it comes to the Chinese and European EV markets.

Right. So what is your forecast for the EV market growth the next couple of years? And I assume we forecast it will grow faster than the market with new OEM customers.

Is that correct? Yes, there have been a lot of changes, but do you think that the growth will continue to accelerate as it comes in?

Yes, since then, after all, in 2025, this is the luck of luck, which is our view. This is exactly what many people saw as not coming so soon in the past.

When it comes to the growth of the EV market, we as a company have been long saying that the year 2025 will be the critical turning point of this EV business. Many people used to say that the critical turning point will be so farther away. It's never going to be 2025. It's so farther away. But this critical point, 2025, is now becoming a reality. Therefore, I believe demand for the EVs will going to increase even more than it is now.

Thank you. Maybe my last question is about our second generation EXO. I understand we are already producing the EXO second generation that has a lower cost. Can you talk to us on how much lower cost and how much of that cost reduction we have to pass on to our customer? Thank you.

Thank you very much. The last question is about GEN2. Currently, production has begun, and the cost is lower than the previous generation. How much lower is the cost compared to the first generation, and how much higher is the price for customers?

For Gen1 and Gen2, we aim to reduce the cost by about 30% to 35%. Compared to Gen1 and Gen2, the volume is reduced by 20% and the cost is reduced by 30% to 35%. The performance is compact. This is a benefit for customers, so we are working in a direction that basically does not lower the price. Therefore, we think that replacing the GEN2 with GEN2 will greatly contribute to the production of traction motors. This is the timing from GEN1 to GEN2 on the 16th page of the slide. In the third quarter of this year, we expect to see a 30% reduction in production. By the end of 2023, GEN2 will be replaced. We expect to see a significant improvement in the production of traction motors. However, all of this is made up of new technologies, so we expect to see a reduction in production

When it comes to this traction motor, Generation 2 traction motor system, Gen 2 is about 30% to 35% cheaper cost-wise in comparison with the first generation. That's our target. And when it comes to GEN2, content is about 20% less than its predecessor, and the cost, once again, is 30% to 35% less than its predecessor. And performance is about the same. Therefore, by using GEN2, our customers will be able to enjoy a lot of benefits, merits with the GEN2 platform. Therefore, basically, we are now going to reduce the price of our Gen 2 product in comparison with its predecessor. Gen 2 is going to make a significant contribution, we believe, to our traction motor business. If you take a look at slide 16, you can see the timing of the transition from Gen 1 to Gen 2. When it comes to Q3, we are expecting 30% of the entire first-generation traction motor to be replaced by Gen 2. The overall comprehensive replacement to Gen 2, we expect to happen in the fiscal year of 2023. Thus, our traction motor businesses' profitability will increase significantly. Since our Gen 2 products entirely use new technologies, not everything is going so smoothly. What we are doing is to tackle and try to solve problems one after another as we move forward. That's the kind of situation we are in.

How much pricing cuts do we have to pass on to our customers?

We are not going to pass on any amount of money over to our customers and we will avoid as much as possible to reflect the amount of cost reduction over to our customers. That's what we like to avoid as much as possible.

Sorry, so could you say you would pass on some of the cost savings to our customer, or we will not pass any cost savings to our customer?

Does this mean that the cost of the book will not exceed the customer's expectations? Or will it exceed the customer's expectations to some extent?

Yes, this is also case by case. Including the power relationship with the other party, it is case by case. However, as far as the current financial situation is concerned, this is not completely reflected in the book. It will be all on a case-by-case basis.

We have to take into consideration, for example, our relationship, our relationship with our customers, and we have not been able to reflect entire price range of raw materials onto our customers. Therefore, we need to go case-by-case in order to decide whether to pass on the price increase over to a customer or not, et cetera.

Thank you very much.

Thank you, John. The next question from Ramzi Neelam of State Street. Ramzi, please go ahead.

Thank you. Can you hear me fine? Can you hear me?

Yes, yes, we can hear you, Josh.

Yeah, yeah, thank you. So, my question is on EXI. I think, can you provide a segment plan for financial year 2022? I think it's $65,000, if I'm not wrong. Do you guys want that?

Sorry, can you please speak up a little bit?

Yeah, so can you please provide guidance of EXL shipments for financial year 2022?

This is to give you figures on our financial presentation that we held this afternoon, Japan time today. Our production estimate forecast for this fiscal year is going to be 550,000 units. Our production plan for the next fiscal year, which is the fiscal year 2023, will be 1.2 million units.

So is it 550 units? Is it downgraded from your previous estimate?

What was what from the previous estimate, did you say?

Yeah, so for the current financial year, you said the estimate is 550,000 units. Does it downgrade it from your previous estimate?

As for this year, it was originally planned to be 600,000 units, but there was also a lockdown in Shanghai.

When it comes to this fiscal year's production forecast, it was initially 600,000 units, but due to some factors such as the lockdown in Shanghai, China, the actual number was down by 50,000 units and now it's down to 550,000 units. When it comes to production forecast for fiscal year 2023, our forecast as April was 1 million units, but it is now up by 200,000 units to 1.2 million units.

And then on slide number 14, so you mentioned that in Europe, the in-house manufacturing cost is relatively high. Can you give us some understanding in how significant the cost difference between Nairobic and European in-house manufacturers and how Nairobic is able to capture the market?

Can you repeat that question, please?

Yeah, I'm sorry. So on slide number 14, we mentioned that in Europe, in-house EXL manufacturing cost is relatively high. So can you give us some understanding of how significant the cost difference is and how NIDIC is able to capture the market?

On page 14, you can see the cost of internal production is very high. It's written that the cost of manufacturing is high. How different is that? As a producer, how do you make the market a product?

I think that's what you're saying. It's not about how high it is objectively. It's about the voice of various market-related people. Also, the fact that we are doing it ourselves, including quantity and technology issues, we were aware that the market would come to these issues. This means that such a situation is coming sooner than we expected. This is what we have been able to grasp from various information.

When it comes to this difference in cost, it's not something we can say. This is based on various voices of people concerned in the market. Therefore, when it comes to quantity as well as technology, the current situation is as we see. This is something we... The situation is coming to a reality a little faster than we had expected. That's the situation that I can say based on various points in the market.

Okay, thank you. Mr. Nagayashi, I have one more question. Chinese EVs are sold in Europe. However, there are hardly any cases where European-made EVs are imported and sold in China. That's a good thing. European-branded EVs are sold in China, but they are mostly made in China. From that point of view, I think the cost of European EVs

One thing that I like to say based on the slide we have just alluded to is this one fact that the EVs produced in China are exported to Europe, and these EVs run in European countries. There are hardly any cases where European-made EVs are exported to China, and almost all the European-brand EVs vehicles running in China are made in China. Therefore, they cost expensive when it comes to EVs in Europe, and these are all associated with the component cost and many other different related costs.

Thank you very much for your questions. We have a few more minutes to take your questions, and I would like to welcome any questions. Otherwise, I would like to conclude the conference call. Okay, now there seems to be no further questions, and we would like to conclude the conference call. I'd like to appreciate for your active participation. Should you have any further questions, please do not hesitate to contact NYDEC Corporation or your state representative at the CBCSJ Morgan Stanley Security. Thank you very much for joining the conference call, and now you may disconnect.