Nidec Corp Adr

Dear all, thank you very much for joining NIDEX conference call. I'm Yoichi Orikasa, General Manager, Kyoto 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 NIDEX homepage right now. Please note, This call is being recorded and the conference materials will be posted on NYDEC's homepage for the coming week for investors and analysts who are not able to join today's call. Now, I would like to introduce today's attendee from NYDEC Corporation, Mr. Akinobu Samura, Senior Vice President and Chief Financial Officer. First, Mr. Samura will make a presentation. After his presentation, we will move on to a Q&A session, and Mr. Samura will answer your questions. Mr. Samura now presents NIDEX Q3 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 Akinu Samura, Chief Financial Officer of NIDIC. I'll be your main speaker today and answer your questions with the help of Mr. Hironari, which is an interpreter. Please see slide 3 for the financial year 2022 nine-month results. Shown on slide 4, the nine-month net sales stood at a record high of $1,000. 699.7 billion yen, 20.8% higher year-on-year. The nine-month operating profit decreased 6.8% year-on-year to 124.4 billion yen. However, the nine-month profit before income taxes and the profit attributable to owners of the parents increased 9.7% year-on-year to 141.9 billion yen, 4.8% year-on-year to 104.1 billion yen, respectively. Both stood at record high. We are implementing WPRX, the Drastic Reform of Profitability, to tackle the recent deteriorations of market environments with aims to reduce the fixed cost significantly and to make a V-shaped recovery in financial year 23. Based on Q3 results and the Q4 demand outlook, we have made revisions to financial year 22 annual forecast. On slide six and seven, you have step charts showing the net sales and operating profit year-on-year and quarter-on-quarter, respectively, by product groups which exchange rate effect eliminations and structural reform expenses. As you see the upper chart of slide seven, the quarterly sales of all of the segments except for electronic and optical components, and other declined due to recent deteriorations of market environments. The overall operating profit on the lower chart declined due to decreased OP in small precision motors, automotives, and appliance commercial vehicles. commercial and industries, or ACI, as well as structural reform expenses. Please see slide eight. We have started WPRX, the drastic reform of profitability amid adverse market conditions, in the second half of financial year 22, as explained on slide nine. WPRX is a drastic reform of profitability to tackle economic downturn caused by the expansion of COVID-19 in China and economic shrink in Europe through prolonged Russian invasion of Ukraine, as well as polarization caused by technological innovations. With the idea of technology creates cost competitiveness in mind, we are going to accelerate development of products that can overwhelm competitors with our technologies and to implement structural reform to reduce fixed costs through automation with our technologies and streamlining operations. Please see slide 14. The number of EV models adopting NIDEX e-AXEL has increased by 3 to 14 models compared with the previous quarter. The annual sales of EVs with our e-AXEL grew 175% year-on-year in current year 2022, and the latest December sales hit record highs. Please see slide 15. The e-axle market in China is about to enter the growth stage on a full scale. The number of market entrants, including OEMs, for self-manufactured motors is increasing. An increase in the number of competitors in such a growth stage is within our expectations. at the time of strategy creation. As our strategies for this growing market, firstly, we ensure a speedy implementation of large-scale capital expenditure before the demands arrive as countermeasures for market expansion. Secondly, in order to expand our customer base and geographical market areas. We will be targeting five major customers in China, two existing and three new customers, and acquiring new orders from European and US OEMs. Please see slide 16. Global sales volume over YP Axel is expected to continue to increase at a pace that exceeds the growth rate of the battery electronic vehicle, our BEB market, and we are targeting to sell 4 million units of e-axle in financial year 2025, which consists of Nidec PSA e-motors, a joint venture with Stellantis, and customers in China and other areas. Please see slide 17. We are preparing for V-shaped recovery in financial year 23 by posting large structural reform expenses in the second half of financial year 22. Please see slide 18. A paradigm 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-wheel vehicles and small EVs. We are planning mass production in financial year 2022. for 11 projects including six related to electronic two-wheel vehicles and five related to small EVs. We have added in four-wheel motors for electronic motorcycles in India. And with regard 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 floor area of our Indian factory. Slide 19. In the small precision motor segment, we are implementing business portfolio transformation amid HDD motor market structural change. Slide 20. 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 generator storage system, battery charger for EVs, etc. And for the air conditioner market, we are going to expand the business globally, mainly for industrial use. Assuming a higher raw material cost continues for the time being, like in the oat businesses, we are going to accelerate the improvement of the profit structure through passing that onto selling price and reducing manufacturing cost. Please see slide 21. Despite the weaknesses in the appliance and the commercial areas due to loss of demands driven by COVID-19 and the negative impact of prolonged Russian invasion of Ukraine on the European market, We are going to continue our efforts to improve profitability. Please see slide 22. In other project groups, the operating profit ratio since financial year 21 is keeping high level of over 15%. Please see slide 23. Neadex Machine Business Group which consists of Nidec Simple, Nidec Machine Tool, and Nidec OKK is going to expand and improve product portfolio through steady organic growth and M&A and realize high growth of the machinery businesses. Firstly, in the machine tool business, we are planning M&A's to expand product line-ups of machine tools and explore overseas markets, and supporting overseas sales expansion of NIDEC machine tools and NIDEC OKK by acquiring PAMA in Italy, which has a strong sales network in highly growing markets such as China, etc. Secondly, in the press machine business, orders for machine for manufacturing cans and EV-related parts, such as motor core, battery, etc., are increasing. We are going to strengthen production and sales through collaboration among our major brands. Thirdly, in the reducer business, we are launching Komagane business facilities in Japan with an aim to increase supply capacity of high precision reducers and planetary reducers for the domestic market and aiming to gain market share of reducers for six accessible robots. Please see slide 24. We have purchased the shares of Italian machine tool manufacturer, PAMA, and its nine affiliates, and executed a transfer agreement on the stock acquisition. PAMA is one of the most well-known companies in the machine tool industry for the wide range of product lineups and high-level technological capabilities with large machine tools, particularly horizontal boring milling machines. The company is also known for its solid sales and service networks in Europe and other places, such as China, the U.S., and India. Following completion of acquisition of PAMA, Following the completion of the acquisition of PAMA through reciprocal usage of management resources between PAMA and our two machine tool companies, Nideco Machine Tool and Nideco OKK, we are able to pursue synergies in all areas of sales, manufacturing, and product development. After completing the stock acquisition, we are going to actively provide PAMA with resources and make necessary investments in PAMA to accelerate the growth of NIDEX machine tool businesses. Please see slide 25. We are tackling to build a strong corporate governance system. and following the Establishment of Sustainability Committee that we announced in the previous quarter. We established a nomination committee last November as an advisory body to the Board of Directors. With the establishment of the nomination committee, fairness, transparency, and objectivity are ensured in the deciding on the election policy. It's the standards and the candidates of our directors and executive officers with appropriate engagement and advice from our external directors. We will continue to improve our corporate governance system even further going forward. 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 would like to turn to the Q&A session. Mr. Samura will be pleased to answer your questions. Today's Q&A session is 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. We now pose four questions from the participants. Our first question today is from Mr. Ito of Arga Investment. Mr. Ito, please go ahead.

Yes, thank you very much. So I have two questions regarding your big restructuring charges. I just want to first understand, is this primarily because of demand, macro demand, or maybe it's more because of pricing? So I think in previous quarters, NIDAC has said that you expect higher raw material costs to be passed on to customers with a time lag. I don't really see this positive impact in the current numbers. So are you getting a lot of difficulty in passing on pricing? And that is one of the reasons why you are embarking on the restructuring program. That's my first question. And so my second question is just for a more detailed breakdown of your restructuring costs. I think I read somewhere that it's about 70 billion yen for the full year. So if you could confirm the number, how much is in Q4, and for which particular products these charges are going to be for. Thank you very much.

My name is Ito. Thank you for your time. I have two questions. The first question is about the cost of large-scale restaurants. The main reason is that there is a micro-demand demand. Or is it based on the price setting? I would like to ask you about that. In the previous quarter, we talked about NIDEC. It is difficult for customers to add raw materials. I think there was an explanation of the purpose, but I don't see such a good impact in a good way, so I wonder if you are facing such a difficult situation in terms of the price increase of the price to the customer. This is the first question about this restaurant program. The second question is about the cost of the restaurant. Ichiwake ni tsuite oshiete itadakitai to omoimasu. Itsuka, doko ka de yonda ka to omon desu ka, nenkan de 70 billion yen kura keijo shite irassharu to yonda to omon desu kedomo, Kyufo ni oita dorekurai no okane ga tsukawareru, keijo sarete otte, doitta seihin o taishou ni kono ristora hiyo tsukawareru to iu yote ni natte iru toka to oshiete itadakitaku omoimasu. First of all, I'd like to say that there is no direct relationship between price charging and restructuring cost.

And when it comes to restructuring cost,

This 70% of this entire, and the restructuring cost accounts for 70% of the entire downward revision, which is worth 100 billion yen.

There are two factors for that. One of them is automotive related mainly in Europe and other places.

In European automotive businesses, we have encountered with the quality defect issues and other issues in our business operations. And these issues have to be solved in the course of communications among the top executives and others on a daily basis.

And our corporate culture, as well as our growth model, is based on this type of communications.

This communication has enabled us to establish a very good relationship of trust between our service and our customers. しかしながらですね、やはりこの数年、なかなかトップマネジメント同士のコミュニケーションというのが極めて不足、欠落していました。 However, over the past few years, this type of communications between top management executives has been what we have been lacking or missing.

こういうことからですね、比較的小さな問題が非常に大きな問題に発展してきたという事例がいくつか顕在化してまいりました。

Due to this lack of communications among top executives, relatively small problems have developed into larger problems and issues in some cases. One of the examples of such a case is the quality issues that has been developed into a compensation issue.

Another issue is also related to our communications with our customers.

As the production volume changes or fluctuates, Sometimes we have seen excessive amount of equipment that is not in use. And these are the issues that are mostly with the automotive businesses in Europe and other places.

もう一つ大きな要因としてはですね

Another major issue is the deterioration of the market environment. Under this circumstance, this year marks our 50th anniversary since our company's foundation. Therefore, to commemorate this 50th anniversary, in this year of fiscal year of 2023, we would like to make a V-shaped recovery after successfully and significantly reducing our fixed costs. This is the main primary purpose of this WPR-X, which is the initiative that I have explained in my presentation at the beginning of this speech. This WPR-X is the initiative for us to significantly reduce our fixed and other costs.

And during this process, we are going to slash

we are going to face consolidation and we are going to incur restructuring costs and we are going to reduce the amount of so-called slow-moving inventory. And these are all part of our ongoing restructural reform.

So, in this new 50th anniversary, we are going to make a start. In this new 50th anniversary, we are going to make a start.

Therefore, in commemorating our 50th anniversary as a company, and in order for us to be able to have a very good, secure, and healthy growth for the next 50 years, we like to go through this restructuring process structural reform so that we can establish a very healthy, extremely healthy financial structure and we can go ahead as a healthy company. Those are my answers to your two questions, sir.

Thank you. Can I just confirm that the pricing increase to customer is going according to plan and also can I just confirm that when you talk about the quality issues with the European automotive business this is related to maybe electronic power steering or the brake the braking systems and sorry one last confirmation is when you do when you mentioned restructuring Does this also include headcount reduction? Thank you.

Thank you. Is it related to electronics, electronic parts, power steps, or brakes? This is the second confirmation point. The third confirmation point is, does this RISTRA include a reduction in headcount? This is the third confirmation point.

Regarding the price change, compared to the previous year, When it comes to the first point that you would like to confirm with us, which is the price charging, we are still having this huge amount of

We are still experiencing the effects of just a huge amount of price charging. Price charging is smaller compared with the price increase on a year-on-year basis, which is in the amount which is approximately 20 billion yen or so. That's one thing that I like to say.

When it comes to quality-related issues, I would like to refrain from referring to specifics

but approximately 50% of the entire amount has been solved in Q2 and Q3, and the remaining 50% is still remaining in Q4.

In terms of whether there is a headcount in the Ristora合理化, the policy is to use one or more facilities in the group as much as possible.

When it comes to the third point that you would like to confirm, which is the possible head-to-gound reduction as part of the restructuring and the streamlining, of course, under the one-need policy, we like to utilize our equipment as well as people on a group-wide basis, but some head-to-gound reduction is part of our restructuring plan. Thank you very much.

Thank you. Mr. Ito, thank you very much for your question. And the next question is from Mr. John Hall of Junker. Please go ahead.

Yes, hi. Good evening. Thank you very much for making time, Mr. Samura. I wanted to ask you about the actual business. Maybe you can describe for us the changes in the forecast for this year and next year that you have made from the last quarter that drove that change, and how we assess the prospects going forward on the e-axle business. Thank you.

Thank you for your time. This is a question about e-axle. Regarding this year and next year, I would like to ask you about the changes in the forecast. How do you see it from Q3?

When it comes to the EXO business,

Our prediction is that we are going to reach a critical point in the year 2025, and our forecast at that time is 4 million units to sell, and this forecast remains unchanged. It's all the same.

However, as for the 22nd and 23rd years, including the spread of COVID-19, the market is slightly shrinking.

But when it comes to fiscal years of 2022 and 2023, due to the spread of COVID-19 and other reasons, it is true that the market is shrinking.

And as I understand, when it comes to fiscal 2023,

some people predict that there will be a slowdown in the Chinese market.

According to what I have heard from our people working in the local places, It is also true that one out of every three cars are EVs already.

Therefore, even though the rapid growth rate of two times or three times a year is not going to be maintained anymore, but I believe there is no doubt that the growth will continue.

One important point for us is to make a quick transition or quick transition from Gen 1 to Gen 2.

When it comes to Gen 2 products, it utilizes quite a few new technologies and we had to take a little more time than expected in checking the performances of Gen 2 products. Therefore, this is why we had to postpone the debut timing of Gen 2 products from Q3 to Q4.

However, as for the 22nd year, the Gen 2 ratio is lower than we thought. However, as for the 23rd year,

Therefore, when it comes to fiscal year 2022, the rate of the Gen 2 products is going to be lower than initially expected. However, when it comes to fiscal year 2023, our forecast remains unchanged. In other words, on average, three out of every four vehicles will be using Gen2 products. Therefore, as we have been saying from a long time ago, our plan is to generate a profit for our traction motor business in fiscal 2023. this plan itself also remains unchanged.

Right. Can I just follow up to ask a few questions? The growth rate, as you said, for EV penetration is slowing. And many OEMs, particularly in China, are really not making money. And recently, the OEMs like Tesla and others are cutting prices. Does that put some pressure on our negotiation of our Gen 2 prices? Can you give us some color on how pricing negotiation is going with our customers?

I would like to ask about the price negotiation conditions with our customers. I see that the EVE's inflation rate has dropped slightly and has slowed down. In particular, in China, customers of OEMs do not make much money and do not make much profit, and Tesla is also cutting prices. In such a situation, are you facing any pressure from Gen2 prices? When it comes to the price reduction as the quantity increases, it's something we have already been thinking about as part of our strategy.

As Mr. Nagamori, our chairman, has been saying,

a long time ago. The average price of the cars will be one-fifth of what it is now. What we need to understand is that we need to be able to increase the volume and try to reduce the price. We need to wait. We need to be ahead of other people. We wait for the arrival of the demands to come to us.

That's our strategy. Therefore, Tesla's ongoing price reduction is part of this movement, in my opinion. And therefore, in comparison with Gen 1, Gen 2's cost is 35% less.

And when it comes to Gen 3, its cost is 50% less than Gen 1. And that's the type of product development strategy that we have in place.

Therefore, as the volume increases, there will be a growing number of companies to enter the business, and the cost of competition will become higher.

harsher and harsher, and that's the type of thing that happens in many different markets, in my opinion. If you take a look at the slide 15 of our presentation material, detailed information is provided there.

Thank you. And one last one on the e-axle question. Is it true that some of our customers are in-sourcing or second-sourcing from other suppliers? How do we think about that?

Finally, one more question about e-axle. Some of our customers are in-sourcing or second-sourcing from other suppliers. And of course, some customers are making these axles in-house and in-person. For some other customers, we provide them with motors or even other components. There are quite a few different types of cases.

最終的には一番量を稼ぐところが一番コスト的なメリットがあるということになりますので、 最終的にはそういう量でトップになるというところを我々は目指しています。

So what we are focused on achieving the most is to secure a good amount of quantity of our products because that's most beneficial cost-wise.

いいアクセルをまとめた形で収めるということだけではなくてですね、 その単体部品を収めると、 これいろんなビジネス形態を持ちながらですね、 量を稼いでいくというような戦略で進めていくことになるのかと思っています。

Therefore, our strategy is to deliver a large amount of EXR units, but not only that, we will continue to deliver to our customers other components or individual components. That's how we try to secure a large amount of products.

Thank you very much. So if I can ask one question about the restructuring initiatives. My understanding is NYDAC always has cost reduction and operational efficiency plan. How is WPRX different to our ongoing reduction plans? Can you tell us why aren't we doing it already? Why do we have to start something new now? And how much of the restructuring cost is just writing off assets that we already paid for versus a requirement for cash investment for restructuring. Thank you.

最後にWPLX関係のリストに関する質問なんですけれども、NIDACといえば、いつもコストを下げてオペレーション関係の効率をどんどん上げていくという活動を常に行っていたかと思うんですが、 Why did they do WPLX here? What is the difference between cost reduction activities and WPLX? Why did they do this new cost reduction activity now? What kind of impact does it have on capital? What is the impact of cash and investment? When it comes to WPR-X, it is not really the same as the WPR-X initiatives that we have held or started in the past. Currently, we are in the midst of a huge, large-scale technological change.

In other words,

Currently, we are in the midst of a huge technological change. For example, the ICE, internal combustion engine, are replaced by EVs, and AI, or artificial intelligence, is replacing human when it comes to labor. That's the type of technological change that we are currently experiencing.

Therefore, instead of trying to reduce the cost all across the board in the entire unit, we like to focus on certain businesses that we would like to focus on,

And this is how we like to establish a competitive advantage over other companies.

Therefore,

The conventional WPLX activities are aimed or intended to reduce procurement cost and increase production efficiencies. Currently, the current WPLX activities initiative is to change our products themselves.

Okay, thank you.

Thank you very much, John. Next question is from Ramzei Neelam of State Street. Please go ahead.

Thank you. So I have a couple of questions. So firstly on e-exile guidance, so we have reduced guidance from 550,000 units to 420 units roughly, so 24% decline in the units, as well as if we compare on quarter-on-quarter basis, it's almost 70% decline from Q3. So can you explain why there is a downgrade in the guidance?

Thank you. The primary reason for the reduction is the reduced demand from our customers due to COVID-19 and other elements. And another reason is that we have to delay the debut timing of Gen 2 because we need to take time to inspect and check the technological performance of Gen 2 products.

Okay. And on other questions, sorry to stress on this, on the restructuring question regarding the quality issues. So is it related to EV-related business or traditional automotive business that we have?

This is Dora. Regarding the quality issue, the quality issue is related to EV, or is it related to the car industry that has been around for a long time? This restriction is related to traditional auto businesses.

Okay, thank you. And lastly, on the traction motor business or EXL business, it seems like Q3 had recorded close to 10 billion losses. It is accelerated from the previous quarter. So can you give some color on why the losses are ballooning in Q3?

Finally, I have a question about e-acceleration. I think there is a loss of about 10 billion yen from Q3. I think there is a lot of disappointment from Q3, but I would like to hear more about the reason.

Yes, I think it is Q2 to Q3. And of course, I believe you're talking about this difference between Q2 and Q3.

And the reason for this loss is that our customers, including GSC, are in a very struggling situation at this moment. Therefore, selling price is making some increasing again. That's one of the reasons.

And another reason is that when it comes to

Hardly profitable models, we tend not to deliver such models. That led to produce less of those models.

That's another reason.

And another reason is the operation ratio of the factories during the month of December, for example.

Thank you.

Thank you very much, Ramzi. Next question is from Brad Schneider of Eagleton Capital. Brad, please go ahead.

Hi, thank you very much. for taking the time to speak to us. I have a few questions. I guess first, just wanted to know what was the operating margin for the HDD segment in the December quarter?

Thank you for your time. I have a few questions. The first one is, how much was the HDD operation margin for the last three months until December?

And the HDD business, the quantity dropped significantly.

So usually 30% when it comes to margin, but due to this significant loss, Now, this percentage is down to 20%.

Twenty. Okay. Thank you. And I think just to follow up the earlier question, I don't think I heard the answer correctly, but of the $70 billion restructuring charge, how much of that amount is for inventory and other asset write-offs?

I don't know. The next question is the same as the previous question, but I don't think you have answered it yet. This is a question about the cost of 70 billion Ristora. How much is the cost of the asset related to the stock?

This is a question about the cost of the stock, such as slow moving, and so on. It is about 10 billion yen. And the calculation rate is as follows.

We have a slow-moving inventory for which we had to spend 10 billion yen, and we have stagnant accounts receivables. And all in all, it's approximately 20 billion yen in total.

Okay, so 20 for receivables and 10 for inventory, or 10 of each?

Yes. The latter is correct. In other words, 10 billion for slow-moving inventory, another 10 billion yen for stagnant accounts receivable. So it's 20 billion yen in total.

Thank you. Thank you. And then just the machinery segment, I was just wondering in there, like for the sales in Q3, how much of the sales was from the acquisitions from OKK and Mitsubishi.

I think it was about 19 billion in Q2. I think it was about 90 billion in Q2. For this quarter from October to December, it's approximately 9 billion yen for these two companies.

That's great. Thank you very much. Just one last question for me. I guess I was surprised by the comments around the Gen 2 performance testing. I guess we've been hearing about the Gen 2 for several quarters now, and I was kind of surprised that you delayed the launch by a quarter because of the testing. I would have thought that was in your plans and forecast that it would require testing. So I guess what happened with the testing that you weren't expecting? Thank you. That's all for me. Thank you very much.

My last question is about Gen 2. I was surprised to hear that the debut was delayed from 2003 to 1994 because of the performance test. I think it's a topic that has been heard in the past several quarter-finals of the Zen2 era, but here, further, the first quarter-finals, the start was delayed, so I think that such tests were also included in the original plan and forecast, but I would like you to explain this delay.

When it comes to the production of Gen2, it started from the end of September.

That was as initially planned.

But as I've said before, Gen2 includes various new technologies. Therefore, some customers are extra sensitive and extra cautious, and they requested us to test extra cautiously when it comes to these new technologies.

Therefore, these requests differ from our customers, but when it comes to our primary most important customers, which is GAC, they differ. gave us a request to be extra careful about checking these performances at the very, very final moment. And because of this request, we had to delay the start of our mass production of Gen2 products. These issues have almost all been solved already. and has been already decided that the mass production will start in the month of February.

That's very helpful. Thank you.

Mr. Schneider, thank you very much. As we have run out of time, the next will be today's final question. Mr. Ito, again, please.

Thank you. I just want to confirm again. So for your restructuring costs of $70 billion, so we know that at least $20 billion is non-cash because it's related to inventories and receivables. But can you tell us how much in total would be cash and non-cash? Thank you very much.

I'd like to know how much is cash and how much is non-cash. I heard that the total cost of the restaurant is 70 billion yen. How much is cash and how much is non-cash?

And, of course, the examination of these numbers are still ongoing, but overall, 15% of the entire amount is cash-related, and the remaining 15%

85% is non-cash related.

That's very helpful. Thank you very much.

Mr. Ito, thank you very much. Now we'd like to conclude the conference call. I'd like to appreciate all your participation. Should you have any further questions, please do not hesitate to contact INEC Corporation or your sales representatives at Mitsubishi XJ Morgan Stanley Securities. Thank you again for joining the conference call, and now you may disconnect.