Nidec Corp Adr

Thank you very much for joining NIDIC conference call. My name is Chiharu Abe, General Manager, Institutional Safety Department of Mitsubishi UFJ Securities. As we start this conference, I would like to ask you to make sure all of materials are ready in front of you. If not, please download the files on NIDIC's website right now. Please note this call is being recorded and the conference materials will be posted on NIDEX website 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 attendees from Mr. Akino 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 Q&A session, and then Mr. Samura will answer your questions. Mr. Samura now presents NIDEC's first quarter fiscal 2023 results, future outlook, and then management strategy. Mr. Samura, please go ahead.

Okay. Good day, everyone. I'm Akito Samura, Chief Financial Officer of NIDEC. Please see slide three and four for our first quarter results. As shown on slide four. you can see that the operating profit in each segment has recovered quite sharply in Q1. Please see slide 7. As quarterly operating cash flow keeps improving, we are targeting record high free cash flows in fiscal year 23. In summary on slide 8, net sales increased 4.8% year-on-year, to 566.1 billion yen. Operating profit increased 34.7% year-on-year to 60.2 billion yen, marking a record high on a quarterly basis. Profit before income taxes increased 51% year-on-year to 86.1 billion yen, after foreign currency gain of 24.3 billion yen posted, and marked a record high on a quarterly basis. Profits attributable to owners of parents increased 55% year-on-year to 64 billion yen, marking a record high on a quarterly basis. or ACI segment, which is one of our mid-term growth drivers, marked a record high. Please see slide 12. We are going to realize high growth by capturing a green innovation demand created by replacement with high efficiency motors. As mid-term growth drivers in the home appliance area, we offer brushless DC motors for air conditioners, washing machines, dryers, dishwashers, and compressors for refrigerators to meet the increasing demand for replacement with high-efficiency motors. In the commercial area, we continue to supply motors used for commercial air conditioners and robot modules used for e-commerce In the industrial area, we are focusing on battery energy storage solutions, essential systems in the renewable energy industry, and the joint venture business with Freya, a semi-solid lithium-ion battery manufacturer. Please see slide 13. A Moen stands for motion and energy that handles medium to large size motors, generators, drive and controls, elevators, robotics, infrastructure within ACI. Moen business is expected to contribute to increase in sales and profit of ACI in fiscal year 23. Please see slide 14. This slide illustrates four examples of solution business within Moen. Please see slide 15. The BESS business that I just explained on the previous slide is expected to grow sharply against the backdrop of energy crisis caused by Russian invasion of Ukraine. Under the current circumstances, we have a 7.4 gigawatt hour of BSS installed or in excursion in over 135 projects or 27 countries. We also completed establishment of a joint venture with Norwegian Freya battery last December, thus paving the way for a further growth of BSS business. Slide 16. NEDEC has made inroads to a new business of aerospace electrification within ACI. As you see on the left, we have announced an agreement to establish a joint venture company called NIDEC Aerospace to develop electric propulsion systems for the aerospace sector. The JV will develop and manufacture the electric propulsion system for electric vertical takeoff landing or VTOL vehicles to enter the urban air mobility market. Also on the right, NIDEC and the Japanese company SoftBank have jointly developed a lightweight, high efficiency and high reliability, actual flux type motor for high altitude Platforms Station, or HAPS. This newly developed motor also meets the specifications required for SunRider. The unmanned aircraft system developed by HAPS Mobile Inc., a subsidiary of SoftBank. The world's leading comprehensive motor manufacturer NIDEC stays committed to developing products based on these technologies to develop light, thin, short, small, high efficiency and highly controllable products and to offering at an overwhelming speed. Revolutionary solutions that contribute to the lives of people around the world. Please see slide 17. We have acquired ownership of HOMA Armature Works, a privately owned U.S. company from its founding family through our subsidiary NMC. HOMA has been a service partner that manufactures motors and generators and provides field service to oil and gas producers operating out of Louisiana and Texas. The end users of their services on and off shore during marine and wind-renewable energy power generators and manufacturers, including Kato Engineering, Aeroisoma, and U.S. Motors, all of which are under the NIDEC umbrella. Through these acquisitions, NMC will be able to enhance its service offerings, including expanding its share within its own U.S. installed bases. and HOMA will be able to provide services to NMC's customers. Please see slide 19. We are aiming to become number one automotive system company by anticipating the strong electrification demand boost by CASE, or Connected Autonomous Sharing Electronic Mobility Trends. In the EV area, the EV traction motor related business is expected to become profitable in fiscal year 23 through introduction of Gen 2, whose targeted replacement ratio is over 18%, and by reducing the cost and shipment volumes of Gen 1. In addition, the market areas will be shifted from China-centric to global, including Europe and North America. And the growth of sales and profits will be promoted strongly through focus on traction motors only and other components in addition to E-axles. In the organic oil area, NIDEC will capture increasing demand for electrification and gain further market share for motors for electric power steering and electric brake despite slower growth in the global auto sales. Please see slide 20. With a battery EV related business made profitable for the first time in the June quarter of fiscal year 23, we will strengthen the business foundation by prioritizing profitability. Please see slide 21. We are targeting battery EV-related business at sales of 500 billion yen in fiscal year 25 by supplying traction motors only and other components in addition to E-axles. Please see slide 22. NIDIC and Lunasoft Electronics Corporation have agreed to join forces on the development of semiconductor solutions for next generation E-axle called X-in-1 system that integrates EV drive motor and the power electronic for EVs. Today's EVs are increasingly adopting the three-in-one unit called e-AXO, which integrates motor, inverter, and gearbox to realize high performance and efficiency, as well as smaller size, lightweight, and lower cost, and to accelerate vehicle development. EVs are also integrating power electronics controls such as DC-DC converters and onboard chargers. EV manufacturers in advanced markets such as China have developed an XIN1 platform that integrates multiple functions, accelerating the adoption in many vehicle models. As XIN1 integrates multiple functions and increases in complexity, and maintaining a high level of quality in vehicles becomes challenging. Thus, developing preventive safety technologies such as diagnostic functions and failure predictions is crucial for ensuring safety and security in vehicles. To address this challenge, the two companies agreed to combine Nidex motor technology and Renesas semiconductor technology to jointly develop a highly reliable and high-performance proof-of-concept, or POC, for the XIN1 system. The POC is designed to support the industry's highest performance and efficiency, as well as smaller size, lightweight, and lower cost for the X-in-1 system. Building on the POC developed through this collaboration, NIDESC plans to rapidly increase, create e-access systems to add to its portfolio and wrap up to mass production to lead the ERC market. Please see slide 23. We are targeting a B-sharp recovery in fiscal year 23 after posting large structural reform expenses in the second half of fiscal year 22. Please see slide 24. We have started to mass produce small automotive motors in addition to capturing demand for energy efficiency and thermal management. As mid-term growth drivers, we are going to transform the portfolio firstly by actively working on small automotive motors such as electric two-foil vehicles and small EV motors that are less than 30 kilowatts. Secondly, by thermal solutions such as cooling fans and our group company CCI's products. And thirdly, by digital home appliance motors. In HDD, we continue to focus on data centers and servers to improve the product mix for higher profitability. Please see slide 28. A newly created business unit called Machinery and Automation is up and running from fiscal year 23. with Nidec Drive technology at the core company. This business unit handles reducers, press machines, and machine tools, and is going to drive a high growth of machinery business and aiming for the net sales of 500 billion NEM in fiscal year 25 and 1 trillion NEM in fiscal year 30. At mid-term growth drivers, We are aiming to gain a bigger global market share of strain waves gears for collaborative robots. As for planetary gears, we set a new production base in Europe by utilizing unused facilities of Nidec motors and actuators in Spain. In press machines, We are focusing on anti-plastic demands and EV demands against the backdrop of a shift from plastic to canned bottles, and a growing demand for EVs, and launching product lineups from small and high-speed to large machines, and introducing related equipment. In machine tools, we are going to expand product lineups and market areas with a focus on the Chinese market to seek high growth. In addition to this, we announced commencement of tender offer for Takisawa machine tool. 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 will move 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 have any questions, please press the star key and then number 1 for your touchtone on. Again, please press star key and then number 1 if you have any questions. If you would like to cancel your request, please press star key and number 2. We will now pose for questions from the participants. The first question is from the Mr. James Parsford, Arma Capital. James, please go ahead.

Great. Thank you. Can you hear me?

Yes. Thank you very much.

Wonderful. Great. Thank you very much for your time. Can I ask a question first of all about your e-axle business? I'm interested. I think that when you started the year, you were forecasting volumes of about 949,000. So you've made, if that's correct, you've made a dramatic cut to 545. And I'm aware of your strategy. So it's a much bigger cut than I would have thought likely, but I understand why it could have gone down. But I'm interested, if that's gone down because you've terminated some contracts with clients, perhaps, I'm interested, for next year, you're expecting... still very dramatic growth. And I'm just wondering, I find it surprising you've cut this year so much without next year being apparently very much impacted. I wonder if you could comment on that. And also you mentioned the business is shifting to a more global basis. I'd be interested to know, for example, for next year when sales go up a lot, how much of that is expected to be China next year?

I have a question about the contract. At the beginning, you mentioned the volume of 949K. I think you can say that 545K has fallen quite a bit. I don't know if the number of customers has decreased, but I'd like to ask if the contract was terminated by the customer, or if such a large-scale phenomenon occurred because it was terminated. Next year, I think you will see a lot of growth in business. Despite this year's decline, I would like you to comment on the fact that there are so many changes. The second point is that I think you are looking forward to global growth in this business. I would like you to comment on how bad China will be in the expected sales.

First of all, I'd like to cover the first question. There are three reasons as to the significant decline in the volume.

The first reason is regarding the transition from Gen 1 to Gen 2. Due to the several timing issues, we have expressed a series of troubles, and our startup process of this Gen 2 wasn't really as smooth as it should have been.

The second reason is concerning China, where there is a clear line emerging between winners and losers within the Chinese customers that we have, and the models to which our

our EXO units are installed, weren't really selling as much as they should.

The third reason is that we have been focusing on 100kW and 150kW power, but the market has shifted to 70kW and 50kW power at a rapid pace. This is the third reason.

The third reason is about the market shift from the large models, such as 100 kilowatts and 150 kilowatts, to smaller, more compact models, such as 70 kilowatts and 50 kilowatts. And we were rather slow in keeping up with this trend. So that's the third reason for this significant decline.

There was a slight delay in the timing of the small modelization. So we were not really absolutely correct in coming up with the right timing to debut our compact models. Therefore, towards the second half of this fiscal year,

we were urging to try to debut the new Gen 2 models of 70kW. In addition to that, during the next fiscal year, we are going to introduce to the market Gen 3 products within the volume zone of 70 kilowatts and 50 kilowatts. Plus, we are going to also target another zone of 40, 30, and 20 kilowatts in the next fiscal year.

That was my answer to your first question. Here's my answer to your second question.

Please kindly take a look at slide 20. The orange portion indicates our models for the Stellantis.

So this Stellantis portion, the orange portion, is for Europe and the United States, and the green portion, as you can see, is the portion for the Chinese market.

Okay, thank you very much. That's very clear. Can I ask for your Gen 3, when next year would you expect to be able to launch that, and will it initially be just one or two models, or will it, in terms of Gen 3 becoming a significant portion of the volume, when will that be?

Thank you. This is a question about Gen 3. When will it be launched next year? I think we received information about the volume.

Our planned target for debuting our GEN3 products is scheduled for June of 2024.

Our initial target fiscal year was 2025, therefore we are advancing our schedule by one year.

When it comes to the volume of our Gen 3 models, this is something that we need to discuss with our OEM customers.

But when it comes to 2024, our plan for the Chinese market is to ship 955,000 units.

Okay, thanks. Of Gen 3, yeah? Okay, no, thank you very much. And in Q1 this year, the Gen 2, is that still quite a small percentage in Q1, or what was that?

In Q1, what percentage is Gen 2? Gen 2 is about 50% of Gen 1. When it comes to Q1, the ratio between Gen 2 and Gen 1 is approximately 50 and 50. Thank you.

Great. And sorry, one last question, if I may. The transition to Gen 3 is likely to do what to cost compared to Gen 2, please?

Okay.

Our target cost for Gen 3 compared with Gen 2 is minus 30%. And when it comes to the comparison with Gen 1, Gen 3 products' target is minus 50%.

Great. Thank you very much indeed.

Thank you very much. Next question is from from State Street Global Advisors.

Thank you for taking my question.

I'm trying to understand about the profit margin. on EXL business or EV motor business. So with the reduced target now, so are we still aiming to achieve operating profit margin for the rest of the three quarters? I mean, positive operating profit.

I have a question about EV motor. It seems that the target has dropped, but despite the drop, the operating profit margin remains the same.

I'd like to mention one big improvement when it comes to cost between Gen 1 and Gen 2.

When it comes to Q1, as I've explained already, our Gen 2's cost is – our ratio for the Gen 2 models is now up to 50% against Gen 1's 50%. But when it comes to Gen 1 products, cost has been reduced significantly. That's one area of major improvement when it comes to our products.

The second element that I'd like to mention here is that the last fiscal year or so, the raw material cost increased significantly, but these increased portion of the raw material cost has been able to

be observed to the increase in selling cost. And thirdly, I'd like to mention that the last year, we launched the structural reform. Because of that, we were able to reduce our fixed cost significantly. When it comes to Q1 this fiscal year, we were able to further reduce the fixed cost, including our research and development cost. These are the three elements that I'd like to mention that contributed to our improvement in our cost structure.

When it comes to whether we will be able to aim

maintain operating profit despite the reduction in volume, the reduction in the volume of Gen 2 would cause a negative impact on us. However, on the other hand, the reduction in the not so successfully performing Gen 1 models would be able to make a positive impact on our financial performance. Therefore, that way we will be able to maintain the level of operating profits despite reduced reduction in the volume.

Thank you. That's helpful. Just to follow up on that question, can you give us some color on pricing of EXLs or EV traction motors in the market? You also mentioned that some of your customers are facing intense competition. In general, the market dynamics and the competition that your customers are facing, is that giving you some pricing pressure?

In terms of the E-Axle market, I think that the customers are also under pressure to lower their prices. I think that the customers are under pressure to lower their prices. Is there any impact on the price of the car? The price is getting smaller and smaller. The price is getting smaller and smaller. The price is getting smaller and smaller.

The price is getting smaller and smaller. The price is getting smaller and smaller. The price is getting smaller and smaller.

Now, one thing that I'd like to say about this EXO market is that it's not really about the price, but it's about the reduction in the size of these models. We were originally required to make more and more compact models, and the cost prices are going down. Therefore, these are making an impact on us.

And many, many of these manufacturers are required to make growingly compact, more and more compact models. In the meantime, the price competition is becoming growingly

which is a fact, I believe. And therefore, among these circumstances, there are some companies that are going to survive, but there are some other companies that are going to be disappearing from this market.

As I mentioned earlier, we were a little behind in terms of timing for small companies. As I mentioned, we were slow in capturing the very good timing when it comes to this size reduction of the EEB vehicles.

But our area of expertise is to have the technology that enables us to make light, thin, short, and small products. Therefore, in this area, we believe that we will be able to gain competitiveness, and I believe this circumstance is something that we can turn into a chance for us.

That's really helpful. And my last question from me on HDD motor segment. So since the Seagate left us back in 2021 or 2020, so HDD have been declining in double digits. Of course, I understand the market conditions are not great. Is it also indicating that we are losing some market share even after Seagate incident?

The last question is about the HGD motor market. I think Shigeto was withdrawn in 2020 or 2021, but since then, the market size of HGD has dropped by about two digits. I think it's a good thing, but at the moment, I don't know how many conditions there are.

Yes. I have a question for you. Since September 3rd, Seagate has not been supplying any of their products. The relationship between hard disk drives and motors is that Seagate is supplied by Minamiya Mitsumi, and Western Digital and Toshiba are supplied by us, and each of them is supplied by single sourcing. Here's the answer to your question regarding the HDD motor market.

We stopped supplying to Seagate our motors after September three years ago. And therefore, currently, Minibian Mitsui is the single source supplier of motors to the Seagate HDD market. and NIDEC is the single source supplier of HDD motors to Western Digital and Toshiba. Therefore, there is no competition over market share between us and Minervia Mitsui when it comes to HDD motors.

The problem is the size and volume of the market as a whole. In the 2020 and 2021 calendar years, In both years, we had about 2.6 billion yen, or 2.6 million yen in exports. However, last year, in 2022, we had 1.7 billion yen, or 1.72 million yen. This year, we have various expectations, but we expect that it will be about 126 million yen.

And the main issue here is the size and the volume of HDD motor market. In calendar years of 2020 and 2021, the shipment volume was approximately 260 million units for these consecutive two calendar years. But when it comes to calendar year of 2022, this volume was down to 172 million units. And when it comes to calendar year of 2023, it is forecast that this number is further down to approximately 126 million units or so.

That is to say, in two years, the market volume has dropped by half, which is the current situation of this market, as you understand.

Therefore, please understand that the current HDD in the market is that it is shrinking more than 50% over the past two years.

Thanks for the call. A very quick follow-up. So what is the margin of HDD segment in Q1 2023? Q1, that's HDD, no.

You mean Nidex margin in the market? Yeah, the operating margin.

Roughly 17%. Okay, thank you. No, no, not 27, but 17.7% to say exact.

Yeah, got it. Thank you. Okay.

Thank you, Mr. Niran. Next question is from Mr. Takashi Ito from Arga Investment.

Yes, thank you very much. I just have two quick questions. I'll ask in English and Japanese. So the first question is regarding working capital. Is it normal now or is there still room for improvement? The other question is, of your PP and E in your balance sheet, how much of this is related to the E-Axle? One more last question. When you have, say, a customer in China who is not selling their EVs, is it easy to find another customer who can use your EXO as long as it is the correct size, you know, 100 kilowatt or 70 kilowatt, or it's not easy to just sell the same EXO to a different customer? In my opinion, For example, if a Chinese customer's sales are poor, is it easy to sell E-Accel to other customers? Of course, the size of 100kW or 70kW is the same, but is it difficult to sell the same product to different customers?

When it comes to first answer to your first question, which is,

regarding working capital has increased significantly over the past two years. This is partially due to the effect of the currency exchange, but also is due to the significant increase in the length of lead time to obtain raw materials. And this level of the leased time is now finally starting to decrease. Partially because of that, we have been able to achieve a record high free cash flow during this past Q1.

When it comes to the e-accels percentage in the entire PPE,

I'm not currently having any exactly accurate numbers in my hands, but it is approximately 30 to 40 billion yen.

Yes, and the third point is that if you don't sell it to other customers, it's a matter of versatility. The base is basically the same structure, but customers can customize it depending on the type of car. When it comes to the flexibility or versatility of our EXO models for the customers that do not necessarily have our models in the first place, there are some areas or elements in our models

that are basically the same throughout the entire product catalogs. But there are some other components that can be customized for individual customers' requirements or requests. Therefore, one thing that I can do, that we can do as NIDIC, is that we could sell our models that partially have the same elements or components throughout the entire models, but that can be partially customized based on that can partially be modified or customized based on individual customized requirements.

Mr. Asano, I'd like to ask you about the driver's license. This quarter has been a positive contribution. It's not like it's been normalized. Do you think that working capital will continue to be a plus factor in free cash flow? Is that what you think?

Yeah, well, the

Over the past two years, this working capital has improved significantly, and our plan is to make sure that for the next three years, we elect to make an improvement of 10% on the cash conversion cycle basis per year. So when it comes to a normal level, in our definition, our normal level was the level back in 2020, which is three years ago.

Thank you very much.

Ito-san, thank you very much. Next question is Mr. James Parsford from the Arma Capital.

Great. Thank you very much. I wonder, can you notice in the results is the very dramatic improvement in profitability in ACI. And for it to get a bit better is not surprising, but the degree that it's improved is surprising to me at least. I wonder if Could you comment on specific factors behind that? Did restructuring play a large part in that? Is there any temporary element to that improvement? Can you provide a bit more color?

The HCI has seen considerable improvement in the food industry. The level of improvement may not be that high, but the level of improvement is very high. I would like you to comment on this factor. Is it because of the structural reform? Or do you think there are other factors? In this ACI, especially in the household sector, the market continues to be in a very difficult state. In the structural reform, we have taken quite a bit of action. When it comes to this ACI segment, our home appliance market continues to be in struggle, but we took actions for that kind of situation and we have made improvements significantly in that regard.

And secondly, which is most important point of all, is about the Moen segment, the motion energy segment. This is something that I've

that we have explained in detail in our slide or presentation materials that were explained today. But within the Samoan segment, especially industrial segment, there are new business emerging, and those emerging businesses or segments made a significant, very good contribution to our operating profits.

Thank you. And looking at page 13, obviously you've got a number of products there. The growth within the division that you're expecting for this mowing area is very strong. Which products in particular are seeing very strong growth this year? And if you look at Q1, which were the products that caused this very sharp improvement?

Well, it's always a show here, isn't it? Which products rather than segments, yeah? Which products? Thanks.

I would like to mention particularly the power generation business, elevator business, and robotics business. In addition to these

successfully doing markets. I like to mention infrastructure related to business, which is also very promising and newly emerging business for us.

Of those, the demand growth, areas like elevators, generators, are they going to show sustained growth beyond this year?

Do you think that elevators and power plants will continue to grow even after this year? Yes, especially for power plants, we will dig up a lot of high-quality resources, such as caterpillars.

We have a lot of customers, but we think that this area will continue to grow.

I would like to say, yes, when it comes to power generator business, I believe the momentum will continue, especially among our customers, such as Caterpillar, which is one of our loyal customers. And I believe they will especially continue to maintain their current momentum.

And when it comes to infrastructure business, I believe actions are being taken in individual countries. Therefore, I believe demand will continue to expand or grow.

in infrastructure business.

Okay, good. Okay, thank you very much.

Thank you very much. Next question is from Mr. Ken Su from Barrier and Asset Management.

Hello. Good morning. Good afternoon. Sorry. Good evening, Samura-san and Nakayasu-san. I just have one question. Q1 was very strong on the OP side. Was there any one-off cost or benefit that was embedded in the Q1 result that may or may not repeat in Q2 or the physical year? Thank you.

I have a question. Q1 was a very good year. Q2 and Q1 and Q1 and Q1 and Q1 and Q1 and Q1 and Q1 and Q1 and Q1 and Q1 and Q1 and Q1

When it comes to individual segments, there were some one-timers.

In Q2, as well, there are some one-timers that will exist. Therefore, in comparison with Q1, we will not believe there is any significant gap to be drawn between Q1 and Q2 thereafter.

Got it. Any way to aggregate those numbers in Q1? Do you know roughly how much of one-time impact? Was it a positive impact or negative impact on the OP?

Thank you. The number is not really a big percentage, but it's only several percent.

several percent of the OP, and was it a positive impact or negative impact on those one-timers?

It's a positive impact, and it accounts for several percent of the OP.

Got it. Great. Thank you very much. Thank you very much.

Any questions, please?

Now, there seems no further question, and then we would like to conclude this conference call. I would like to appreciate for your participation today. Should you have any further questions, please do not hesitate to contact NIDEC Corporation or your sales representatives at Mitsubishi UFJ Morgan Sunrise Securities. Thank you very much for joining this conference call. You may now disconnect. Have a good day.