Nidec Corp

TSE:6594

Earnings Call Transcript 2024-Q1

[Chiharu Abe, analyst]

Hello, everyone, thank you very much for joining Nidec's conference call. My name is Abe, Chiharu Abe, General Manager, Institutional Affairs Department of Mitsubishi UFJ Securities.

As we start this conference, I would like to ask you to make sure all our materials are ready in front of you. If not, please download the files on Nidec's website right now.

Please note, this call is being recorded. The component materials will be posted on Nidec's 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 Nidec 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 Q&A session, and then Mr. Samura will answer your questions. Mr. Samura now will present Nidec's first quarter fiscal year 2023 results, future outlook and then management strategy.

Mr. Samura, please go ahead.

[Akinobu Samura, executive]

Okay. Good day, everyone. I'm Akinobu Samura, Chief Financial Officer of Nidec.

Please see Slide 3 and fall for our first quarter results. As shown on Slide 4, 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 flow in fiscal year '23.

In summary, on Slide 8, net sales increased of 4.8% year-on-year to JPY 566.1 billion. Operating profit increased slightly 4.7% year-on-year to JPY 60.2 billion, marking a record high on a quarterly basis. Our profit before income taxes increased by 51% year-on-year to JPY 86.1 billion after foreign currency gain of JPY 24.3 billion posted and marked a record high on a quarterly basis. Profit attributable to owners of current increased 55% year-on-year to JPY 64 billion, marking a record high on a quarterly basis.

Quarterly operating profit of appliance, commercial and industrial or ACI segment, which is one of our midterm growth drivers marked a record high.

Please see Slide 12. We are going to realize high growth by capturing green innovation demand created by replacement with high-efficiency motors as midterm growth drivers in the home appliance area. We offer brushless DC motors for air conditioners, washing machines, dryers and 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 FREYR, a semi-solid lithium-ion battery manufacturer.

Please see Slide 13. A MOEN stands for motion and energy that handles medium- to large-sized motors, generators, drives and controls, elevators, robotics, infrastructure within ACI. MOEN business is expected to contribute to increase in sales and the profit of ACI in fiscal year '23.

Please see Slide 14. This slide instructs -- illustrates 4 examples of solutions business with MOEN.

Please see Slide 15. The BESS business and that I have 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 7.4 gigawatt hour of BESS installed or in execution in over 135 projects or 27 countries. We also completed establishment of a joint venture with Norwegian FREYR battery last December, thus paving the way for our further growth of BESS business.

Now please see Slide 16. NIDEC 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 system for the aerospace sector. The JV will develop and manufacture the electric propulsion system for electric vertical take-off, landing or eVTOL vehicles. To enter the urban air mobility market. Also on the right, Nidec and the Japanese company, SoftBank, have jointly developed lightweight, high-efficiency and high-reliability axial flux-type motor for high altitude platform station or HAPS. This newly developed motor also meets the SAS specifications, required for [Sun Rider]. The unmanned aircraft system developed by HAPSMobile Inc., a subsidiary of SoftBank.

As the world's leading comprehensive motor manufacturer, Nidec stays committed to developing products based on mix technologies to develop a light same short, small, high-efficiency and highly controllable products and to offering an overwhelming speed, revolutionary solutions that contribute to the lives of people around the world.

Please see Slide 17. We have acquired for the ownership of Houma Amateur Works. Privately owned U.S. company, from its founding family through our subsidiary and [MC]. Houma has been a service partner that manufactures motors and generators and provides our [Indiscernible] service to all other gas producers. Operating out of Louisiana and Texas. The end users of their services and offshore during mining and wind renewable energy power generators and manufacturers, including [value] engineering, [Indiscernible] Houma and U.S. Motors, all of which are under the Nidec umbrella. Through this acquisition, NMC will be able to enhance its service offering, including expanding its share within its own U.S. installed basis. And Houma will be able to provide services to NMC customers.

Please see Slide 19. We were aiming to become #1 automotive system company by anticipating the strong electrification demand, boosted by CASE or connected autonomous sharing electronic mobility trend.

In the EV area, the EV traction motor-related business is expected to become profitable in fiscal year '23 through introduction of Gen 2, for the targeted replacement ratio is over 80%. And by reducing the cost and the segment 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 auto area, Nidec will capture increasing demand for electrification and gain further market share promoters for electric power steering and electric brakes despite slower growth in the global auto sales.

Please see Slide 20. With the battery EV-related business, made profitable for the first time in the June quarter of FY '23. We will strengthened the business foundation by prioritizing profitability.

Please see Slide 21. We are targeting battery EV-related business as sales of JPY 500 billion in fiscal year '25 by supplying traction motors only and other components in addition to E-Axles.

Please see Slide 22. Nidec and [Renesas] Corporation have agreed to joining forces on the development of semiconductor solutions for next-generation E-Axles called X-in-1 System that integrates EV drive motor and the power electronics for EVs. As today EVs increasing adopting a 3 in 1 unit called the E-Axle, which integrates motor inverter and the 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 convertors and onboard charger. EV manufacturers in advanced markets such as China have developed an X-in-1 platform that integrates multiple functions, accelerating the adoption in many vehicles and motors. As X-in-1 integrates multiple functions and the increases in complexity and maintaining a high level of quality in vehicles become challenging, thus developing preventative safety technologies such as diagnostic functions and failure predictions in crucial for ensuring safety and security vehicles.

[Over] this challenge, the 2 companies agreed to combine Nidec's Motor Technology and [Renesas's] semiconductor technology to jointly develop a highly reliable and a high-performance proof of concept or POC for the X-in-1 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. Nidec plans to rapidly increase -- create E-Axle systems to add to its portfolio and lock up to mass production to lead the E-Axle market.

Please see Slide 23. We are targeting a V-shaped 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 summer management. As midterm growth drivers, we are going to transform the portfolio firstly by actively working on small automotive motors such as electric two-wheeled vehicles and small EV motors that less than 30 kilowatt. And secondly, by thermal solutions such as cooling fans and our group company CCI products and suddenly, by digital home appliance motor. In HDDs, we continue to focus on data centers and servers to improve the product mix for higher profitability.

Please see Slide 28. Newly created business unit called machinery and automation is up and running from fiscal year '23. With Nidec drive technology, the core company, this business unit handles the users, press machines and machine tools and is going to drive a high growth of machinery business and aiming for the net sales of JPY 500 billion in fiscal year '25 and JPY 1 trillion in fiscal year '30. As midterm growth drivers, we are aiming to gain a bigger global market share of strain wave 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 antiplastic demand and EV demand against the backdrop of a shift from plastics 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 the products lineups and market areas with a focus on the Chinese market to seek high growth. In answer 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, both our suppliers for their support and the commitment as well as our shareholders.

At this time, we would like to open up the call for questions.

[Chiharu Abe, analyst]

[Operator Instructions] The first question is from Mr. James Pulsford, Alma Capital.

[James A. Pulsford, analyst]

Can you hear me?

[Chiharu Abe, analyst]

Yes. Thank you very much.

[James A. Pulsford, analyst]

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 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 it's -- 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. So I wonder if you could comment on that. And also, you mentioned the business is shifting to a more global basis. So I'd be interested to know an example for next year when sales go up a lot, how much of that is expected to be China next year?

[Masahiro Nagayasu, executive]

[Interpreted] First of all, I'd like to cover the first question. There are 3 reasons as to the significant declines 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 start-up process of this Gen 2. It wasn't really as smooth as it should have been. The second reason is concerning China, where there is a clear line imaging between winners and losers within the Chinese customers that we have and the models to reach our E-Axles units are installed weren't really selling as much as they should.

The 3rd reason is about the market shift from the large models, such as 100 kilowatts and 150 kilowatts to smaller and more compact models such as lots 70 kilowatts and 50 kilowatts. And we were rather slow in keeping up with this tranche and that's the third reason for this significant decline. So we were not really absolutely correct in coming up with the right timing to give you our compact models. Therefore, towards the second half of this fiscal year, we were [indiscernible] trying to debut the new Gen 2 models of 70 kilowatts. 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 next fiscal year. That was my answer to your first question. Yes, my answer to your second question. First, I'd like you to take a look at Slide 20. The orange portion indicates our models for [Indiscernible]. So this orange portion is for the Europe and United States and green portion, as you can see, is the portion for the Chinese market.

[James A. Pulsford, analyst]

Okay. That's very clear. Can I ask your Gen 3, when next year would you expect to be able to launch that? And will it initially be just 1 or 2 malls? Or will it -- in terms of Gen3 becoming a significant portion of volume, when will that be?

[Masahiro Nagayasu, executive]

[Interpreted] Our target for reviewing our Gen 3 product is due for June of 2024. Our initial target for fiscal year 2025, therefore, we are advancing our schedule by 1 year. And 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 the 2024, our plan for the Chinese market is to ship 955,000 units.

[James A. Pulsford, analyst]

Of Gen 3. And in Q1 this year, the Gen 2, is that still quite a small percentage in Q1? Or what was that?

[Masahiro Nagayasu, executive]

[Foreign Language].

[James A. Pulsford, analyst]

In Gen 2, what percentage is -- in Q1, what percentage is Gen 2?

[Masahiro Nagayasu, executive]

[Interpreted] When it comes to the Q1, the ratio between Gen 2 and Gen 1 is approximately 50 and 50.

[James A. Pulsford, analyst]

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?

[Masahiro Nagayasu, executive]

[Interpreted] 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%.

[Chiharu Abe, analyst]

Next question is from Ramsai Neelam from State Street Global Advisors.

[Ramsai N, analyst]

I'm going to try to understand about the profit margin on E-Axle 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 3 quarters, I mean positive operating.

[Masahiro Nagayasu, executive]

[Interpreted] I would like to mention 1 big improvement when it comes to cost between Gen 1 and the Gen 2. When it comes to Q1, as I have explained already, our Gen 2 cost is where our ratio for the Gen 2 model is now up to 50% against Gen 1s 50%. But when it comes to Gen 1 products, cost has been being reduced a significant way, that's one area of major improvement when it comes to our product. The second area, second element that I'd like to mention here is that the last fiscal year, so the raw material cost increased significantly. But now these increased proportion of the raw material cost has been able to be absorbed to the increase in selling costs and prices.

And thirdly, I'd like to mention that last year, we launched the structural reform. Because of that, we were able to reduce our fixed cost significantly, and when it comes to Q1 this fiscal year, we were able to further reduce the fixed cost, including our research and development costs. These are the 3 elements that I'd like to mention that contributed to our improvement in our cost structure. Now when it comes to what are we [indiscernible], maintain our operating profit, despite the reduction in volume, the reduction in the volume of Gen 2 will be -- will cause a negative impact on us. However, on the other hand, the reduction in the not so successfully performing Gen 1 models will be able to make a positive impact on our financial performance. Therefore, that way, we will be able to maintain the level of current level of operating profit despite reduced reduction in the volume.

[Ramsai N, analyst]

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

[Masahiro Nagayasu, executive]

[Interpreted] One thing that I'd like to say about this E-Axle market is that it's not mainly -- it's not really about the price, but it's about the reduction in the size of these models, we were urgently 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 a growingly compact -- more and more compact models. In the meantime, the price competition is becoming a growing way in at, which is an effect, I believe. And therefore, among these circumstances, there are some companies that are going to survive.

And -- but there are some other companies that are going to be disappearing from this market. As I've mentioned, we were a slow in capturing a very good timing when it comes to this size reduction of the EV vehicles. But our area of expertise is to have the technology that will estimate light things short and a small products. Therefore, in this area, we believe that we will be able to gain competitiveness. And I believe this is -- this circumstance is something that we can turn into a chance for us.

[Ramsai N, analyst]

That's really helpful. And 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?

[Masahiro Nagayasu, executive]

[Interpreted] Here's the answer to your question relating to the HDD market, we stopped supplying Seagate our motors after September 3 years ago. And therefore, currently, MinebeaMitsumi is the single source supplier of motors to the Seagate for HDD motors. And Nidec is the single sole supplier of HDD motors to Western Digital and Toshiba. Therefore, there is no competition over market share between us and MinebeaMitsumi when it comes to HDD motors. 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 160 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 the calendar year 2023, it is expect forecast that this number is further down to approximately -- excuse me, 126 million units [as of]. Now please understand that the current HDD market is that it is shrinking more than 50% over the past 2 years.

[Ramsai N, analyst]

Yes. Thanks for the color. Very quick follow-up. So what is the margin of HDD segment in Q1 2023?

[Masahiro Nagayasu, executive]

[Interpreted] You mean Nidec's margin in the market?

[Ramsai N, analyst]

Yes. Yes, operating margin.

[Masahiro Nagayasu, executive]

[Interpreted] Roughly 17%. No, no, not 27 but 17, 17.7% to say exact.

[Chiharu Abe, analyst]

Next question is from Mr. Takashi Ito from ARGA Investment.

[Takashi Ito, analyst]

[Interpreted] Yes. I just have 2 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&E in your balance sheet, how much of this is related to the E-Axle. And 1 more last question. When you have, say, a customer in China who is not selling the EVs. Is it easy to find another customer who can use your e-axle as long as it is that correct size, 100-kilowatt, 70-kilowatt or it's not easy to just sell the same E-Axle to a different customer.

[Masahiro Nagayasu, executive]

[Interpreted] When it comes to the first answer to your first question, which is regarding working capital, it has increased significantly over the past 3 years. This is partially due to the effect of the currency exchange, but also it is due to the significant increase in the length of lead time to obtain raw materials. And at this level of the lead time is now finally starting to decrease because of that, partially because of that, we have been able to achieve a record high free cash flow during this Q1 [indiscernible] as Q1. When it comes to the E-Axles percentage of our in the entire PP&E, I'm not currently having exactly accurate numbers in my hand, but it is approximately JPY 30 billion, JPY 40 billion.

When it comes to the flexibility of versatility of our E-Axle models, for customers that do not necessarily have our models in the best place. There are some early elements in our models that 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 at Nidec is that we could sell our models that partially have the same elements or components, the entire model, throughout entire models but that can be partially customized based on that can partially modified or customized based on individual customers' requirements. Yes, well, the -- over the past 2 years, this working capital has improved significantly. And our plan is to make sure that for the next 3 years, we would like to make an improvement of 10% on a cash conversion cycle basis per year. So when it comes to the normal level in our definition, our normal level was the level back in 2020, which is 3 years ago.

[Chiharu Abe, analyst]

Next question is Mr. James Pulsford from the Alma Capital.

[James A. Pulsford, analyst]

Great. I wonder, could you note sort of the results, there is a very dramatic improvement in profitability in ACI and for it to get a bit better, it's not surprising. But the degree that it's improved is surprising to me at least. And I wonder, can you comment on specific factors behind that, did restructuring player has restructuring played a large part in that? Is there any temporary element to that improvement? Can you provide a bit more color?

[Masahiro Nagayasu, executive]

[Interpreted] When it comes to this ACI segment, our home appliance market continues to be in a struggle, but we took actions for that kind of situation, and we have made the improvements significantly in that regard. And secondly, which is most important point of all is about the [MOEN] the motion energy segment. This is something that we have explained in detail in our slide presentation materials that were [explained] today, but within this [MOEN] segment, especially industrial segment, there are new business emerging. And those emerging businesses or segments made a significant -- a very good contribution to our operating profit.

[James A. Pulsford, analyst]

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 MOEN area is very strong, which products in particular are seeing very strong growth this year. And if you look at Q1 which are the products that caused this very sharp improvement?

[Masahiro Nagayasu, executive]

[Foreign Language].

[James A. Pulsford, analyst]

Which products rather than segment, yes, which products?

[Masahiro Nagayasu, executive]

[Interpreted] I would like to mention particularly the power generation business, elevator business and robotics business. In addition to these successfully doing markets, I'd like to mention infrastructure related to business, which is also very good product in the newly emerging business for us.

[James A. Pulsford, analyst]

And of these the demand grade, I mean areas like elevators, generators. Are they going to be -- show sustained growth beyond this year?

[Masahiro Nagayasu, executive]

[Interpreted] Yes. I would like to say, yes, when it comes to power generator business, the momentum will continue especially among our customers such as Caterpillar, which is one of our loyal customers. And I believe they will be especially continue to maintain their current momentum. And when it comes to infrastructure business, I believe, actions are being taken in individual countries. Therefore, [indiscernible] demand, we will continue to expand or grow in infrastructure business.

[Chiharu Abe, analyst]

Next question is from Mr. Ken Zhou from [ Bariani ] Asset Management.

[Ken Zhou, analyst]

I just have 1 question. Q1 was very strong on the OP side. Was there any one-off cost or benefit that was embedded in the Q1 results that may or may not repeat in Q2 of the fiscal year?

[Masahiro Nagayasu, executive]

[Interpreted] When it comes to individual segments, there are some -- there were some one-timers and in Q2 as well, there are some onetimer staff will exist, therefore. But in comparison with Q1, we will not believe there is any significant gap to be drawn between Q1 and Q2 thereafter.

[Ken Zhou, analyst]

Got it. Any way to -- if we aggregate those numbers in Q1, do you know roughly how much a onetime impact? Was it a positive impact or negative impact on the OP?

[Masahiro Nagayasu, executive]

[Interpreted] The number is not really a big percentage, but it's only several percent.

[Ken Zhou, analyst]

Several percent of the OP. And was it a positive impact or negative impact from those one timer?

[Masahiro Nagayasu, executive]

[Interpreted] It's a positive impact and It accounts for several percent of the OP.

[Chiharu Abe, analyst]

Any questions, please? Now there seems no further questions, and 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 Stanley Securities. Thank you very much for joining this conference call. You may now disconnect. Have a good day.