Nidec Corp

TSE:6594

Earnings Call Transcript 2023-Q2

[Yoichi Orikasa, analyst]

Thank you very much for joining Nidec's conference call. I am 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 already in front of you. If not, please download the files on Nidec's homepage right now. Please note, this call is being recorded, and the conference materials will be posted on the company's homepage for the coming week for investors and analysts who are not able to join today's call. Now I'd like to introduce today's attendees from Nidec Corporation. Mr. Akinobu Samura, Senior Vice President and the 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 our Q&A session. And Mr. Samura and Mr. Nagayasu will answer your questions.

Mr. Samura now presents Nidec's Q2 Fiscal Year 2022 results, future outlook, and management strategy. Mr. Samura, please go ahead.

[Akinobu Samura, executive]

Good day, everyone, and welcome to today's conference call. My name is Akinobu Samura, Chief Financial Officer of Nidec. I'll be your main speaker today and answer your questions with the help of Mr. [indiscernible] [ as an interpreter ]. Joining us also is Mr. Masahiro Nagayasu, General Manager of Nidec's IR team. For the forward-looking statements, please see Slide 2 of our presentation material for details.

Now I'm going to review the key figures. Please see Slide 3 for our past half results. I'll summarize on Slide 4. The net sales stood at a record high of JPY 1,130.8 billion, a 24.2% higher year-on-year. The operating profit increased 8.1% year-on-year to JPY 96.4 billion, marking a record high. The profit before income taxes and profit attributed to owners of the parent increased 35.9% year-on-year to JPY 118.4 billion. 30.1% year-on-year to JPY 86.6 billion, respectively, both stood out record highs. The quarterly net sales, operating profit are profit for 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 [ various ] demand in home appliance. However, overall sales increased due to the remaining segments increased sales and weak IN. 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 expecting that the global ratio, NEV or new energy vehicle, which is including EVs and PHV is going to reach 20% in 2025 and 37% in 2030. And regarding the NEV ratio in China and Europe, which are the 2 advanced NEV lesions. And China is expected to hit 37% in 2025 and 55% in 2030 while you are up to reach 32% in 2025 and 81% in 2030.

Please see slide 13. The cumulative number of EV using our E-Axle succeeded 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 3 types, namely Type A for manufacturer 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 estimated it will take more time to shift to outsourcing. However, we are beginning to see the signs that Type A customers in Europe to shift earlier than expected as we have been contacted by Asia-European OEM for possible outsourcing. The background of this is considered to be #1 fierce price competition for EVs with Chinese OEMs who are exporting their EVs increasingly. And number 2, E-Axle's manufacturing in-house by European OEMs are relatively costly. We are going to capture this opportunity and aiming to win orders of attraction models.

Please see Slide 15. We created Nidec PSA e-motors, a joint venture with Stellantis back in May 2018 as our strategic core in the European E-Axle businesses, and they started the first-month 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. Planned conversion 2 E-Axles have started from 100 kilowatts 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 at '23 on a single fiscal year basis and recoup cumulative losses in financial year '25. In R&D, we have already started to tackle the host generation of E-Axle. The theme is magnet-free, and this has been adopted by Green Innovation Fund Project, NEDO namely New Energy and Industrial Technology Development Organization, and 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 7 factories and other areas is going to be 7 million units in financial year '25, and we are going to prepare almost double the capacity of the 4 million orders in the timing point of year - of financial year '25.

Please see Slide 18. As higher raw material prices and lockdowns in China pressurized profitability, auto results are recovering after the profitability bottomed out in the March quarter of financial year '21.

Please see Slide 19. Paradigm shift from ICE or internal combustion engine vehicles to EVs is rapidly accelerating in 2 wheels and small cars as well. We are focusing on the 2 largest markets of India and China in both electric to 2 wheels vehicles and small EVs. We're applying mass production in financial year '22 for 11 projects, including 6 related to electric 2 wheels vehicles and 5 related to small EVs. We have added in-wheel 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 micro-mobility and we are applying to divest a floor area of our Indian factory.

Please see Slide 20. In the small precision motor segment, we are implementing business portfolio transformation amid the HDD motor market structure change.

Please see Slide 21. In ACI, we are executing selected 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 3-New Strategy in the periods of generators, battery energy storage system, battery charger for EVs, et cetera. And for the air conditioning market, we are going to expand the businesses globally, mainly for industrial use. Assuming the higher raw material cost continues for the time being like in the auto business. We are going to accelerate the improvement of profit structure through passing that on to selling price and reducing the manufacturing costs.

Please see Slide 22. Nidec signed a joint venture agreement with FREYR Batteries S.A. Norwegian semi-solid lithium-ion battery manufacturer. Nidec Battery Energy Storage Solution or BESS provide services to the great that enable accelerated adoption of renewable power generation, which contributes to the realization of a carbon-zero society. Meanwhile, FREYR has invented a semi-solid lithium-ion battery manufacturing technology in terms of quality and manufacturing process. And it's planning to manufacture EcoFriendly semi-solid lithium-ion batteries using 100% renewable energy through a dedicated power purchase agreement with Statkraft, which is Europe's largest renewable energy producer based on 100 hydroelectric power.

Our partnership with FREYR will ensure stable procurement of competitive and clean semi-solid lithium-ion batteries on Nidec 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 the carbonized society.

Please, Slide 23. Nidec's Innovative Battery Energy Solutions are used in prominent projects worldwide. ACI is also entering solution business such as EV charging stations and circular economy-related products.

Please see Slide 24. Despite headwinds posted by demand slowdown in Europe, raw material price hike, we are going to continue efforts to achieve operating profit ratio over 25% - 15%.

Please see Slide 25. In other product groups, the operating profit ratio since financial year '21 is keeping high level of over 15%.

Please see Slide 26. Nidec Sankyo, Nidec-Read, and Nidec-Shimpo are the 3 major group companies in the Machinery segment. And they are going to contribute to Vision2025 target as growth drivers with high profitability by expanding such respective businesses. As industrial robots operated the circuit board inspection system, supplies for inspection system, automated optical inspection equipment, inspection system for parts of traction motors, machine tools, press machines, and reducers.

Please see Slide 27. Nidec established sustainability committee, which makes a decision on sustainability within the Board of Directors, we will find the challenge to be the ideal company. A company growing for the next 100 years and beyond and promote our sustainable management in the longer-term and broader perspective through the committee's activities. And 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.

[Yoichi Orikasa, analyst]

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 ask your questions. [Operator Instructions] Our first question today is from James Pulsford of Alma Capital.

[Tom Grew, analyst]

Sorry, this is Tom, James' 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 JPY 16 billion. But even excluding this, sales are very strong, again -- well, both in Q1 and also again in Q2. So could you comment on this? And then also how sustainable this trend is, please?

[Unknown Executive]

[Foreign Language]

[Masahiro Nagayasu, executive]

[Interpreted] When it comes to machinery, the machine tool has been -- machine businesses have been -- are making very good contributions on a year-on-year basis, and the sales have been $25 billion. And when it comes to the [ sales ] that you have mentioned JPY 16 billion. This comes from not OKK but from the Nidec Machine Corporation, which was carved out from Mitsubishi heavy industry. And this group company's operating profit ratio is more than 12%. When it comes to Nidec OKK Corporation, it used to be in a deficit. It's now in making a profitable business, but it's still within the process of recovery at this moment. And we can expect a lot more contributions from our machine tool businesses in quarter 3. When it comes to our machine tool businesses, we are planning to have additional acquisition of other companies or businesses. Therefore, we would like to raise these new businesses to be our cash cows.

[Tom Grew, analyst]

Okay. Understood. Okay. So for the JPY 16 billion from Nidec Machine Tool, I understand that in terms of organic non-M&A contributions to the growth in sales this year, are you able to guide me on that?

[Unknown Executive]

[Foreign Language]

[Masahiro Nagayasu, executive]

[Interpreted] When it comes to these machine tool businesses, which are Nidec Machine Corporation and Nidec OKK Corporation, they are currently under the post-merger integration process under the direct supervision of Mr. Nagamori, the Chairman of Nidec Group, and they are trying to improve -- strengthen their sales capabilities by trying to obtain as many sales inquiries as possible. And after that, today, I'm trying to reduce the cost and thus trying to make their businesses as [ presentable ] as [indiscernible]. That's how these 2 companies are doing business within the area of machine tool business.

[Tom Grew, analyst]

Okay. But other than these 2 businesses, not just the -- not these 2, but the rest of the machinery segment, how is that performing?

[Unknown Executive]

[Foreign Language]

[Masahiro Nagayasu, executive]

[Interpreted] When it comes to the areas outside the machine tool business, we have one of our growth companies called Nidec-Read Corporation. They are making and selling semiconductor inspecting machines, and they are doing extremely profitable business. And the profitable ratio is very high when it comes to the Nidec-Read Corporation. And other detailed information can be found on Slide 26. And other than Nidec-Read Corporation, we have Nidec-Shimpo Corporation which makes pressing machines as well as reducers. And when it comes to reducers in particular, they are going to be installed in robotic equipment, et cetera. So we can expect a significant growth in the business.

[Tom Grew, analyst]

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 you expose to these areas? And what's your view into next year about the environment?

[Unknown Executive]

[Foreign Language]

[Masahiro Nagayasu, executive]

[Interpreted] Currently, the market is hitting a plateau, I believe, and I believe some people or we could expect some harsh conditions going forward. But when it comes to machine tool, for example, we are thinking about entering into a market we have never been entered - we have never entered before. When it comes to Nidec 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 production is about to start at our factories in China. Therefore, by entering into China's local market, we could expect enlarge - expand our business - scale of business.

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. So far Nidec Machine Tool has been -- 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 market or good conditions and bad conditions occur at 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.

[Yoichi Orikasa, analyst]

Thank you very much for your question. Next question is from John Ho of Janchor Partners.

[John Ho, analyst]

Can you hear me properly on this line?

[Yoichi Orikasa, analyst]

Yes, we can hear you.

[John Ho, analyst]

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 a far different exchange rate to what is very likely from this point on? And if the exchange sensitivity still holds to profit?

[Unknown Executive]

[Foreign Language]

[Masahiro Nagayasu, executive]

[Interpreted] As far as Nidec is concerned, our policy is to reduce our products locally and have these products consume locally as well. Therefore, compared with other companies, we are not so prone to the current exchange rate situation. We are doing a business very -- on a very global basis. And our currencies -- the currencies that we handle very one after another, and this is a very -- currency exchange rate situation is very complex as far as Nidec is concerned about the overall situation, we are not really being seriously affected by the current depreciation of the yen. And currently, the US dollar is being truly appreciated against the Japanese yen. And we are generating sales modern 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 very abnormal and extraordinary. Therefore, going forward, we believe that there may be some flashback, we may have some returning effect of this current depreciation of the end - pushback of the depreciation of the yen.

[John Ho, analyst]

I see. Can I ask about our E-Axle business in China that we talked about on the slide? Overnight, there was some news that Tesla is going to be cutting their prices in China, presumably because our 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?

[Unknown Executive]

[Foreign Language]

[Masahiro Nagayasu, executive]

[Interpreted] My opinion about the Chinese market, EV market in China is that in China, as well as the European markets, are concerned, they are not really slowing down. It's rather the demands are growing in both of these markets. And raw material prices were increasing more and more. It has been very difficult for us to pass up the price increase over to our selling -- our product selling prices. 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.

[John Ho, analyst]

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

[Unknown Executive]

[Foreign Language]

[Masahiro Nagayasu, executive]

[Interpreted] When it comes to the growth of the EV market, we have been -- we, as a company, have been long saying that year 2025 will be the critical turning point of this EV business. And many people used to say that the critical turning point will be so further 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.

[John Ho, analyst]

Maybe my last question is about our second-generation E-Axle. I understand we are already producing the E-Axle 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?

[Unknown Executive]

[Foreign Language]

[Masahiro Nagayasu, executive]

[Interpreted] When it comes to this traction model - Generation 2 traction motor system -- it is -- 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 Gen 2, our content is about 20% less than its predecessor and cost once again is 30% to 35% less than its predecessor. And performance is about the same. Therefore, by using Gen 2, our customers will be able to enjoy a lot of benefit merits with the Gen 2 product. And therefore, basically, we are not going to reduce the price of our Gen 2 product in comparison with its predecessor. And 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. And when it comes to Q3, we are expecting 30% of the entire first-generation traction motor to be replaced by Gen 2. And the overall comprehensive replacement to Gen 2, we expect to happen in the fiscal year of 2023. And thus, our traction motor businesses profitability will increase significantly. However, since our Gen 2 products use - entirely use new technologies, not everything is going. So similarly, what we are doing is to tackle and try to solve problems one or another as we move forward. That's the current situation we are in.

[John Ho, analyst]

So how much pricing cuts do we have to pass on to our customer?

[Unknown Executive]

[Foreign Language]

[Masahiro Nagayasu, executive]

[Interpreted] We are now going to pass on any amount of money over to our customers. And we will avoid as much as possible to reflect the cost reduction -- amount of cost reduction over to our customers. That's what we like to avoid as much as possible.

[John Ho, analyst]

Sorry. So did 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?

[Unknown Executive]

[Foreign Language]

[Masahiro Nagayasu, executive]

[Interpreted] 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 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 of customer or not, et cetera.

[Yoichi Orikasa, analyst]

The next question from Ramsai Neelam of State Street.

[Ramsai Neelam, analyst]

Yes. Thank you [ for taking your time ]. Can you hear me?

[Masahiro Nagayasu, executive]

Yes, we can hear you.

[Ramsai Neelam, analyst]

Yes. So firstly, my question on E-Axle, I think - can you provide a shipment plan for financial year 2022? I think 65,000 if I'm not [indiscernible] on that.

[Unknown Executive]

Sorry, can you please speak up a little bit?

[Ramsai Neelam, analyst]

Yes. So can you provide guidance of E-Axle shipments for financial year 2022?

[Unknown Executive]

[Foreign Language]

[Masahiro Nagayasu, executive]

[Interpreted] This is Nagayasu to give you a figure on the -- 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 million units.

[Ramsai Neelam, analyst]

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

[Unknown Executive]

From the previous estimate, did you say?

[Ramsai Neelam, analyst]

Yes. So for the current financial year, you said the estimate is 550,000 units. Does it downgraded from your previous estimate?

[Unknown Executive]

[Foreign Language]

[Masahiro Nagayasu, executive]

[Interpreted] When it comes to this fiscal year, 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. Now when it comes to our 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.

[Ramsai Neelam, analyst]

And on Slide #14, on forward. So you mentioned that in Europe, the in-house E-Axle manufacturing cost is very really high. Can you give us some understanding on how significant the cost difference between Nidec and Europe in [ E-Axle ] manufacturers and how [ it might] be able to capture the market?

[Unknown Executive]

Can you repeat that question, please?

[Ramsai Neelam, analyst]

Yes, I'm sorry. So on Slide #14, we mentioned that in Europe, E-Axle manufacturing cost is relatively high. So can you give us some understanding of how significant the cost differences and how Nidec is able to capture the market?

[Unknown Executive]

[Foreign Language]

[Masahiro Nagayasu, executive]

[Interpreted] This is now - when it comes to this difference in cost, it's not something we can say this is based on the various voices of people concerned in the market. And therefore, when it comes to quantity as well as technology, such current situation is as we -- is something we had [indiscernible] question is coming to a reality a little faster than we had expected that the situation that I can say based on various [indiscernible] in the market. This is Nagayasu speaking. One thing that I'd like to say based on the slide, we have just alluded to, this one fact that the Chinese -- what the EV is produced in China are exported to Europe and these EVs run in European countries. But there are heavily any cases where European-made EVs are exported to China and almost all the European brand vehicles running in China are -- were all made in China. Therefore, they're cost expensive when it comes to EVs in Europe. And these are all associated with the compound [ growth and M&A ] different related costs.

[Yoichi Orikasa, analyst]

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 no further questions, and we would like to conclude the conference call. I'd like to appreciate for your active participation. If you have any further questions, please do not hesitate to contact Nidec Corporation or our business representative and [indiscernible] Morgan Securities. Thank you very much for joining the conference call, and now you may disconnect.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]