Nidec Corporation (OTCPK:NJDCY) Q2 2022 Results Earnings Conference Call October 24, 2022 9:00 AM ET
Company Participants
Yoichi Orikasa – General Manager, Kyoto branch of Mitsubishi UFJ Morgan Stanley Securities
Akinobu Samura – Senior Vice President and Chief Financial Officer
Masahiro Nagayasu – General Manager of the IR & CSR Promotion
Conference Call Participants
Tom Grew – Alma Capital
Ramsai Neelam – State Street Global Advisors
Yoichi Orikasa
Dear all. Thank you very much for joining Nidec’s 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 from Nidec home page 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 Chief Financial Officer, and Mr. Masahiro Nagayasu, General Manager, Investor Relations.
First, Mr. Samura will make a presentation. After his presentation, we will move on to a Q&A session and Mr. Samura and Mr. Nagayasu will answer your question. Mr. Samura now presents Nidec’s Q2 fiscal year 2022 results, future outlook and the management of traffic. Mr. Samura, please go ahead.
Akinobu Samura
Good day, everyone. And welcome to today’s conference call. My name is Akinobu Samura, Chief Financial October of Nidec. I will be your main speaker today and answer your questions with the help of Hironari Noguchi [ph] 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 materials for details. Now I’m going to review the key figures.
Please see slide 3 for our first half results. As summarized on slide 4, the net sales stood at record high of ¥1,130.8 billion, 24.2% higher year-on-year. The operating profit increased 8.1% year-on-year to ¥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 ¥118.4 billion, 30.1% year-on-year, to ¥86.6 billion respectively. Both stood at record highs. The quarterly net sales, operating profit, profit before income taxes and profit attributable owners of the parent recorded all-time highs.
On slide 5 and 6, you have step charts showing the net sales and operating profit year-on-year and the quarter-on-quarter respectively. By product groups, with exchange rate effect eliminations and the structural reform expenses, as you see the upper chart of slide 6, the quarterly sales of small precision motors and appliance, commercial and industrial, or ACI, declined due to the reduced demand in home appliance. However, overall sales increased due to the remaining segment’s increased sales and weaker yen.
The overall operating profit on the lower chart increased as the decline in small precision motors was more than covered by all of the remaining segment’s increased operating profit.
Please see slide 12. We are estimating that global ratio NEV, or a new energy vehicle, which is including EVs and PHVs, is going to reach 20% in 2025 and 37% in 2030. Regarding the NEV ratio in China and Europe, which are the two advanced NEV regions, China is expected to hit 37% in 2025 and 55% in 2030, while Europe to reach 32% in 2025 and 81% in 2030.
Please see slide 13. The cumulative number of EVs using our E-Axle exceeded 547,000 units since the beginning of the sales in May 2019. Each month in the September quarter exceeded the previous high and the total sales in the latest quarter increased 188% year-on-year.
Please see slide 14. As you see, on the left hand side, we have classified the EV OEM customers into three types, namely type A for manufacture motors in-house; type B who sit between type A and C; and type C who outsource motors. And we have been prioritizing type B and C customers over type A. We estimated it will take more time to shift to outsourcing. However, we are beginning to see the sign that type A customers in Europe shift earlier than expected as we have been contacted by a major European OEM, who are possibly outsourcing.
The background of this is considered to be, number one, fierce price competition for EVs with Chinese OEMs who are exporting their EVs increasingly and, the number two, our E-Axle manufactured in-house by European OEMs are relatively costly. We are going to capture this opportunity and aiming to win orders of traction motors.
Please see slide 15. We created Nidec’s PSA emotors joint venture with Stellantis back in May 2018 as our strategic core in the European E-Axle businesses. And this started the first mass production just last month. As you’ll see, on the right hand side, they’re expecting to produce more than 1 million units of E-Axles in 2025 and more than 3 million in 2030.
Please see slide 16. A conversion to E-Axle gen 2 have started from 100 kilowatt and 30% of conversion is expected to happen in the December quarter. We are aiming to complete the whole conversion in the March quarter of the financial year 2023. And as originally planned, we are aiming to realize a profit in financial year 2023 on a single fiscal year basis and recoup cumulative losses in financial year 2025.
In R&D, we have already started to tackle the fourth generation of E-Axles. The theme is magnet free and this has been adopted by Green Innovation Fund Project of NEDO, namely New Energy and Industrial Technology Development Organization, a national research and development agency in Japan.
Please see slide 17. As you see on the left hand side, the total production capacity of the seven factories and other areas is going to be several million units in financial year 2025, and we are going to prepare almost double the capacity of the 4 million orders in the turning point of financial year 2025.
Please see slide 18. As higher role material prices and lockdowns in China pressurized profitability, auto results are recovering after the profitability bottomed out in the March quarter of financial year 2021.
Please see slide 19. 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, so India and China, in both electric two wheeled vehicles and the small EVs. We’re planning mass production in financial year 2022 or 11 projects including six related to electric two-wheeled vehicles and 5 related to small EVs.
We have added in four-wheeled motors for electric motorcycles in India. And with regards to production, we have converted the former HDD factory in the province of Zhejiang, China to that of micro mobility and we are planning to double the floor area of our Indian factory.
Please see slide 20. In the small precision motor segment, we are implementing business portfolio transformation amid HDD motor market structural change.
Please see slide 21. In ACI, we’re executing structural reform in overseas businesses and looking to enter a new phase of growth. While gaining market share outside Europe that is shaken by the conflict, we are going to accelerate top line growth through three new strategies in the fields of generators, battery energy storage system, battery charger for EVs, et cetera.
And for the air conditioner market, we are going to expand the businesses globally, mainly for industrial use. Assuming the higher raw material costs continues for the time being, like in the auto business, we are going to accelerate the improvement of profit structure surpassing that on to same price and reducing the manufacturing cost.
Please see slide 22. Nidec signed a joint venture agreement with FREYR Battery SA, a Norwegian semi-solid lithium-ion battery manufacturer. Nidec’s Battery Energy Storage Solution, or BESS, provide services to the grid that enable accelerated adoption of renewable power generation, which contributes to the realization of a carbon zero society.
Meanwhile, FREYR has invented semi-solid lithium ion manufacturing technology in terms of quality and the manufacturing process and is planning to manufacture a [indiscernible] 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 a stable procurement of competitive and clean semi-solid lithium-ion batteries for Nidec’s 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 the strategic alliance, Nidec will provide innovative storage battery and power management technologies to the world, thereby contributing to the promotion of renewable energy and the realization of a decarbonized society.
Please slide 23. Nidec’s innovative Battery Energy Storage Solutions are used in prominent projects worldwide. ACI is also entering solution business such as the EV charging stations and circular economy created products.
Please see slide 24. Despite headwinds bolstered by demand slowdown in Europe, raw material price hike, we are going to continue reports to achieve operating profit ratio of 15%.
Please see slide 25. In other product groups, the operating profit ratio since financial year 2021 is keeping high levels of over 15%.
Please see slide 26. Nidec Sankyo, Nidec-Read, Nidec-Shimpo are the three major group companies in the machinery segment and they are going to contribute to Vision 2025 target as growth drivers with a high profitability by expanding such respected businesses as industrial robots, printed socket 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’s established sustainability committee, which makes decision on sustainability within the Board of Directors, we will find challenges 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 the broader perspective through the committee’s activities.
Lastly, on behalf of the entire management team, we would like to thank our customers, partners, suppliers for their support and commitment as well as our shareholders.
At this time, we’d like to open up the call for questions.
Question-and-Answer Session
A – Yoichi Orikasa
Thank you very much, Mr. Samura. Now, we’d like to turn to the Q&A session. Mr. Samura and Mr. Nagayasu will be pleased to answer your questions. Today’s question-and-answer session will be conducted differently. [Operator Instructions]. Okay, our first question today is from James Pulsford of Alma Capital.
Tom Grew
Sorry, this is Tom, James’ colleague. James is unavailable. But can I ask about the machinery sales which were very strong. I know that you have contribution from OKK, the acquisition contribution of about ¥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 sort of sustainable this trend is please? Thank you.
[Foreign Language]
Akinobu Samura
[Foreign Language]
When it comes to machinery, the machine tool businesses are making very good contributions on a year-on-year basis and the sales have been $25 billion. And when it comes to this figure that you have mentioned, ¥16 billion, this comes from not OKK, but from the Nidec Machine Tool 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 making a profitable business, but it’s still within a process of recovery at this moment and we can expect a lot more contributions from our machine tool businesses in quarter three.
[Foreign Language]
When it comes to our machine tool businesses, we are planning to have additional acquisition of other companies or businesses, therefore, we’d like to raise these new businesses to be our cash cows.
Tom Grew
So, the ¥16 billion from Nidec Machine Tool, I understand that – in terms of, like, organic, non-M&A contributions to the growth in sales this year, are you able to guide me on that?
[Foreign Language]
Akinobu Samura
When it comes to these machine tool businesses, which are Nidec Machine Tool Corporation and Nidec OKK Corporation, they are currently under the post-merger integration process under the direct supervision of Mr. Nagamori, the Chairman of the 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, they are trying to reduce cost and they’re trying to make their businesses as profitable as possible. That’s how these two companies are doing business within the area of machine tool business.
Tom Grew
Okay. But other than these two businesses, not these two, but the rest of the machinery segment, how is that performing?
[Foreign Language]
Akinobu Samura
[Foreign Language]
When it comes to the areas outside machine tool business, we have one of our growth companies called Nidec-Read Cooperation. They are making and selling the semiconductor inspecting machines and they are doing extremely profitable businesses. And the profitable ratio is very high when it comes to this Nidec-Read Corporation.
[Foreign Language]
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, etc. So we can expect the significant growth in our business.
Tom Grew
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 semiconductor market and machinery market people are pricing in quite negative assumptions. And I was wondering what is your view for your businesses exposed to these areas? What’s your view into next year about the environment?
[Foreign Language]
Currently, the market is hitting a plateau, I believe, and believe some people – 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 entered before. When it comes to Nidec Machine Tools gear businesses, we could expect we enter into China’s local market, which is not something we have done 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 to enlarge or expand our business – scale up business.
[Foreign Language]
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 had this strategy of wading into niche markets. But as we move forward, we are trying to help this company, Nidec Machine Tool, cover all the possible models. And depending on these models, there are some ups and downs in a market, 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
Next question is from [indiscernible].
Unidentified Participant
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 this 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 rate sensitivity still holds to a profit?
[Foreign Language]
Akinobu Samura
[Foreign Language]
As far as Nidec is concerned, our policy is to reduce our products locally and have these products consumed locally as well. Therefore, compared with other companies, we are not so prone to the current exchange rate situation. We are doing a business on a very global basis. And our currencies – the currencies that we handle vary from 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’re 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 more than our cost. Therefore, in that regard, we are enjoying the merits of the currency depreciation of the yen. But we do not necessarily think that 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 or we may have some returning effect of this current depreciation of the yen – push back of the depreciation of the yen.
Unidentified Participant
Can I ask about our E-Axle business in China that we talk about on the slide? Overnight, there was some news that Tesla is going to be cutting their prices in China presumably because demand has been somewhat challenging. Do you think this will affect the markets? Do we have a view if the EV market in China might be slowing because of perhaps higher penetration? And does that affect us?
[Foreign Language]
Akinobu Samura
[Foreign Language]
My opinion about the Chinese market, EV market in China is that – in China as well as the European market are concerned, they’re not really slowing down. It’s rather that demands are growing in both of these two markets and raw materials prices were increasing more and more and has been very difficult for us to pass up the price increase over to our selling – our products’ selling prices. 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 market.
Unidentified Participant
So, what is your forecast for the EV market growth the next couple of years? And I assume we forecast it will grow faster than the market with new OEM customers, is that correct?
[Foreign Language]
Akinobu Samura
[Foreign Language]
When it comes to the growth of the EV market, we as a company have been long saying that the year 2025 will be the critical turning point of this EV business. And many people used to say that the critical turning point will be so farther away, it’s never going to be 2025, it’s so farther away. But this critical point, 2025, is now becoming a reality. Therefore, I believe demand for the EVs will – going into increase even more than it is now.
Unidentified Participant
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?
[Foreign Language]
Akinobu Samura
[Foreign Language]
When it comes to this traction motor – generation two traction motor system, gen two is about 30% to 35% cost-wise in comparison with the first generation. That’s our target. And when it comes to gen two, our content is about 20% less than its predecessor and the cost once again is 30% to 35% less than its predecessor. And performance is about the same. Therefore, by using gen two, our customers will be able to enjoy a lot of benefits, marriage with the gen two product. And therefore, basically, we are going to reduce the price of our gen two product in comparison with its predecessor. And gen two 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 one to gen two. And when it comes to Q3, we expecting 30% of the entire first generation traction motor to be replaced by gen two. And the overall comprehensive replacement to gen two, we expect to happen in the fiscal year of 2023. And thus, our traction motor business’ profitability will increase significantly.
However, since our gen two product entirely use new technologies, not everything is going smoothly. What we are doing is to tackle and try to solve problems one after another as we move forward. That’s the current situation we are in.
Unidentified Participant
So, how much pricing cuts do we have to pass on to our customer?
[Foreign Language]
Akinobu Samura
[Foreign Language]
We are not going to pass on any amount of money over to our customers and we will avoid as much as possible to reflect the amount of cost reduction over to our customers. That’s what we like to avoid as much as possible.
Unidentified Participant
Sorry, 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?
[Foreign Language]
Akinobu Samura
[Foreign Language]
It will be on a case-by-case basis. We have to take into consideration, for example, our relationship with our customers and we have not been able to reflect entire price surge of raw materials on to our customers. Therefore, we need to go case by case in order to decide whether to pass on the price increase over to our customer [indiscernible], et cetera.
Yoichi Orikasa
The next question from Ramsai Neelam of State Street.
Ramsai Neelam
My question is on E-Axle. Can you provide [Technical Difficulty] shipment plan for financial year 2022. I think it was 65,000 if I’m not wrong [indiscernible]?
Unidentified Company Representative
Sorry, can you please speak up a little bit?
Akinobu Samura
Can you please provide guidance of E-Axle shipment for financial year 2022?
[Foreign Language]
Masahiro Nagayasu
[Foreign Language]
This is Nagayasu. We give you figures on our financial presentation that we held this afternoon Japan time today.
[Foreign Language]
Our production estimate – our forecast for this fiscal year is going to be 550,000 units.
[Foreign Language]
Our production plan for next fiscal year, which is the fiscal year 2023, will be 1 million units.
[Foreign Language]
Ramsai Neelam
So is it – 550,000 units, is it downgraded from your previous estimate?
Unidentified Company Representative
What was what from the previous estimate, did you say?
Ramsai Neelam
Yeah, so for the current financial year, you said the estimate is 550.000 units, does it downgrade it from your previous estimate?
[Foreign Language]
Masahiro Nagayasu
[Foreign Language]
When it comes to this fiscal year’s production forecast, it was initially 600,000 units. But due to some factors such as the lockdown in Shanghai, China, the actual number was down by 50,000 units and [Technical Difficulty] down to 550,000 units.
[Foreign Language]
Now, when it comes to our production forecast for fiscal year 2023, our forecast at April was 1 million units. But it is now up by 200,000 unit to 1.2 million units.
Ramsai Neelam
And on slide number 14, so you mentioned that, in Europe, in-house E-Axle manufacturing cost is relatively high. Can you give us some understanding in how significant the cost difference between Nidec and European in-house manufacturers and how Nidec can able to capture the market?
Unidentified Company Representative
Can you repeat the question?
Ramsai Neelam
I’m sorry. On slide number 14, we mentioned that in Europe, in-house E-Axle manufacturing cost is relatively high. So, can you give us some understanding as to how significant the cost difference is and how Nidec could be able to capture the market?
[Foreign Language]
Akinobu Samura
[Foreign Language]
When it comes to this difference in cost, it’s not something we can say this is based on various invoices of people concerned in the market. And therefore, when it comes to quantity as well as technology, the current situation is as we’d expect. It is something we [Technical Difficulty] coming to a reality a little faster than we had expected that next year situation that I just said based on various [Technical Difficulty] in the market.
Masahiro Nagayasu
[Foreign Language]
This is Nagayasu speaking. One thing that I’d like to say based on the slide we have just alluded to is this one fact that the Chinese – the EVs produced in China are exported to Europe and these EVs run in European countries, but there are hardly any cases where European-made EVs are exported to China and almost all the European brand EVs vehicles running in China were/are made in China. Therefore, they’re cost expensive when it comes to EVs in Europe, and these are all associated with the component cost and many other different related cost.
Yoichi Orikasa
We have a few more minutes to take your questions and we’d like to welcome any questions. Otherwise, we’d like to conclude the conference call.
Yoichi Orikasa
Okay. Now, there seems to be no further questions and we’d like to conclude the conference call. I’d like to appreciate for your active participation. Should you have any further question, please do not hesitate to contact Nidec Corporation or your territorial representative at Mitsubishi UFJ Morgan Stanley Securities. Thank you very much for joining the conference call. And now you may disconnect.
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