Nidec Corporation (OTCPK:NJDCY) Q3 2022 Earnings Conference Call January 24, 2023 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
Conference Call Participants
Takashi Ito – ARGA Investment Management
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 on Nidec’s homepage right now. Please note, this call is being recorded and the conference materials will be posted on Nidec’s homepage for the coming week for investors and analysts who are not able to join today’s call.
Now, I would like to introduce today’s attendee from Nidec Corporation. Mr. Akinobu Samura, Senior Vice President and Chief Financial Officer. First, Mr. Samura will make a presentation. After his presentation, we will move on to a Q&A session and Mr. Samura will answer your questions. Mr. Samura now presents Nidec’s Q3 fiscal year 2022 results, future outlook and the management strategy. Mr. Samura, please go ahead.
Akinobu Samura
Good day, everyone, and welcome to today’s conference call. My name is Akinobu Samura, Chief Financial Officer of Nidec. I will be your main speaker today and answer your questions with the help of Mr. [Hironari Noguchi] (ph) as an interpreter.
Please see slide three for the financial year 2022 nine months results. As shown on slide four, the nine months net sales stood at the record high of JPY1,699.7 billion, 20.8% higher year-on-year. The nine months operating profit decreased 6.8% year-on-year to JPY124.4 billion. But however, the nine months profit before income taxes and the profit attributable to owners of the parent increased 9.7% year-on-year to JPY141.9 billion, a 4.8% year-on-year to JPY104.1 billion, respectively. Both stood at record high.
We are implementing double WPR-X, the drastic reform of profitability to tackle recent deteriorations of market environments with aims to reduce the fixed cost significantly and to make a V-shaped recovery in financial year 2023. Based on Q3 results and Q4 demand outlook, we have made revisions to financial year 2022 annual forecasts.
On slide six and seven, you have step charts showing the net sales and operating profit year-on-year and quarter-on-quarter, respectively. By product groups, with exchange rate effect eliminations and the structural reform expenses, as you see the upper chart of slide seven, the quarterly sales of all of the segments, except for electronic and optical components and other declined due to recent deterioration of the market environments. The overall operating profit on the lower chart declined due to the decreased OP. In small precision motors, automotive and appliance, commercial and industries or ACI, as well as structural reform expenses.
Now please see slide eight. We have started WPR-X, the drastic reform on profitability amid adverse market conditions in the second half of financial year 2022. As explained on slide nine, WPR-X is a drastic reform on profitability to tackle economic downtime caused by the expansion of COVID-19 in China and economic shrink in Europe through prolonged Russian invasion of Ukraine, as well as prioritization caused by technological innovation. With the idea of technology creates cost competitiveness in mind we are going to accelerate development of products that can overwhelm competitors with our technologies and to implement structural reform to reduce fixed cost through automation with our technologies and streamlining operations.
Please see slide 14. The number of EV models adopting Nidec’s E-Axle has increased by three to 14 models compared with previous quarter. The annual sales of EVs with our E-Axle grew 175% year-on-year in calendar year 2022. And the latest December sales hit record high.
Please see slide 15. The E-Axle market in China is about to enter the growth stage on a full scale. The number of market entrants, including OEMs, who self-manufacture motors is increasing. The increase in the number of competitors in such growth stage is within our at the time of strategy creation. As our strategies for this growing market, firstly, we ensure a speedy implementation of large scale capital expenditure before the demands arrive as countermeasures for market expansion. And secondly, in order to expand our customer base and geographical market areas. We will be targeting five major customers in China, two existing and three new customers and acquiring new orders from European and US OEMs.
Please see slide 16. Our global sales volume of our E-Axle is expected to continue to increase at the pace that exceeds the growth rate of the battery electric vehicle or BEV market and we are targeting to sell 4 million units of E-Axle in financial year 2025, which consists of Nidec PSA eMotor, a joint venture with Stellantis and customers in China and other areas.
Please see slide 17. We are preparing for V-shaped recovery in financial year 2023 by posting large structural reform expenses in the second half of financial year 2022. Please see slide 18. Paradigm shift from ICE or Internal Combustion Engine vehicles to EVs is rapidly accelerated in two wheels and small cars as well. We are focusing on the two largest markets of India and China in both electric two wheel vehicles and small EVs. We are planning the mass production in financial year 2022 for 11 projects, including six related to electronic two wheel vehicles and five related to small EVs. We have added in four-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 19. In the small precision motor segment, we are implementing business portfolio transformation amid HDD motor market structural change. Please see slide 20. 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 generator 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 higher raw material costs continues for the time being, like in the all businesses, we are going to accelerate the improvement of profit structure surpassing that on to selling price and reducing the manufacturing cost.
Please see slide 21. Despite the weaknesses in appliance and commercial areas, due to loss of demand driven by COVID-19 and a negative impact of prolonged Russian invasion of Ukraine on the European market. We are going to continue our efforts to improve profitability.
Please see slide 22. In other product groups, the operating profit ratio since our financial year 2021 is keeping high level of over 15%. Please see slide 23. Nidec’s machine business group, which consists of Nidec-Shimpo simple as Nidec Machine Tool and Nidec OKK is going to expand and improve product portfolio through a steady organic growth and M&A, and realize high growth of the Machinery businesses. Firstly, in the machine tool business we are applying M&As to expand the product line-ups of machine tools and explore overseas markets and supporting overseas sales expansion of NidecMachine Tool and the NidecOKK by acquiring PAMA in Italy, which has strong sales network in highly growing markets such as China, et cetera.
Now secondly, in the Press Machine business, our orders for machine for manufacturing cans and EV related parts, such as the motor core, battery, et cetera are increasing. We are going to strengthen production and the sales through collaboration among our major brands. And thirdly, in the Reducer business, we are launching Komagane business facilities in Japan with an aim to increase supply capacity of high-precision reducers and planetary reducers for the domestic market and aiming to gain market share of reducers for 6- axis robots.
Please see slide 24. We have purchased the shares of Italian machine tool manufacture PAMA, and its nine affiliates and executed transfer agreement on the stock acquisition. PAMA is one of the most well-known companies in the machine tool industry for the wide range of product lineups and high level technology capabilities of its large machine tools, particularly horizontal boring and milling machines. The company has also known for its solid sales and service networks in Europe and other places, such as China, the U.S. and India. Following competition of acquisition of PAMA — following compression of the acquisition of PAMA through reciprocal usage of management resources between PAMA and our two machine tool companies, NidecMachine Tool and Nidec OKK we are able to pass those synergies in all areas of sales, manufacturing and product development. After completing the stock acquisition, we are going to actively provide PAMA with resources and make necessary investments in PAMA to accelerate the growth of the Nidec Machine Tool businesses.
Please see slide 25. We are targeting to build a strong corporate governance system. And following the establishment of sustainability committee that we announced in the previous quarter, we established a Nomination Committee last November as an advisory body to the Board of Directors. With the establishment of the Nomination Committee, fairness, transparency and objectivity are ensured in the deciding on the election policy. Data standards and the candidates are our directors and executive [indiscernible] with appropriate engagement and advice from our external directors. We will continue to improve our corporate governance system even further going forward.
Lastly, on behalf of the entire management team, we would like to thank our customers, partners, suppliers for their support and commitment as well as our shareholders. At this time, we would like to open up the call for questions.
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 will be pleased to answer your question. Today’s Q&A session is conducted electronically. [Operator Instructions] Our first question today is from Mr. Ito of ARGA Investment. Mr. Ito, please go ahead.
Takashi Ito
Yes. Thank you very much. So I have two questions. Regarding your big restructuring charges, I just want to first understand, is this primarily because of demand, macro-demand or it’s also — or maybe more because of pricing. So I think in previous quarters, Nidec has said that you expect higher raw material costs to be passed on to customers with a time lag. I don’t really see this positive impact in the current numbers. So are you getting a lot of difficulty in passing on pricing and that is one of the reasons why you are embarking on the restructuring program? That’s my first question.
And so, my second question is just for a more detailed breakdown of your restructuring costs. I think I read somewhere that it’s about JPY70 billion for the full year. So if you could confirm the number, how much is in Q4? And for which particular products these charges are going to be for? Thank you very much.
Akinobu Samura
[Foreign Language] [interrupted] First of all, I’d like to say that there is no direct relationship between price charging and the restructuring cost.
And when it comes to restructuring cost, this 70% of this entire — and the restructuring cost accounts for 70% of the entire downward revision, which is worth JPY100 billion. There are two factors for that: one of them is automotive related mainly in Europe and other places. In European automotive businesses, we have encountered with the quality defect issues and other issues in our business operations. And these issues have to be solved in the course of communications among the top executives and the others on a daily basis. And our corporate culture as well as our growth model is based on this type of communications that — and this communication has enabled us to establish a very good relationship of traffic between our service and our customers.
However, over the past few years, this type of communications between top management executives has been what we have been lacking, we are missing. Due to this lack of communications among top executives, relatively small problems has developed into a larger problems and issues in some cases. And one of the examples of such a case is the quality issues that has been developed into a compensation issue. And another issue is also related to our communications with our customers. As the production volume changes or fluctuates, sometimes we have seen excessive amount of equipment that is not in years. And these are the issues that are mostly with the automotive businesses in Europe and other places.
One another major issue is the deterioration of the marketing environment. And at this circumstance, we are going to — this year marks our 50th anniversary since our company’s foundation. Therefore, to commemorate this 50th anniversary in this year of fiscal year of 2023, we like to make a V-shaped recovery after successfully and significantly reducing our fixed cost. And this is the main — primary purpose of this WPR-X which is the initiative that I have explained in my presentation at the beginning of this speech. And this WPR-X is the initiative for us to significantly reduce our fixed standard cost. And during this process, we are going to slash — we are going to face consolidation and we’re going to incur restructuring costs and we are going to reduce the amount of so called slow moving inventory and these are all part of our ongoing restructure reform.
Therefore, in commemorating our 50th anniversary as a company and in order for us to be able to have a very good secure and healthy growth for the next 50 years we like to go on to — and go through this restructuring — excuse me, this reform or structural reform so that we can establish a very healthy — extremely healthy financial structure and we can go ahead as a healthy company. Those are my answers to your two questions.
Takashi Ito
Okay. Thank you. Can I just confirm that the pricing increase to customer is going according to plan? And also, can I just confirm that when you talk about quality issues with European automotive business, this is related to maybe electronic power steering or the braking systems? And sorry, one last confirmation is, when you do — when you mentioned restructuring, does this also include headcount reduction? Thank you.
Akinobu Samura
[Foreign Language] [interrupted] When it comes to the first point that you would like to confirm with us, which is the price charging. We are still having this huge amount — we are still expressing the effects of this huge amount of price charging — price charging is smaller compared with the price increase on a year-on-year basis, which is, in the amount, which is approximately JPY20 billion or so. That’s one thing that I’d like to say.
When it comes to quality related issues. I would like to refrain from — refrain you to specifics, but approximately 50% of the entire amount has been solved in Q2 and Q3 and the remaining 50% is still remaining in Q4. When it comes to the third point that you would like to confirm with us, which is the possibly headcount reduction as part of the restructuring and streamlining. Of course, under the one Nidec policy, we’d like to utilize our equipment as well as people on a groupwide basis, but some headcount reduction is part of our restructuring plan.
Takashi Ito
Thank you very much.
Yoichi Orikasa
Mr. Ito, thank you very much for your questions. And our next question is from Mr. [John Hall] ph) of [indiscernible]. Please go ahead.
Unidentified Participant
Yes. Hi. Good evening. Thank you very much for making time Mr. Samura. I wanted to ask you about the E-Axle business. Maybe you can describe for us the changes in the forecast for this year and next year that you had made from the last quarter that drove that change? And how we assess the prospects going forward on the E-Axle business? Thank you.
Akinobu Samura
[Foreign Language] [interrupted] When it comes to the E-Axle business, our prediction is that, we are going to reach a critical point in year 2025 and our forecast at that time is $4 million units to sell. And this forecast remains unchanged. It’s all the same. But when it comes to fiscal years of 2022 and 2023 due to the spread of COVID-19 and other reasons, it is true that the market is shrinking.
And as I understand, when it comes to fiscal 2023, some people predict that there will be a slowdown in Chinese market. According to what I have heard from our people working in the local places, it is also true that one of the every — one out of three, every three cars are EVs already. Therefore, even though the rapid growth rate of two times or three times a year is not going to be maintained anymore. But it is, I believe, there is no doubt that the growth will continue.
One important point for us is to make a quick transition or replacement or quick transition from Gen 1 to Gen 2. Now when it comes to Gen 2 products, it utilizes quite a few new technologies. And we had to take a little more time than expected in checking the performances of Gen 2 products. Therefore, this is why we had to postpone the debut timing of Gen 2 products from Q3 to Q4. Therefore when it comes to fiscal year 2022, the rate of the Gen 2 products is going to be lower than the initially expected. However, when it comes to fiscal year 2023, our forecast remains unchanged. In other words, on average, three out of every four vehicles will be using Gen 2 products. And therefore, as we have been saying from a long time ago, our plan is to generate a profit for our traction motor business in fiscal 2023. This plan itself also remains unchanged.
Unidentified Participant
Alright. Can I just follow-up to ask a few questions? The growth rate as you said for EV penetration is slowing and many OEMs, particularly in China, really not making money. And recently, the OEMs like Tesla and others are cutting prices. Does that put some pressure on negotiation of our Gen 2 prices? Can you give us some color on how pricing negotiation is going with our customers?
Akinobu Samura
[Foreign Language] [interrupted] Now when it comes to price reduction as the quantity increases is something we have already been thinking about as part of our strategy. And as Mr. Nagamori, our Chairman has been saying long time ago, the average price of the cars will be one-fifth of what it is now. And what we need to understand is that, we need to be able to increase the volume and try to reduce price and we need to wait — we need to be ahead of other people and we wait for the arrival of the demands to come to us. That’s our strategy.
Therefore, Tesla’s ongoing price reduction is part of this movement, in my opinion. And therefore, in comparison with the Gen 1, Gen 2s cost is 35% less. And when it comes to Gen 3, its cost is 50% less than Gen 1. And that’s the type of product development strategy that we have in place. Therefore, as the volume increases, there will be a growing number of companies to enter the business and across the competition we will become faster and faster. That’s type of thing that happens in many different markets, in my opinion.
If you take a look at the slide 15 of our presentation material, detailed information is provided there.
Unidentified Participant
Thank you. And then one last one on the E-Axle question. Is it true that some of our customers are in sourcing or second sourcing from other suppliers? How do we think about that?
Akinobu Samura
[Foreign Language] [interrupted] And of course, some customer are making these E-Axle in house and for some other customers we provide them with motors or even other components. There are quite a few different types of cases. But what we are focused on achieving the most is to secure a good amount of quantity of our products, because that’s most beneficial cost wise. Therefore our strategy is to deliver a large amount of E-Axle units, but not only that we will continue to deliver to our customers other components or individual components, that’s how we like to — that’s how we try to secure our large amount of products.
Unidentified Participant
Thank you very much. So if I can ask one question about the restructuring initiatives. My understanding is, Nidec always have cost reduction and operational efficiency plan. How is WPR-X different to our ongoing reduction plans? Can you tell us why aren’t we doing it already? Why do we have to start something new now? And how much of the restructuring cost will be just writing off assets that we will be paid for versus requirement for cash investment for restructuring? Thank you.
Akinobu Samura
[Foreign Language] [interrupted] When it comes to WPR-X, it is not really the same from — same as the WPR-X initiatives that we have held or started in the past. Currently, we are in midst of huge, large scale technological change. In other words, currently, we are in the midst of a huge technological change in — for example, the ICE or internal combustion engine is — are replaced by EVs. And AI or artificial intelligence is replacing human when it comes to labor. That’s a type of a technological change that we are currently experiencing.
Therefore, instead of trying to reduce the cost all across the board in the entire unit, we like to focus on certain businesses that we would like to focus on. And this is — we like to establish competitive advantage over other companies. Therefore, the conventional WPR-X activities are aimed or intended to reduce procurement cost and increase production efficiencies, but currently the current WPR-X activities or initiative is to change our product themselves.
Unidentified Participant
Okay. Thank you.
Yoichi Orikasa
Thank you very much, John. Our next question is from Ramsai Neelam of State Street. Please go ahead.
Ramsai Neelam
Thank you. So I have a couple of questions. So firstly on E-Axle guidance. So we have reduced our guidance from 550,000 units to 420,000 units, roughly. So 24% decline in the units. As well as if we compare on quarter-on-quarter basis, it is almost 70% decline from Q3. So can you explain why there is a downgrade in the guidance?
Akinobu Samura
[Foreign Language] [interrupted] Primary reason for the reduction is the reduced demand from our customers due to COVID-19 and other elements. And another reason is that, we had to delay the debut timing of Gen 2 because we then need to take time to inspect and check the performance of technical — technological performance of Gen 2 products.
Ramsai Neelam
And on other questions, so sorry to stress on this, on the restructuring question regarding the quality issues. So is it related to EV related business or traditional automotive business that we have?
Akinobu Samura
[Foreign Language] [interrupted] This restructuring is related to traditional auto businesses.
Ramsai Neelam
Okay. Thank you. And lastly, on the traction motor business or E-Axle business, it seems like Q3 had recorded close to JPY10 billion losses. It is accelerated from the previous quarter. So can you give some color on why the losses are ballooning in Q3?
Akinobu Samura
[Foreign Language] [interrupted] And of course, I believe you’re talking about this difference between Q2 and Q3. And the reason for this loss is not our customers, including [GSE] (ph) is – are in a very struggling situation at this moment. Therefore, selling price is making some increasing again. That’s one of the reasons. And another reason is that, when it comes to highly profitable models, we tend not to deliver such models and that led us to produce less of those models. That’s another reason. And another reason is that, the operation ratio of the factories during the month of December, for example.
Ramsai Neelam
Thank you.
Yoichi Orikasa
Thank you very much, Ramsai. Next question is from Brad Schneider of [indiscernible] Capital. Brad, please go ahead.
Unidentified Participant
Hi, thank you very much for taking the time to speak to us. I have a few questions. I guess, first, just wanted to know what was the operating margin for the HDD segment in the December quarter?
Akinobu Samura
[Foreign Language] [interrupted] In the HDD business, the quantity dropped significantly. So usually 30% when it comes to margin, but due to this [indiscernible] loss, now this percentage is down to 20%.
Unidentified Participant
20%. Okay. Thank you. And I think just follow-up to earlier question. I don’t think I heard the answer correctly, but of the JPY70 billion restructuring charge, how much of that amount is for inventory and other asset write offs?
Akinobu Samura
[Foreign Language] [interrupted] Our calculation rate is as follows: when we have a slow moving inventory for which we had to spend a JPY10 billion and we have stagnant accounts receivables. And all in all, it’s approximately JPY20 billion in total.
Unidentified Participant
Okay. So it’s JPY 20 billion for receivables and JPY10 billion for inventory or JPY10 million of each?
Akinobu Samura
[Foreign Language] [interrupted] The latter is correct. In other words, JPY10 billion for a slow moving inventory, another JPY10 billion for stagnant accounts receivable. So it’s JPY20 billion in total.
Unidentified Participant
Thank you. Thank you. And then just the machinery segment, I was just wondering in there like for the sales in Q3, how much of the sales was from the acquisitions from OKK and the Mitsubishi? I think it was about [JPY19] (ph) billion in Q2.
Akinobu Samura
[Foreign Language] [interrupted] For this quarter, from October to December, it’s approximately JPY9 billion for these two companies.
Unidentified Participant
That’s great. Thank you very much. Just one last question for me. I guess, I was surprised by the comments around the Gen 2 performance testing. I guess, we’ve been hearing about Gen 2 for several quarters now and I guess I was kind of surprised that you delayed the launch by a quarter because of the testing. I would have thought that was in your plans and forecast that it would require testing. So I guess what happened with the testing that you weren’t expecting.
Thank you. That’s all for me. Thank you very much.
Akinobu Samura
[Foreign Language] [interrupted] When it comes to the production, Gen 2 is started from the end of September, that was as initially planned. But as I’ve said before, Gen 2 includes various new technologies. Therefore, some customers are extra sensitive and extra cautious and they requested us to test extra cautiously when it comes to these new technologies. Therefore, these requests differ from our customers, but when it comes to our primary and most important customers, which is GSE, they gave us a request to be extra careful about checking these performances at the very final moment. And this — because of this request, we had to delay the start of our mass production of Gen 2 product. Now these issues have almost all been solved already and has been already decided that the mass production will start in the month of February.
Unidentified Participant
That’s very helpful. Thank you.
Yoichi Orikasa
Mr. Schneider, thank you very much. As we have run out of time. The next will be today’s final question. Mr. Ito again, please.
Takashi Ito
Thank you. Just want to confirm again. So for your restructuring costs of JPY70 billion, so we know that at least JPY20 billion is non-cash, plus it’s related to inventories and receivables. But can you tell us how much in total would be cash and non-cash. Thank you very much.
Akinobu Samura
[Foreign Language] [interrupted] And of course, the examination of these numbers are still ongoing. But overall, 15% of that amount is cash related and remaining 85% is non-cash related.
Takashi Ito
That’s very helpful. Thank you very much.
Yoichi Orikasa
Mr. Ito, thank you very much. Now, we’d like to conclude the conference call. I’d like to appreciate all your participation. If 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 again for joining the conference call. And now you may disconnect.
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