Nidec Corporation (OTCPK:NJDCY) Q4 2021 Earnings Conference Call April 21, 2022 9:00 AM ET
Company Participants
Yoichi Orikasa – General Manager, Kyoto branch of Mitsubishi UFJ Morgan Stanley Securities
Jun Seki – Representative Director, President and Chief Operating Officer
Hidetoshi Yokota – Senior Vice President and Chief Financial Officer
Masahiro Nagayasu – General Manager of the Investor Relations & CSR Promotion
Conference Call Participants
Ramsai Neelam – State Street Global Advisors
Yoichi Orikasa
Dear all, 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 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 material 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 would like to introduce today’s attendees from Nidec Corporation. Mr. Jun Seki, Representative Director, President and COO.
Jun Seki
Hello everyone.
Yoichi Orikasa
Mr. Hidetoshi Yokota, Senior Vice President and Chief Financial Officer.
Hidetoshi Yokota
Hello everyone.
Yoichi Orikasa
First, Mr. Yokota will make a presentation. After his presentation, we will move on to a Q&A session. And Mr. Seki and Mr. Yokota will answer your questions. Mr. Yokota now presents Nidec’s Q4 fiscal year 2021 results, future outlook and management strategy. Mr. Yokota, please go ahead.
Hidetoshi Yokota
Thank you, Orikasa-san, for the introduction. Good day everyone and welcome to today’s conference call. My name is Hidetoshi Yokota, Chief Financial Officer of Nidec. Today. Mr. Jun Seki, Representative Director, President and Chief Executive Officer of Nidec and myself will be your main speakers and answer your questions. Joining us also is Mr. Masahiro Nagayasu, General Manager of Nidec’s IR team. For our forward-looking statement, please see Slide 2 of our presentation material for details.
Now, I’m going to review the key figures. Please see Slide 3 for the fiscal year 2021 full year results. As shown on Slide 4, the 12 month net sales stood at record high of ¥1,918.2 trillion, 18.5% higher year-on-year. The operating profit and profit before income tax increased 7.2% year-on-year to ¥171.5 billion and 11.9% year-on-year to ¥171.1 billion respectively and both were records high. The profit attributable to owners of the parent stood at record high of ¥136.9 billion, 12.2% higher year-on-year.
On slide 5 and 6, you have picture showing the net sales and operating profit year-on-year and quarter-on-quarter respectably by product groups with Exchange Rate effect, Eliminations and Structural Reform Expenses. As you see the upper chart of Slide 6, the sales of Small Precision Motors declined sharply due to the lockdown measure implemented in China. However, the sales of automotive apply automotive Appliance, Commercial and Industrial, or ACI, and machinery made an increase.
Regarding the operating profit in the lower chart, Small Precision Motors declined due to reduced sales and automotive went down due to a Structural Reform Expenses and R&D expenses of traction motor system. However, the other segment increased despite the adverse climate in the market.
Please see Slide 8. For a fiscal year 2022 focus, we are aiming for net sales of 2 trillion [ph] or ¥100 billion. Operating profit of ¥210 billion and operating profit ratio of 10%.
Please see Slide 12. We are aiming to become number one automotive hardware company by anticipating the strong electrification demand boosted by CASE, which means Connected Autonomous, Sharing and Electric. In the EV traction motor related business, mass production of E-Axle by the joint venture with Stellantis is expected to start in the second half of fiscal year 2022 and orders increasing by the tailwind of strengths and environmental regulation in Europe. In China, in addition to the two existing major customers, we are going to focus on the resources on five customers, including the three new ones.
In other motors and auto parts, as a market in fiscal year 2022 is expected to recover gradually while the increase raw material price and expected to continue. We are accelerating to improve our profit structure by passing high, low material costs to our selling price and by reducing manufacturing cost. And we are aiming to achieve ¥1 trillion net sales organically and ¥300 billion additional net sales through M&As in fiscal year 2025 in the Automotive segment.
Please see Slide 13. Nidec is ranked as number one third-party supplier in E-Axle in the Chinese battery EV market. As you see the right hand slide of Slide, 2 – Slide, 2.91 million battery EVs were sold in China in calendar year 2021 of which 1.45 million were assumed to be installed with E-Axles. We estimated 840,000 E-Axle were manufactured in-house by OEMs and 610,000 E-Axle were supplied by third-party suppliers. In this market Nidec has 27% share, which is almost double compared to second largest suppliers.
Please see Slide 14. The cumulative number of vehicles using our E-Axle exceeded 335,000 unit. And the number of EV models has reached 11. Despite the February decline due to Chinese New Year, March show the highest shipment volume and fiscal year 2021 sales increased 140% year-on-year.
Please see Slide 15. We are going to solidify the outlook for E-Axle business monetization for post-turning points by introducing mass-produced Gen2 E-Axles in fiscal year 2022. The first generation E-Axle gen one prioritize speedy entry to the market and the expansion of the market share. However, gen two is designed to achieve higher performance and further cost reduction of 30% lower than generation one.
By introducing generation two, E-Axle in the second half of fiscal year 2022, we are going to tackle to monetize earlier than originally plan. We have also started developed generation three already whose theme is to gain overwhelming competitiveness to win through the high growth period.
Please see Slide 16. Our OEM customers are classified into Type A who manufacture a traction motor in-house, Type C, who outsource them, and Type B who sit in the middle. This entry we are seeing increasing order from Type A class, who are Type A customers, but they buy products from traction motors from outside. At Nidec E-Axle for Type A and C looked after by Automotive Motor & Electronic Control Business Unit or AMEC, Type B customers Stellantis by Nidec PSA emotors or NPE and motors for small EVs and the 30-kilowat as well as a motors for electric motorcycle by newly created small automotive motor and the solution business group or small platform motor and solution business unit.
Please see Slide 17. While rising raw material price, squeeze quarter four profitability. We are going to prepare for the demand recovery with passing into increased material price onto the selling price and reducing cost in fiscal year 2022.
Please See Slide 18. Paradigm shifts from ICE or Internal Combustion Engine vehicle to EV is rapidly accelerating in two wheel small car as well. We are focusing on two largest market of India and China in both electric, two wheel vehicles, and small EVs. We are planning mass production in fiscal year 2022 for 11 project, including six related to electric two wheel vehicles and five related to small EVs.
Please see Slide 19. Nidec’s UltraFlo FDB or UFF, Ultra-Thin & Ultra-Small Fans developed with a technology accumulated through hard disk drive motor production, is supporting the solid demand for PCs and it shipment in increasing. As you see on the right hand side of the slide, the quarterly shipment volume exceeded seven million unit in quarter three.
Please see Slide 20. Nidec is launching Ultra-Small and Ultra-Thin product by applying our magnetic circuit design technology cultivated in the design of HDD motors. CA series linear vibration motors of the left hand side has approximately 150s of power conception compared to our conventional product, and its diameter is Ultra-Small 3-millimeter. With these motors installed in stylus pen. They recreate the tactile sense to market users feel as if they were actually writing on paper by replicating the way a pen tip vibrates when writing words.
The volume of slider, linear vibration motors of the right hand side has been reduced by 40% compared to our conventional product and the thickness is Ultra-Thin 2-millimeter. With this installed as smartphones and the smart watches they function to control violation to make users feel as if they were placing the bottom and vibrate the synchronization with the video.
Please see Slide 21. In the Small Precision Motor segment, we are implementing business portfolio transformation aimed at HDD motor market structural change. In ACI, we are executing structural reform in overseas business and looking to enter a new phase of growths. While gaining market share outside Europe, which has taken by the conflict, we are going to accelerate top-line growth through three new strategy focusing on the field and the logistics and the material handling and to prepare for expansion into the field, into in India and other Asian air conditioner market. Assuming higher raw material cost continues for the time being the same as in auto business, we will accelerate improvement of the profit to structure through passing that onto selling flight and the reducing in manufacturing cost.
Please see Slide 23. Nidec’s Innovative Battery Energy Storage Solution used in prominent project worldwide. ACI is also entering a solution business such as EV charging station and circular economy related products.
Please see Slide 24. While struggling temporarily due to demand decline in Europe and higher material costs in the second half of fiscal year 2021. ACI is continuing to aim for operating profit ratio of 15%.
Please see Slide 25. In other product groups, the operating profit ratio for fiscal year 2021 is keeping high level of over 15%. Please see Slide 26. The Machinery segment has been successful in achieving high growth in expanding the improving product portfolio through the steady organic growth and M&A. And especially in the machine tool business of our subsidiary Nidec-Shimpo, we are going to explore a global market with organic growth and M&A duplicating a successful method in the press machine business.
Please see Slide 27. We have completed the purchase of stake in OKK Corp via third party share allocation. We are aiming to become highly profitable and comprehensive machine tool manufacturer by creating synergies with Nidec Machine Tool.
Last but not least on behalf of entire management team, we would like to thank you 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 any question.
Jun Seki
Orikasa sorry. This is the Seki speaking. This doesn’t included in this presentation package, but prior to today’s financial announcement in Japan, it’s five hours ago Mr. Nagamori announced that he come back to CEO positions while myself, I was CEO by today’s morning times, I moved back to COO. So, we still control this company by two top management, but just Nagamori come back to CEO and then go to COOs. I think probably many question is waiting. So I avoid to tell more detail, I’m waiting for questions.
Question-and-Answer Session
A – Yoichi Orikasa
Thank you very much, Mr. Seki and Mr. Yokota. Now, we would like to turn to the Q&A session. Mr. Seki and Mr. Yokota will be pleased to take your questions. Today’s question-and-answer session will be contacted electronically. If you’d like to ask a question, please press the star key and one on touchtone phone. Again, please press star and one if you would like to ask a question. If you’d like to cancel your request, please press star and two. Again, if you would like to cancel your request, please press star and two. We’d now pause for one moment for questions from the participants. Again, if you would like to ask a question, please star and one on your touchtone phone. Okay. Our first question today is from Ramsai Neelam of State Street Global Advisors.
Ramsai Neelam
Thanks for – can you hear me fine?
Yoichi Orikasa
Yes.
Jun Seki
Yes.
Ramsai Neelam
Yes, I’m sorry. So my first question is on the inflation pressure. So how much of the price increase is required to completely offset the raw material cost inflation that you’re anticipating in 2022? And also how much is already passed on? Can you give a small color on the raw material inflation cost in the pricing?
Hidetoshi Yokota
Okay. Maybe I will break it up by maybe quarter size for everyone to better understanding. So every quarter similar level of inflation has been observed recently. Of course, a mix of raw material have changed from time to time, but recently especially after the Ukraine-Russia crisis, most of the commodity is stabilizing again. So recently, magnetic steel lessen, copper, aluminum, everything is going up and the rare metal as well. So I would say for – per quarter, the gross impact of material inflation is roughly more than ¥10 billion per quarter. And we are offsetting those by increasing price or putting some engineering effort. So every quarter, normally 4 billion is a leftover. So if we completely offset 100, no impact, but there is a timeline or sometime negotiation with customer is prolonged. So that’s why we can’t offset everything in the same quarter.
So as we promised in the previous quarter, quarter three, we are a bit behind in the press release we are showing quarter three, especially in ACI. So this quarter, quarter four, ACI was very aggressive to recover the price. So actually ACI is getting more than their impact in quarter four. So, but in general quarter, so impact growth is luckily 100 to 120 – ¥10 billion to ¥12 billion and we offset maybe 60% or 70% of it and the ¥4 billion on the leftover. So that is a mechanism per quarter. And in fiscal year 2022, of course, nobody knows what’s going to happen in the material situation, but if similar thing happens, even we try to be very aggressive to squeeze this leftover, this impact is still, how should I say, there’s a timeline to be carried over to next quarter.
Ramsai Neelam
Okay. Thank you. And my other question is, well, since you mentioned Russia-Ukraine conflict, so there is also an impairment of 1.6 billion in auto segments. So can you give us the demand side of the equation? So how is the demand in Europe and in China because of the COVID-19? So can you give us the demand side? There has any changing trend in various segments?
Jun Seki
Okay. So this is Seki speaking. Regarding automotive divisions, we have a direct impact by this Ukraine for customers’ demands. Actually, we don’t clearly know the market demand has dropped or just automotive OEM cannot produce, but as a parts supplier we are suffered by 15% less volume than original estimations. And then for China, so far maybe less than 5%, it’s just started. So it’s depending on how long this lockdown continues. Let’s say if it’s continued till the end of May, probably impact become at 15% to 20%. That we are estimating. But we are not seeing actually slow down from market itself. So it’s a pure delivery problems.
Ramsai Neelam
Thank you. And demand in other segments like ACI and Small Precision Motors, how is the demand there?
Jun Seki
For ACI side, for the Ukraine, we have an impact from two divisions, one is general appliance. We have a pure customer in last year. And the other one is like energy control segment, and then those are roughly impacted by like €20 million to €30 million sales, maybe around €10 million profit impact. But instead we are seeing a better demand from North American side. So, I think, we can mitigate this, but the impact is, as I said, in Europe. For China, we are still watching what is real impact. So far direct impact is happening for inventories because we can’t ship and also a very high logistic cost because many ports are stopped. Other than that, we are not seeing actual demand drop even from our customers that we are seeing.
Ramsai Neelam
And then last question for me is on E-Axle, can you kind of give us the – if I – I mean the latest reported financial year sales and operating loss and also what you are in-building into your forecasting for the coming financial?
Jun Seki
Yes. Thank you, Ramsai. So far when we’re talking about E-Axle, we – our sales is only happening in China. And then if you go to Page 14, accumulated total sales is 335,000 and then in fiscal year 2021 our sales was about 250 and then this is of course a record high for us. And then before answering to your questions, let us advertise again. If we go Page 13 and please look at donut graph on right hand side, green color is ours. So in China still there are a mix of like in-house motor and purchased motor. This is a market share for pure purchased motor from third parties. And then we are outstandingly high market share already. And then we are receiving lots of RFQ and then actual order takings. So we are expecting that this market share will expand. Then in 2022 from April to March, we are expecting about 600,000 to 700,000 units. Customers demand is over 800,000, which we don’t believe they can build. So we set our business plan based on 650,000 and then accumulated to E-Axle, which Page 14 said 330,000, but actually we already sold over 60,000 for LCD side through the ACI. So the result is already 400,000.
If we sell 600,000 to 700,000 in this fiscal year, we easily reach 1 million in sales. You are not asking our total sales, but let me advertise it, yes, because 1 million is so important for me. And then if you go Page 15, sorry, Page 15, upper chart showing our growth, vertical axis is sales amount and the horizontal axis is year by year. And then lower part is our introduction strategy of our E-Axle. Currently, we are selling – building and selling generation one. And then it will move and transferred into generation two from middle of this year. In terms of generation one, our object of generation one is introduction to the market because no one believe us. Naturally, we had a very gorgeous specification and then also we intentionally lowered our price to grow up faster.
So generation one in short, it’s not profitable at all. So each time I sell, we lose money. And then that level is getting better and better. So far, I want to be very straight, our marginal profit is minus 10%. It used to be minus 60%. So I think we can make this minus 10% to breakeven within this H1. Hopefully, I can do that by June. Then we don’t lose any money after that. Okay. And then our original commitment by this chart showing that we make a business, profitable business in 2023. Model by model, profitable model introduced much earlier, but because we have remaining all the models, 2023 is a target to make it breakeven. But today I said I’m aiming to go ahead at three to six months to be profitable. So that is our forecast and then challenges, Ramsai.
Ramsai Neelam
Sorry, if I missed this. So Seki, give me the operating loss number in the segment in last year 2021 and also what is projected for 2022 if you can?
Jun Seki
Just a moment. Okay. So let me be very frank, okay. Usually, I don’t announce this to outside. I lost over 200 oku yen by this business. It’s not only loss from sales, but also loss from a R&D budget. So, lastly, I lost probably 60 oku yen from business, 144 like a fixed cost related to R&D budget. [Technical Difficulty] Okay. So again time by time loss per car getting smaller, but meanwhile, we are selling more. So that’s a very difficult for the past. I’m very confident we completely turnaround by generation two, which already – almost, let’s say, 94% completed for that development.
Hidetoshi Yokota
Yes, actually ¥20 billion of deficit is mentioned by Mr. Nagamori during the earnings call. So what he said was if we turn into breakeven, we will gain ¥20 billion. And then if we can pile up another ¥20 billion, that is going to be ¥4 billion increase from now. So that’s why we want to eliminate this ¥20 billion a lot as soon as possible by accelerating the launch of gen two. So that’s our strategy from now.
Ramsai Neelam
Thank you. I’ll get back to the queue.
Jun Seki
Okay, thank you.
Yoichi Orikasa
Ramsai, thank you very much. Next question is from [indiscernible]. John, please go ahead.
Unidentified Analyst
Hello. Hi. Good evening. Can you hear me?
Hidetoshi Yokota
Yes, we can.
Jun Seki
We hear you clearly.
Unidentified Analyst
Excellent. I just wanted to follow up on the E-Axle questions. Did you say that in June quarter of this year, we will be gross profit breakeven from minus 10%? Did I hear that correctly?
Jun Seki
Yes, that’s exactly I said, but that is my challenge, okay. I cannot commit to you because…
Unidentified Analyst
All right.
Jun Seki
I can commit you if market price doesn’t move. Day by day, I’m seeing rate metal is going up, copper going up and aluminum going up. So I have to offset all of those and then plus I have to delete minus 10%. Let’s say my confidence level is 85%. Sooner or later, I see it get to breakevens.
Unidentified Analyst
I see. Can I also ask – on your Page 13, you showed the donut market share, we are clearly number one market share. Do you think that some of these other competitors A, B, C, D and others, are they also losing money? And do you expect them to exit the business in the coming one or two years?
Jun Seki
Yes. Let me deploy two ways. Okay. First, actually, we don’t know. Yes. But of course we communicate very closely. Yes. At least A is much breathing than us, and B maybe similar to us, C, D, we don’t know, but probably breathings.
Unidentified Analyst
I see, I see. And for our – we will have very good growth this year, you mentioned 650,000 units. Is it – how much of that is the models that you show on Page 14? And how much of the 650,000 are new models that will be launched, that will use our E-Axle traction motor system?
Jun Seki
Since we say traction motor E-Axles, those are all E-Axle, which are motor, but reducer combined. At…
Unidentified Analyst
I asking the mix of gen one and gen two out of 650,000, right?
Jun Seki
Okay. Okay.
Unidentified Analyst
No, sorry. What I meant was, I know what I meant was you show on Page 14, the OEM models that use our E-Axle system. So out of the 650,000, are they – how much is from this list and how much is from additional OEM models that will use our system this year? Yes.
Jun Seki
Okay. We didn’t observe that way, so may not be accurate, but I think this group of 335,000 will grow to let’s say 500,000 and the 150,000 are like additional models from other brands.
Unidentified Analyst
Yes, makes sense. Thank you. And I also wanted to ask to clarify on your Page 16. At the moment, we are doing business with OEMs that are outsourcing the motors. And what you’re saying is in the future towards 2023, 2024, 2025, those that are making this traction motor in-house will start to outsource. Is that your thinking for the next few years and therefore our adjustable market will grow because there will be more outsourcing?
Jun Seki
Yes, that’s exactly we are seeing. John, actually, we are working with type C and type B. Type B is typically they request us to have a joint ventures. So Dongyu Motor in China is – and then we have a joint venture with Stellantis in France and that will start production from this H1 and then those no hesitation to ask next model, next model. Okay. So your question is type A and then we start receiving the RFQ from them. Sometimes it’s – they request only motor, motor assemblies, okay, sometimes they request us to deliver like a loader assembly or a state [ph] assembly, like a module of motors. So time by time, as they are finding with our quality, speed, cost is much better than their in-house.
But since they are insisting, it does need to be in-house. So while they’re abandoning a very detailed assembly, they stick for final assembly. That’s what you are seeing. And then that start from low cost models, they insist – they keep in-house motor for their high end and that – this invasion will continue towards 2030. I think 2030, no one making a motor by themselves, because finally scale merit is everything for this cost.
Unidentified Analyst
Yes. Yes. So you don’t think the OEMs think of this e-traction – E-Axle traction, motor as strategic that they have to – like people like Tesla or Ford or GM in the West, when they make EV, you don’t think they will want to keep it in-house, you think all of them including the Chinese ones will want to outsource that’s your expectation, is that right?
Hidetoshi Yokota
Yes. I’m 100% sure. They want to keep it in-house at least next five years. Yes. But they will find their in-house cost is too high. What the performance it takes, particularly, this electrification only occurring high end or very low end, not for medium end. So when those electrification introducing to like B segment car or C segment car, I think their electric powertrain, in-house electric powertrains too expensive. We already tested two OEMs with ours and lastly, 60% to 120% high because of very high fixed cost, because they don’t have enough volumes.
Unidentified Analyst
Yes. One more question on traction motor, you mentioned when we introduce second generation sometime in this fiscal year and definitely by next fiscal year, we will be able to make a profit because the product has lower cost. And also we can charge more. Is that right? Or it is more a cost lower. We will charge the same and we’ll make a profit because of that.
Hidetoshi Yokota
Yes. Thank you, John. It’s pure, less cost than Generation 1s. And actually we are going to provide some pricing discount to customer as well. We shared this lower cost with customers, not fully of cost. And then one thing I have to tell you is that currently for the Gen 1, we are facing a very rapid material increase particularly like layer metal for magnet materials. Then, let’s say until middle of last year, no other Chinese automaker listened what supplier said. They completely ignored to absorb price up. But since they need volumes and then they know we need money to get the pass. So lately automotive brand by brand they start listenings and actually they’re paying insurance costs for this material increase.
So this Gen 1 price is increasing. So starting point for Gen 2 is increasing too, but it’s pure incremental distance and we are not going to compress because we need a competitiveness anyway. So yes, straight answer to your question, we gain the profit because of cost, but we don’t occupy that cost. We also share that to customers. By the way, this graph may not be so clear, but we introduce first to model this Generation 2 in middle of this fiscal year like September, October periods, and then we expand those to other models.
Unidentified Analyst
Thank you. Maybe one last question on the financial model, the financial question. I know three months ago when we gave the previous quarter results, we reiterated guidance OP, operating profit $190 billion. That was about three months ago. And then obviously we only reported $171 billion is the main difference because of unexpected raw material cost increase or there were some other things that temporarily hurting us that we will get back this year?
Hidetoshi Yokota
Absolutely. You’re right. We are short by ¥18.5 billion against our guidance and vast majority of the shortfall comes from a small position motor and automotive, maybe half and half. Yes, there is an impact of material cost high, but as I said, they are suffered by material cost, but for example ACI business, they are so aggressive to recover the material cost that they suffered from previous quarter. So actually they’re positive in the material. So all portfolio or material cost hike and offset impact in quarter four, actually the impact is not much in the single quarter. The majority of the shortfall comes from maybe unexpected volume drop in small precision motor and lower than expected volume growth in the automotive and also some continuous investment in the traction motors.
So for example, the small precision motor, as we mentioned during the call, there was a big impact from the China lockdown at the end of March, because we have to close the factory for almost a week, and also our shipment supply chain completely freezed due to this. And we couldn’t make many, many last minute sales in the March. That was very big. So, as I mentioned during the call, we estimated the impact of loss of sales of small precision motor is about ¥6 billion for the China lockdown impact in the sales.
And also maybe another will expand a little bit more in the market situation, our HDD business, HDD spindle motor business is keep declining in the quarter four. As you know the HDD spindle motor business the cash flow for us, and the volume deduction by previous quarter about 25% is a significant hit in small precision motor. And on top of that other small precision motor product such as fan motor, or sub-motors, or thermal solution, or so on and so forth severely impacted by tip shortage by customer. This quarter was a bit disaster for us.
So this kind of the combination hit our top-line in small precision motor. And in automotive, as I said, we’re anticipating more sales recovery, especially in Europe, but that was not happening actually lower than expected. And also traction motor business, we keep investing to accelerate some of the development. So all of this, impact comes to the shortfall of 18.5 billion against the outlook that we announced in the second half – end of the second half.
Jun Seki
Then by the very last moment, we had a Ukraine and zero corona strategy policy from China.
Unidentified Analyst
We make that 18.5 billion back this year, meaning whatever we were going to get this year, we would get plus what we lost, because those are mostly delay. Is that fair to say those are mostly delay as opposed to permanent loss?
Jun Seki
No it’s definitely not permanent loss. We can recover. As Yokota said that we are strongly negotiating with customer. We don’t make them no – no, we got very patiently asking help, because we are losing lots of profit. And then as I explained for the traction motor examples, Chinese OEM never listened this type of price increase, because of materials, but they start acknowledge that this is extremely unique from before. So they’re listening and accepting for price increase, and then timing was delayed. So, we’re expecting those are effective from Q1 mainly. And also for the traction motor side, we lost over 200 open last year. As I said, time by time, it’s getting better. So, we are expecting a much less loss in this fiscal year. Also if war and China COVID continue for through this year probably disaster, but we’re estimating those will finish by somewhere in this H1s.
Unidentified Analyst
Right. It’s a ¥210 billion forecast incorporating some disruptions already?
Hidetoshi Yokota
Yeah. I think it’s really I mean that those situations has been deflected in ¥210 billion, right.
Unidentified Analyst
Yes, exactly. Yes, because it is continuing a little bit in April and maybe, maybe a bit May.
Hidetoshi Yokota
Yes, I think it’s really difficult question for us, because as Mr. Seki explained several minutes ago direct business with Russia and Ukraine is quite limited. The indirect economical impact over the Europe market is quite significant in automotive business and the ACI business. But it’s really hard to foresee how much risk to be reflected in ¥210 billion of focus, or how much should be for that. What we can do is, if this kind of risk realized during the operation day-by-day, we will find solution to mitigate a risk or offset the risk. We have a big opportunity in other areas such as North America or Southeast Asia, or even China. If Europe risk is realized to be bigger and deeper. We will take immediate action that’s what Mr. Nagamori said, agile action by Nidec spirit. But it’s – to ask a question, we don’t have crystal ball to, I just say, foresee, how long – how long does it take to complete this kind of a crisis. And it’s – we think the impact to the current level or no deeper than current situation, that’s what we believe.
Unidentified Analyst
Thank you so much. We know you guys are working very hard. We appreciate it. It is an uncertain world. Thank you.
Jun Seki
Sorry, John. My CFO is very conservative. Usually we don’t disclose this number without some margins, our internal plan is much higher than this. So, of course, we have some solution to go higher and stretching that everywhere. As Nidec, I think performance in 2021 is very visible, although we made a new record by four years time, but I expected much higher landings, as you said, at least like 1900 opens. Yeah. So this year as a pride of Nidec, we really have to make this happened. So, we have a margin in back of this, and then to be honest, straight answer to your questions, we aimed some impact to the Ukraine and China in Q1 a lot and Q2 much less. And we are not aimed at any impact for Q3 and Q4, intentionally we are being optimistic for that point. But if it’s continued, we have to bring us other solutions as Yokota said.
Unidentified Analyst
Thank you. I’ll go back in the queue. Thank you very much.
Hidetoshi Yokota
Okay, John.
Masahiro Nagayasu
John, thank you very much. We have a few more minutes to take questions from participants and for the benefit of all participants, please let me repeat. [Operator Instructions] Okay. We will take additional questions from Ramsai. Please go ahead.
Ramsai Neelam
Thank you again. So, when looking at the balance sheet the inventory, it is almost increased 50% compared to last year. So is it that the accumulation of the raw materials are the – some of the products for the – manufacturing? Or can you explain the inventory in the balance sheet?
Hidetoshi Yokota
Okay. This is Yokota speaking. Let me answer your question. We can break it up – break it up in the three pieces for the inventory increase from previous quarter end to this fiscal end. Three pieces mean, one, first piece, first block is a proportional increase by our turnover. As you remember a turnover increased from 1.6 billion – ¥1.6 trillion to ¥1.9 trillion. So naturally our inventory increased by this.
And the second is exactly what we said, we call strategic stock. Strategic stock means, any – the material shortage or material price hike, or supply, how should I say, supply chain congestion? And in order to prepare for this kind of situation, we pile up the inventory, how should say intentionally, that’s that we say a strategic stock.
And the third piece, this is what we should eliminate. Okay. We did not anticipate such increase, or we should take more control over this situation, but actually inventory increased. So, I’d say those part is lastly one third each, let’s say one third each. So the last box, I mention, should it be eliminating, and that is also including the impact of a portal lockdown or China lockdown or I – how we should say…
Jun Seki
Certain customer request.
Hidetoshi Yokota
Not expected the sudden council by the customer at the end of fiscal year. This fiscal year end, we suffered this situation based on China lockdown, and also maybe other area as well. So, and also add some inefficiency in our value chain, supply chain control, and we piling up stock in our production line or supplier products, or maybe finish goods. So, I’d say, our total inventory increase we will surely try to eliminate one third, which is bad inventory we consider. And we will clean up as soon as possible, especially our quarter one. So, how – first, we can eliminate in quarter one is a key for our auction.
Jun Seki
And then Ramsai of course, why do we see settle down of Ukraines, zero corona from China material hike, logistic congestions. We can eliminate [indiscernible], which usually we don’t need, we need very special, because of a current situation.
Ramsai Neelam
And somewhat relevant question. So, I’m hearing, we are reading something around the supply chain issues in the industry, especially in Europe. So, are you facing some supply chain issues in procuring some of your raw materials from China or some other parts of the word?
Masahiro Nagayasu
Ramsai you are asking the supply chain issue in Europe due to – what kind of incident Ukraine, Russia crisis or other?
Ramsai Neelam
In general, I mean shipping related, or it may be related to Ukraine issue.
Jun Seki
Okay. No, it’s difficult to tell you of our situations, but at least we are seeing a longer lead time from like Shanghai to Germany and with more cost. What we are hearing is Korean shipping lots of product to Europe from Korea. Usually they use the [indiscernible], now it’s banned. Okay. Completely blocked. So all Korean baggage coming into sea freight, so sea freight is extremely congested, because they’re coming into seaside. Okay. That makes sea freight days for longer and more cost, actually port by port its station is different. But as average, we are seeing a 30% to 40% increase for the logistics and maybe 10% to 15% longer lead times. But that’s very bigger impact, but more impact is energy side. Yes. I don’t know where you are livings, but our colleague in Germany and Italy’s and they said that energy costs becoming double to triples. So that’s impacting heavier than logistics.
Hidetoshi Yokota
Especially the gas price is crazy high in the Europe right now, due to the impact of our current conflict.
Ramsai Neelam
And last question is on China. So recently China is somewhat I mean, they’re reducing the restrictions. I mean they’re allowing some economic activity and they’re allowing companies to reopen the industrial activity. So, have you seen the improvement in the China’s economic activity for neither in the recent weeks?
Jun Seki
Again area by area it’s different, but fortunately we don’t have a actual manufacturing operation in Shanghai, which is most severe lockdowns, but nearby Shanghai, it’s a one hour and a half – one and half hour drive to the Southwest. We have a Pingfu [ph], which is biggest of operations. And then in a Pingfu, we have a very strong collaboration with local government. And at this moment, time by time, we have a like a short lockdown, but we don’t have a, we are not experienced long lockdown fortunately, but we don’t know tomorrow. Yes. So, and then like we have a [indiscernible] or other area. We have a traction motor operation in the Guangzhou’s. So far all of those are operating. Time by time we have some part delivery shortage, because supplier side is locked down. So, we don’t say no impact. We are receiving the impact, but for our operations, all workings not completely lock down. Of course, Shanghai area is different. We have a big sales office in Shanghai, and then all of them are staying the apartment. They cannot go out from their rooms. But they can work from home.
Ramsai Neelam
Thank you. That’s helpful.
Masahiro Nagayasu
Thank you very much. And we are running out of time and next will be today’s last question that is from [indiscernible] Please go ahead.
Ramsai Neelam
Thank you for giving me a chance to ask one last question. The other variable that’s moving a lot is the yen very quickly in the last two, three months, can you talk about the impact of this very fast moving yen on our operation? If there’s anything to call out?
Jun Seki
Exchange rate?
Hidetoshi Yokota
Yeah, actually we have shared the impact or dollar, yen sensitivity in the pages three in the bottom. But overall, what I can say is maybe you can imagine a big, heavy industry automotive type of company in Japan. Their profit currency and the cost of currency is different. They’re exporting a car from Japan, for example, their cost currency is Japanese Yen, and their revenue currency is the U.S., so their U.S. revenue is boosted because of a rapid three weekly yen. They get a lot of benefit.
As you can see our sensitivity in sales is big, because we have a big revenue from U.S. dollar currency or euro currency. But our production policy is based on the local production, local sales. So our cost of currency and the revenue currency is matching most of the cases. So that’s why our sensitivity in revenue is quite limited. Of course, we will translate the local currency into to Japanese by using the currency exchange. So of course, we will get the benefit of weakening yen by converting this, but you can imagine that their impact on any exporting, the company from Japan is getting the benefit of weakening yen. While we are quite limited impact on profitability side because of the cost of currencies and revenue currencies is matching in most case, not all.
Jun Seki
Many of Japanese industry enjoying this weak yen, but we can’t because we are much healthier than them.
Ramsai Neelam
Yes. This makes sense. So we as investors, we shouldn’t worry about it. I can see you’re saying ¥1.1 billion of OP impact. So even then yen was 120, as we are only going to increase our proper by about ¥11 billion. It doesn’t change it that much.
Jun Seki
Even it’s go up to like a ¥100. You don’t have to worry about that.
Ramsai Neelam
Yes. It’s noting hedging issues either. Right. There’s not hedging issues either because we match – our operations. Yes. Right.
Hidetoshi Yokota
Yes, we don’t have a such impact in operation side. And this situation is, making order keep smiling. So that’s what we can say.
Ramsai Neelam
Yes. So overall sounds like it is a challenging, it’s a very challenging time now. It sounds like maybe as challenging you’ve ever seen, but you feel reasonably good that you are managing well. Yes. It’s a fair summary qualitatively.
Hidetoshi Yokota
Yes, what I can say is, revenue currency, cost of currency based on our production policy, local manufacturing, local sales, the impact is quite limited, but rapidly weakening yen it will also affect Japanese economy. And some cost to increase in Japan. So that may have indirect impact on our side. So, we are not the quite the risk free from that situation, but what I can say is exposure is quite limited.
Ramsai Neelam
Thank you.
Masahiro Nagayasu
John, thank you very much. Now we would like to conclude the conference call.
Hidetoshi Yokota
Sorry. No I expected someone ask me, but, because no one made a question. So let me share what Nagamori explained for the CEO replacement. And then basically he said that, under current situations time-by-time, unexpected disaster comings, if we look back last year material is keep increasings and Southeast Asia attacked by pandemic. And then now we are seeing a war and then say severe lockdown in Chinas. So this is very much against to our business.
Under this situations, he believes he – need a more rapid decision times digital speed. So, because, I thought I have a good speed, but the reality is he know much better than me from corner to corners. While I know many for automotive side, some for ACM, but not so much for group company or precision motor.
So now he said that, for limited time like three years, he better to take back CEO to him and he can make a rapid decisions under the circumstances and in meanwhile traction motor is so important for our futures. And then at this moment, while I’m doing CEO jobs, I don’t have enough time to take care of them. So while Nagamori take this role, I can spend more time for traction motor to put ahead this business profitabilities. And then he said that targeted three years after, within the three years, if our share price going back, business settles and grown up. And then I make a result from traction motors. Let’s going back to original situations.
And then after the very last, he clearly said that old analyst in [indiscernible]. He’s 77 years old. Don’t think his agings. He said he has a full of energies. Of course he can’t do 24/7 days work, but he’s good enough to run these companies. So messages don’t worry. Okay.
Yoichi Orikasa
Thank you very much, Mr. Hidetoshi. And I direct to appreciate all over your participation. Should you have any further questions, please do not hesitate to contact NIDEC Corporation on your sales or support. Your sales representatives at Mitsubishi UFJ Securities, Morgan Stanley Securities. Thank you everyone for joining the conference call today and now you may disconnect.
Jun Seki
Thank you everyone.
Masahiro Nagayasu
Thank you everyone. Bye-Bye.
Hidetoshi Yokota
It’s a good chance to purchase our share now.
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