NNDNF - Nidec Corporation (NJDCY) Q1 2023 Earnings Call Transcript
2023-07-20 15:41:02 ET
Nidec Corporation (NJDCY)
Q1 2023 Earnings Conference Call
July 20, 2023 09:00 AM ET
Company Participants
Masayuki Abe - General Manager
Akinobu Samura - SVP and CFO
Masahiro Nagayasu - General Manager, IR Department
Conference Call Participants
James Pulsford - Alma Capital
Ramsai Neelam - State Street Global Advisors
Takashi Ito - ARGA Investment
Presentation
Masayuki Abe
Thank you very much for joining Nidec Conference Call. My name is Abe, General Manager, Institutional Sales Department of Mitsubishi UFJ Securities. As we start this conference, I'd like to ask you to make sure all of the materials are ready in front of you. If not, please download the file on Nidec's website right now.
Please note, this call is being recorded and the conference materials will be posted on Nidec's website for the coming weeks for those investors and analysts who are not able to join today's call.
Now, I would like to introduce today's attendees from Nidec Corporation. Mr. Akinobu Samura, Senior Vice President and Chief Financial Officer; and Mr. Masahiro Nagayasu, General Manager, Investor Relations.
First, Mr. Samura will make a presentation. After his presentation, we will move on to a Q&A session. And then Mr. Samura will answer your questions. Mr. Samura now presents, Nidec's first quarter fiscal 2023 results, future outlook, and then management strategy. Mr. Samura, please go ahead.
Akinobu Samura
Good day, everyone. I'm Akinobu Samura, Chief Financial Officer of Nidec. Please see slide three and four for our first quarter results. As shown on slide four, you can see that the operating profit in each segment has recovered quite sharply in Q1. Please see slide seven. As quarterly operating flow keeps improving, we are targeting record high operating cash flow in fiscal year 2023.
In summary, on slide eight, net sales increased 4.8% year-on-year to ¥566.1 billion. Operating profit increased 34.7% year-on-year to ¥60.2 billion, marking a record high on quarterly basis.
Our profit before income taxes increased by 51% year-on-year to ¥86.1 billion, after foreign currency gain of ¥24.3 billion posted and marked a record high on quarterly basis.
Profit attributable to owners of current increased 55% year-on-year to ¥64 billion, marking a record high on quarterly basis.
Quarterly operating profit of appliance, commercial and industrial or ACI segment, which is one our midtown growth drivers, marked a record high.
Please see slide 12, we are going to realize high growth by capturing growing innovation demand, created by the placement with high efficiency motors as midterm growth drivers in the home appliance area. We offer a brushless DC motors for air conditioners.
Our washing machines, dryers, dishwashers, and compressors for refrigerators to meet the increasing demand for replacement with higher sensing motor. In the commercial area, we continue to supply motors used for commercial air conditioners and the robot modules used for ecommerce in the industrial area where focusing on battery energy storage solutions, essential systems in the renewable energy industry. And the joint venture business with FREYR, a semi-solid lithium-ion battery manufacturer.
Please see slide 13. MOEN stands for Motion & Energy that handles a medium to sized motors, generators, drives and controls, elevators, robotics, infrastructure within ACI. MOEN business is expected to contribute to increase in sales and the profit of ACI in fiscal year 2023.
Please see slide 14. This slide illustrates four examples of solution business within MOEN.
Please see slide 15, the BESS business that -- I just explained on the previous slide is expected to grow sharply against the backdrop of energy crisis caused by Russian invasion of Ukraine.
Under the current [Indiscernible], we have a 7.4 gigawatt-hour of BESS installed or in excursion in over 135 projects of 27 countries. We also completed establishment of a joint with Norwegian FREYR battery last December, thus paving the way for a further growth of BESS business.
Now, please see slide 16, Nidec has made inroads to a new business of Aerospace Electrification within ACI. As you see on the left, we have announced an agreement to establish a joint venture company called Nidec Aerospace to develop electric propulsion system for the aerospace sector.
The JV will develop and manufacture the electric propulsion system for electric Vertical Take-Off Landing or eVTOL vehicles to enter the [Indiscernible] air mobility market.
Also on the right, Nidec and the Japanese company, SoftBank have jointly developed light-weight, high-efficiency, and the high-reliability axial flux-type motor for High Altitude Platforms Station or HAPS. This newly developed motor also meets the SaaS specifications and required for Sunglider. The unmanned aircraft system developed by HAPSMobile Inc., a subsidiary of SoftBank.
As the world's leading comprehensive motor manufacturer, Nidec stays committed to developing our products based on this technologies to build -- to develop light, short, small, and high-efficiency and highly controllable products and to operating at overwhelming speeds, revolutionary solutions that contribute to the lives of people around the world.
Please see slide 17, we have acquired for our ownership of Houma Armature Works, a privately owned US company from its founding family through our subsidiary, NMC. Houma has been a service partner that manufactures motors and generators and provides field service to oil and gas producers, operating out of Louisiana and Texas.
The end users of their services on and offshore during mining and winds renewable energy power generators manufacturers, including [Indiscernible] engineering, Houma and the US Motors, all of which are under the Nidec umbrella.
Through this acquisition, NMC will be able to enhance its service offering, including expanding its share within its own US installed bases. And Houma will be able to provide services to NMC's customers.
Please see slide 19, our were aiming to become number one automotive system company by anticipating the strong electrification demand, boost by CASE for our connected autonomous sharing electronic mobility trend [ph].
In EV earlier, the EV traction motor-related business is expected to come profitable in fiscal year 2023 through introduction of Gen 2, whose targeted replacement ratio is over 18% and by reducing the cost and the shipment volumes of Gen 1.
In addition, the market areas will be shifted from China-centric to grower including Europe and North America. And the growth of sales and profits will be promoted strongly through focus on traction motors and other components in addition to E-Axles.
In the organic auto area, Nidec will capture increasing demand for electrification and the gain further market share for motors for electric power steering and electric brake despite slower growth in the global auto sales.
Please see slide 20. With Battery EV-related business made profitable for the first time in the June quarter of fiscal year 2023, we will strengthen the business foundation by prioritizing profitability.
Please see slide 21. We are targeting Battery EV-related business as sales of ¥500 billion in fiscal year 2025 by supplying traction motors only and other components in addition to E-Axles.
Please see slide 22, Nidec and Renesas Electronics Corporation have agreed to join -- are joining forces on the development of semiconductor solutions for next-generation E-Axle called X-in-1 System that integrates EV drive motor and the power electronics for EVs.
Today's EVs increasing other things 3-in-1 unit called the E-Axle, which integrates motor, inverter, and the gearbox to realize high performance and efficiency as well as smaller sites like weight and lower cost and to accelerate vehicle development.
EVs are also integrating power electronics controls such as DC-DC converters and onboard charger. EV manufacturers in advanced markets such as China have developed X-in-1 platform that integrates multiple functions, accelerating the adoption in many vehicle models.
As X-in-1 integrates multiple functions and increases complexity and maintaining a high level of quality in vehicles become a challenge thus developing a preventative safety technologies such as diagnostic functions and failure predictions in crucial for ensuring safety and security in vehicles.
To address this challenge the two companies agreed to combine Nidec's motor technology and Renesas semiconductor technology to jointly develop a highly reliable and high-performance proof-of-concept or POC for the X-in-1 System. The POC is designed to support the industry's highest performance and efficiency as well as smaller size, a lightweight and lower cost for the X-in-1 System.
Building on the POC developed through this collaboration, Nidec plans to rapidly increase create E-Axle systems to add it to its portfolio and ramp-up to production to lead the E-Axle market.
Please see slide 23. We are targeting a big sharp recovery in fiscal year 2023 after posting large structurally formed expenses in the second half of our financial fiscal year 2022.
Please see slide 24. We have started to mass produce more automotive motors in addition to capturing demand for energy efficiency and thermal management. As midterm growth drivers, we are going to transform the portfolio firstly by actively working on small automotive motors such as electric two-wheeled motor vehicles and the small EV motors, but less than 30 kilowatt.
Secondly, by thermal solutions such as cooling plants and our group company CCI's products. And thirdly, by digital home appliance motor. In HDD, we continue to focus on data centers and servers to improve the product mix for higher profitability.
Please see slide 28, a newly created business unit called Machinery and Automation is up and learning from fiscal year 2023. With Nidec drive technology, the core company, this business unit handles reducers, press machines, and machine tools and is going to drive a high growth of machinery business and aiming for the net sales of ¥5 billion in fiscal year 2025 and ¥1 trillion in fiscal year 2030.
At midterm growth drivers, we are aiming to gain bigger global market share of strain waves gears for collaborative robots. As for planetary years, we set a new production base in Europe by utilizing unused facilities of Nidec Motors & Actuators in Spain.
In press machines, we are focusing on anti-plastic demands and EV demands against the backdrop of a shift from plastic to canned bottle and growing demand for EVs and launching full product lineups from small and high-speed to large machines and introducing related equipment.
In machine tools, we are going to expand the product lineups and the market areas with a focus on the Chinese market to seek high growth. In addition to this, we announced commencement of tender offer for Takisawa Machine Tool.
Lastly, on behalf of the entire management team, we would like to thank our customers, 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 - Masayuki Abe
Thank you very much, Mr. Samura. Now, we will move to the Q&A session. Mr. Samura and Mr. Nagayasu will be pleased to answer your questions. Today's Q&A session will be conducted electronically. [Operator Instructions]
The first question is from the James Pulsford, Alma Capital. James san, please go ahead.
James Pulsford
Great. Thank you. Can you hear me?
Masayuki Abe
Yes, thank you very much.
James Pulsford
Great. Thank you very much for your time. Can I ask a question first of all about your E-Axle business? I'm interested, I think that when you started the year, you were forecasting volumes of about 949,000. So, you've made -- if that's correct, you made a dramatic cut to 545,000. And I'm aware of your strategy, so it's a much bigger cut than I would have thought likely, but it's -- I understand why it could have gone down.
But I'm interested if that's gone down because you've terminated some contracts with clients perhaps, I'm interested for next year, you're expecting still very dramatic growth. And I'm just wondering -- I find it surprising you've cut this year so much without next year being apparently very much impacted. So, I wonder if you could comment on that.
And also you mentioned the business is shifting to a more global basis. I'd be interested to know an example for next year when sales go up a lot, how much of that is expected to be China next year?
Unidentified Company Representative
[Foreign Language]
Akinobu Samura
First of all, I'd like to cover the first question. There are three reasons as to the significant decline in the volume. The first reason is regarding the transition from Gen 1 to Gen 2 and due to the several timing issues, we have expressed a series of troubles and our startup process of this Gen 2 wasn't really as smooth as it should have been.
The second reason is concerning China where there is a clear line emerging between winners and losers within the Chinese customers that we have. And the models to which our E-Axle units are installed, weren’t really selling as much as they should.
The third reason is about the market shift from the large models such as 100 kilowatts and 150 kilowatts to a smaller a more compact model such as 70 kilowatt and a 50 kilowatt and we were rather slow in keeping up with this transition. That's the third reason for [Indiscernible] current decline.
So, we were not really absolutely correct in coming up with the right timing to debut our compact models. Therefore, towards the second half of this fiscal year, we were [Indiscernible] try to debut the new Gen 2 models of 70 kilowatt.
In addition to that, to our CS -- during the next fiscal year, we are going to introduce to the market Gen 3 products within the volume zone of 70 kilowatts and 50 kilowatts. Plus we are going to also target another zone of 40, 30, and 20 kilowatts in the next fiscal year.
That was my answer to your first question. Here's my answer to your second question. First, kindly take a look at slide 20. The orange portion indicates our models for [Indiscernible]. So, this strongest portion, the orange portion is for the Europe and United States and green portion, as you can see, is the portion for the Chinese market.
James Pulsford
Okay. Thank you. very clear. Can I ask for your Gen 3, when next year would you expect to be able to launch that? And will it initially be just one or two models or will it, in terms of Gen 3, becoming significant portion of volume, when will that be?
Unidentified Company Representative
[Foreign Language]
Akinobu Samura
Our planned target reviewing our Gen 3 products is scheduled for June of 2024. Our initial target fiscal year 2025, therefore we are advancing our schedule by one year.
When it comes to the volume of our Gen 3 models, this is something that I need -- we need to discuss with our OEM customers. But when it comes to the 2024, our plan for the Chinese market is to ship 955,000 units.
James Pulsford
Thank you. Thanks. Of Gen 3, yes. Thank you very much. And in Q1 this year, the Gen 2 is -- is that still got a small percentage in Q1 or what was that?
Unidentified Company Representative
[Foreign Language]
James Pulsford
In Gen 2, what percentage is -- in Q1, what percentage is Gen 2?
Unidentified Company Representative
[Foreign Language]
Akinobu Samura
When it comes to Q1, the ratio between Gen 2 and Gen 1 is approximately 50 and 50.
James Pulsford
Thank you. Great. And sorry, one last question if I may. The transition to Gen 3 is likely to do what to costs compared to Gen 2, please?
Unidentified Company Representative
[Foreign Language]
Akinobu Samura
Our target cost for Gen 3 compared with Gen 2 is minus 30% and when it comes comparison with Gen 1, Gen 3 products target is minus 50%.
James Pulsford
Great. Okay. Thank you very much indeed.
Masayuki Abe
Thank you very much. Next question is from Ramsai Neelam san from State Street Global Advisors.
Ramsai Neelam
Thank you for taking my question. I'm trying to understand about a profit margin on E-Axle business or EV Motor business. So, with the reduced target now, so are we still aiming to achieve operating profit margin for the rest of the three quarters, I mean positive operating?
Unidentified Company Representative
[Foreign Language]
Akinobu Samura
I would like to mention one big improvement when it comes to cost between Gen 1 and the Gen 2. When it comes to Q1, as I have explained already, our Gen 2's cost is -- where our ratio for the Gen 2 model is now up to 50% against Gen 1's 50%. But when it comes to Gen 1 products, cost has been reduced significantly. That's one area of major improvement when it comes to our product.
Second area -- second element that I'd like to here is that the last fiscal year or so, the raw material has increased significantly, but these increased portion of raw material costs has been able to be observed to the increase in selling the cost.
And thirdly, I'd like to mention at the last year, we launched the structural reform because of that we were able to reduce our fixed cost significantly. And when it comes to Q1 this fiscal year, we were able to further reduce the fixed cost including our research and development cost. These are the three elements that I like to mention that contributed to our improvement in our cost structure.
Now, when it comes to what are we evaluating, maintain operating profit despite the reduction in the volume, the reduction in the volume of Gen 2 will be -- will cause a negative impact on us. However, on the other hand, the reduction in the not so successfully performing Gen 1 motors will be able to make a positive impact on our financial performance. Therefore, that way, we will be able to maintain the level of -- current level of operating profit despite reduced reduction in the volume.
Ramsai Neelam
Yes. Thank you. That's helpful. Just a follow-up on that question. So, can you give us some color on pricing of E-Axles or EV traction motors in the market. You also mentioned that some of your customers are facing intense competition. So, in general, the market dynamics and the competition that your customers are facing, is that giving you some pricing pressure?
Unidentified Company Representative
[Foreign Language]
Akinobu Samura
One thing that I'd like to say about this E-Axle market is it's not mainly for -- it's not really about the price, but it's about the reduction in the size of these models and we were urgently required to make more and more compact models. And the cost prices are going down, therefore these are making an impact on us.
And many, many of these manufacturers are required to make a growingly compact -- more and more compact models. In the meantime, the price competition is becoming growing really intense, which is a fact, I believe. And therefore, among these circumstances, there are some companies that are going to survive, but there are some other companies that are going to be disappearing from this market.
Now, as I've mentioned, we were slow in capturing the very good timing when it comes to this size reduction of the EV vehicles. But our area of expertise is to have the technology that -- and I will estimate light, thin, short and small products. Therefore, in this area, we believe that we will be able to gain competitiveness and I believe this is -- this circumstance is something that we can turn into a chance for us.
Ramsai Neelam
That's really helpful. And my last question from me on HDD motor segment. So, since Seagate [ph] left us back in 2021 or 2020, so HDD have been declining in double digits. Of course, I understand the market conditions are not great. Is it also indicating that we're losing some market share even after Seagate incident?
Unidentified Company Representative
[Foreign Language]
Akinobu Samura
Here's the answer to your question regarding the HDD motor market, we stopped supplying to Seagate our motors after September three years ago. And therefore currently, MinebeaMitsumi is the single source supplier of motors to the Seagate for HDD motors. And Nidec is the single source supplier of HDD motors to Western Digital and Toshiba. Therefore, there is no competition over market share between us and MinebeaMitsumi when it comes to HDD motors.
The main issue here is the size and the volume of HDD motor market. In calendar years of 2020 and 2021, the shipment volume was approximately 260 million units for these consecutive two calendar years.
But when it comes to calendar year of 2022, this volume was down to 172 million units. And when it comes to calendar year 2023, it is expected -- forecasted that this number is further down to approximately 126 million units or so.
Now, please understand that the current HDD -- the market is that it is shrinking more than 50% over the past two years.
Ramsai Neelam
Yes. Thanks for the color. Very quick follow-up. So, what is the margin of HDD segment in Q1 2023?
Unidentified Company Representative
[Foreign Language]
Akinobu Samura
You mean Nidec's margin in the market?
Ramsai Neelam
Yes, the operating margin.
Unidentified Company Representative
[Foreign Language]
Akinobu Samura
Roughly 17%. 17%.
Ramsai Neelam
1-7. Okay. Thank you.
Unidentified Company Representative
No, not 27%, but 17. 17.7% to say exact.
Ramsai Neelam
Yes, got it. Thank you.
Masayuki Abe
Thank you, Mr. Neelam. Next question is from Takashi -- Mr. Takashi Ito from ARGA Investment.
Takashi Ito
Yes. Thank you very much. I just have two quick questions. I'll ask in English and Japanese. So, the first question is regarding working capital. Is it normal now or is there still room for improvement?
[Foreign Language]
The other question is of your PPE in your balance sheet, how much of this is related to the E-Axle?
[Foreign Language]
And one more -- last question. When you have say a customer in China who is not selling the EVs, is it easy to find another customer who can use your E-Axle as long as it is the same -- it is the correct size, 100 kilowatt or 70 kilowatt or it's not easy to just sell the same E-Axle to a different customer?
[Foreign Language]
Unidentified Company Representative
[Foreign Language]
Akinobu Samura
When it comes to first answer to your first question which is regarding working capital, it has increased significantly over the past two years. This is partially due to the effect of the currency exchange, but also is due to the significant increase in the length of lead-time to obtain raw materials.
And at this level of lead-time is now finally starting to do decrease because of that, partially because of that, we have been able to achieve a record high free cash flow during this Q1 -- just past Q1.
When it comes to the E-Axle's percentage in the entire PPE, I'm not currently having any exactly accurate numbers in my hands, but it is approximately ¥30 billion to ¥40 billion.
When it comes to the flexibility or versatility of our E-Axle models for the customers that do not unnecessarily have our models in the first place. There are some areas or elements in our models that basically the same throughout the entire product catalogs.
But there are some other components that can be customized for individual customers' requirements or requests. therefore one thing that I can do that we can do at Nidec is that we could sell our models that partially have the same elements or components, the entire model -- throughout the entire models that can be partially customized based on -- that can partially modify to a customer based on individual customers' requirements.
[Foreign Language]
And over the last two years, this working capital has improved significantly and our plan is to make sure that for the next three years, we would like to make an improvement over 10% on the cash conversion cycle basis per year.
So, when it comes to a normal level, in our definition, our normal level was the level back in 2020 which is three years ago.
Takashi Ito
[Foreign Language]
Masayuki Abe
Ito san, thank you very much. Next question is Mr. James Pulsford from the Alma Capital.
James Pulsford
Great. Thank you very much. I wonder if you could note sort of the results is a very dramatic improvement in profitability in ACI and for it to get a bit better is not surprising, but the degree that it's improved is surprising to me at least.
I wonder could you comment on specific factors behind that? Did restructuring play - has restructuring played a large part in that? Is there any temporary element to that improvement? Can you provide a bit more color?
Unidentified Company Representative
[Foreign Language]
Akinobu Samura
When it comes to ACI segment, our home appliance market continues to be in struggle, but we took actions for that kind of situation and we have made improvement significantly in that regard.
And secondly, which is most important point of all is about the MOEN, Motion & Energy segment. This is something that I -- that we have explained in detail in our slide -- our presentation materials that were explained today.
But within just MOEN segment, especially in the Industrial segment, there are new business emerging and those emerging businesses or segments made a significant very good contribution to our operating profit.
James Pulsford
Thank you. And looking at page 13, obviously you've got a number of products there. The growth within the division that you're expecting for this MOEN area is very strong. Which products in particular are seeing very strong growth this year. And if you look at Q1, which were the products that caused this very sharp improvement?
Unidentified Company Representative
[Foreign Language]
James Pulsford
Which products rather than segment, yes, which products?
Unidentified Company Representative
[Foreign Language]
Akinobu Samura
I would like to mention particularly the Power Generation business, Elevator business and Robotics business, in addition to these successfully doing market, I'd like to mention infrastructure related business, which is also very promising and newly emerging business for us.
James Pulsford
Of those, the demand growth, I mean, areas like elevators, generators, are they going to be show sustained growth beyond this year?
Unidentified Company Representative
[Foreign Language]
Akinobu Samura
Yes, I'd like to say, yes, when it comes to power generator business, the momentum will continue especially among our customers such as Caterpillar, which is one of our loyal customers. And I believe they will be, especially, continue to maintain the current momentum.
Unidentified Company Representative
[Foreign Language]
Akinobu Samura
And when it comes to infrastructure business, I believe actions are being taken in individual countries. Therefore, I believe [Indiscernible] will continue to expand or grow in infrastructure business.
James Pulsford
Okay, good. Okay. Thank you very much.
Masayuki Abe
James san, thank you very much. Next question is from Mr. [Indiscernible] from [Indiscernible] Asset Management.
Unidentified Analyst
Hello. Good afternoon. [Indiscernible]. I just have one question. Q1 was very strong on the OP side. Was there any one-off cost or benefit that was embedded in the Q1 result that may or may not repeat in Q2 or fiscal year? Thank you.
Unidentified Company Representative
[Foreign Language]
Akinobu Samura
When it comes to individual segments, there are some -- there were some one-timers. And in Q2 as well, there are some one-time that will exist, therefore -- but in comparison with Q1, we will not believe there is any significant gap to be drawn between Q1 and Q2 thereafter.
Unidentified Analyst
Got it. Any way to -- if we aggregate those number in Q1, do you know roughly how much of one-time impact? Was that a positive impact or negative impact on the OP? Thank you.
Unidentified Company Representative
[Foreign Language]
Akinobu Samura
The number is not really big percentage-wise, it's only several percent.
Unidentified Analyst
Several percent of the OP and was it a positive impact or negative impact on those one-timer?
Unidentified Company Representative
[Foreign Language]
Akinobu Samura
It's a positive impact. It accounts for several percent of the OP.
Unidentified Analyst
Got it. Great. Thank you very much.
Masayuki Abe
Thank you very much. Any question, please? Now, there seem no further question and then we would like to conclude this conference call. I would like to appreciate for your participation today. Should you have any further questions, please do not hesitate to contact Nidec Corporation or your sales representative at Mitsubishi UFJ Morgan Stanley Securities.
Thank you very much for joining this conference call. You may now disconnect. Have a good day.
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Nidec Corporation (NJDCY) Q1 2023 Earnings Call Transcript