Nidec Corporation (6594) Earnings Call Transcript & Summary

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 already in front of you. If not, please download the files on Nidec's home page right now. Please note, this call is being recorded, and the conference materials will be posted on the company's homepage for the coming week for investors and the analysts who are not able to join today's call. Now I'd like to introduce today's attendees from Nidec Corporation, Mr. Jun Seki, Representative Director, President and COO.

Hello, everyone.

Mr. Hidetoshi Yokota, Senior Vice President and Chief Financial Officer.

Hello, everyone.

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.

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 Operating 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 '21 full year result. As shown on Slide 4, the 12-month net sales stood at record high of JPY 1.9182 trillion, 18.5% higher year-on-year. The operating profit and profit before income tax increased 7.2% year-on-year to JPY 171.5 billion and 11.9% year-on-year to JPY 171.1 billion, respectively, and both were record high. The profit attributable to owners of the parent stood at record high of JPY 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, respectively, 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 motor declined sharply due to the lockdown measure implemented in China. However, the sales of automotive; appliance, commercial and industrial, or ACI; and machinery made an increase. Regarding the operating profit in the lower chart, small precision motor declined due to reduced sales and automotive went down due to structural reform expenses and R&D expenses of traction motor systems. However, the other segment increased despite the adverse climate in the market. Please see Slide 8. For the fiscal year '22 forecast, we are aiming for net sales of JPY 2.1 trillion, operating profit of JPY 210 billion and operating profit ratio of 10%. Please see Slide 12. We are aiming to become #1 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 '22 and orders increasing backed by the tailwind of a strengthened environmental regulations in Europe. In China, in addition to the 2 existing major customers, we are going to focus on the resources on the 5 customers, including the 3 new ones. In other motors and auto parts, as the market in fiscal year '22 is expected to recover gradually while the increased raw material price and expected to continue, we are accelerating to improve our profit structure by passing high raw material costs to our selling price and by reducing manufacturing cost, and we are aiming to achieve JPY 1 trillion net sales organically and JPY 300 billion additional net sales through M&As in fiscal year '25 in the automotive segment. Please see Slide 13. Nidec is ranked as #1 third-party supplier in E-Axle in the Chinese battery EV market as you see the right-hand side of slide, 2.91 million battery EVs were sold in China in calendar year '21, of which 1.45 million were assumed to be installed with E-Axles. We estimated 840,000 E-Axles were manufactured in-house by OEMs and 610,000 E-Axles were supplied by third-party suppliers. In this market, Nidec has 27% share, which is almost double compared to the second largest supplier. Please see Slide 14. The cumulative number of vehicles using our E-Axle exceeded 335,000 units, and the number of EV models has reached 11. Despite the February decline due to Chinese New Year, March saw the highest shipment volume and fiscal year '21 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-Axle in fiscal year '22. The first-generation E-Axle, Gen1, prioritized speedy entry to the market and the expansion of the market share. However, Gen2 is designed to achieve higher performance and a further cost reduction of 30% lower than generation 1. By introducing Generation 2 E-Axle in the second half of fiscal year '22, we are going to tackle to monetize earlier than originally planned. We have also started to develop Generation 3 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 traction motor in-house, Type C who outsource them and Type B who sits in the middle. Recently, we have seen increasing order from Type A' who are Type A customers, but they buy products from traction motors from outside. At Nidec, E-Axle for Type A and C are looked after by automotive motor and electronic control business unit, or AMEC; Type B customer, Stellantis, by Nidec PSA emotors or NPe; and motors for small EV and the 30 kilowatt as well as motors for electric motorcycle by newly created small automotive motor and the solution business group of small platform motor and solution business unit. Please see Slide 17. While rising raw material price squeezed quarter for profitability, we are going to prepare for the demand recovery with passing into increased material prices on to the selling price and reducing cost in fiscal year '22. Please see Slide 18. Paradigm shift from ICE, or internal combustion engine vehicle, to EVs is rapidly accelerating into 2-wheel and small car as well. We are focusing on 2 largest markets of India and China in both electric 2-wheel vehicles and small EV. We are planning mass production in fiscal year '22 for 11 projects, including 6 related to electric 2-wheel vehicles and 5 related to small EVs. Please see Slide 19. Nidec's UltraFlo FDB, or UFF, ultra-thin and ultra-small fan developed with technology cumulative through hard disk drive motor production is supporting the solid demand for PCs and its shipment in increasing. As you see on the right-hand side of the slide, the quarterly shipment volume exceeded 7 million units in quarter 3. Please see Slide 20. Nidec is launching ultra-small and ultra-thin product by applying magnetic design circuit design technology cultivated in the design of HDD motors. CA Series linear vibration motor of the left-hand side has approximately 1/50th of power consumption compared to our conventional product and its diameter is ultra-small, 3 millimeter. With these models installed in stylus pens, 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 vibrator 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 in smartphones and smart watches, they function to control vibration to make users feel as if they were pressing the button, and to vibrate the synchronization with video. Please see Slide 21. In the Small Precision Motors segment, we are implementing business portfolio transformation amid HDD motor market structure change. In ACI, we are executing structural reform in overseas business and looking to enter a new phase of growth. While gaining market share outside Europe, which is shaken by the conflict, we are going to accelerate top line growth through 3 new strategy focusing on the field and the logistics and the material handling and to prepare for expansion into the field in India and other Asian air condition market. Assuming higher raw material cost continues for the time being, the same as in auto business, we will accelerate improvement of the profit structure through passing that on to selling price and reducing in manufacturing cost. Please see Slide 23. Nidec's innovative Battery Energy Storage Solutions are used in prominent projects worldwide. ACI is also entering the 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 '21, 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 '21 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, replicating 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 a 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 questions.

Orikasa, sorry, this is Seki speaking. This doesn't included in this presentation package, but prior to today's financial announcement in Japan, at 5 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 2 top management, just Nagamori come back to CEO and I go to COO. I think probably many questions is waiting. So I am going to tell more detail and wait for questions.

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 conducted electronically. [Operator Instructions] Okay. Our first question today is from Ramsai Neelam of State Street Global Advisors.

Yes, 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 are anticipating in 2022. And also, how much is already passed on? Can you give us more color on these raw material inflation costs and the pricing?

Okay. Maybe I'll break it up by maybe quarter size for everyone to better understanding. So every quarter similar level of inflation being observed recently. Of course, mix of materials changed from time to time. But recently, especially after the -- last share prices, most of the commodity is stabilizing again. So recently magnetic steel risen, copper, aluminum, everything is going up, on rare metal as well. So I would say for -- per quarter, the growth impact of material inflation is roughly more than JPY 10 billion per quarter. And we are offsetting those by increasing price or putting some engineering effort. So every quarter, normally, the JPY 4 billion is left over. So if we completely offset 100, no impact, but there is a time lag or sometimes negotiation with our 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 3, we are a bit behind in the price inflation in quarter 3 in especially ACI. So this quarter, quarter 4, ACI was very aggressive to recover the price. So actually, ACI is getting more than their impact in quarter 4. So -- but in general quarter, the impact growth is roughly JPY 10 billion to JPY 12 billion. And we offset maybe 60% of it or 70% of it and the $4 billion the left over. So that is a mechanism per quarter. And in fiscal year '22, of course, nobody knows what's going to happen in the material situation. But if similar thing happen, even we try to be very aggressive to squeeze this left over. This impact is still, I should say, there is a time lag to be carried over to next quarter.

And my other question is on, since you mentioned Russia-Ukraine conflict. So there is also an impairment of 1.6 billion in auto segment. 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, if there is any changing trends in various segments?

Okay. So this is Seki speaking. Regarding automotive divisions, we have direct impact by this Ukraine for customers' demands. Actually, we don't clearly know if market demand is drop or just automotive OEM cannot produce. But as a part supplier, we have suffered by 15% less volume than our 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 continue to the end of May, probably impact become 15% to 20%. That's we are estimating. But we are not seeing actually slowdown from the market itself. So it's pure delivery problems.

And the demand in other segments, like ACI and smart traction motors, how is the demand there?

For ACI side for the Ukraine, we have an impact from 2 divisions. One is general appliance. We have pure customer loss shares. And the other one is like energy control segment. And then those are roughly impacted by like EUR 20 million to EUR 30 million sales, maybe around EUR 10 million profit impact. But instead, we are seeing 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, their 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.

And then last question from me is on E-Axle can you give us the FY -- 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 year?

Yes, so far when we're talking about E-Axle our sales is only happening in China. And then if we go to Page 14 accumulated, total sales is 335,000 in fiscal year '21, our sales was about 250. And then this is, of course, record high for us. And then before answering to your questions, let us advertise again. If we go Page 13 and please look at donuts 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 we are outstandingly high market share already. And then we are receiving a lot of RFQ and actual order taking. So we are expecting 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. And then accumulated E-Axle which Page 14 said 330, actually, we already sold over 60,000 for LCB side through the ACI. So the result is already 400,000. If we sell 600,000 to 700,000 range this fiscal year, we easily reached 1 million 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, but this is a 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 1. And then it will move -- transferred into generation 2 from middle of this year. In terms of the generation 1, our objective of generation 1 is introduction to the market because no one believe us. And naturally, we had a, very gorgeous specifications and then also, we intentionally lowered our price to grow up faster. So generation 1 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 business, profitable business in '23. Model-by-model profitable model introduced much earlier, but because we have remaining old models, '23 is a target to make it breakeven. But today, I said I'm aiming to throw ahead at least 6 months to be profitable. So that is our forecast and the challenges, comes in.

I think I missed this. So can you give me the operating loss number in the segment in last year 2021 and also what is projected for 2022?

Just a moment okay. So let me be very frank, okay. Usually, I don't announce this outside. I lost over 200 oku yen by this business. It's not only a loss from sales, but also loss from R&D budget. So lastly, I lost probably 60 oku yen from business, 144 like fixed cost related to R&D budget. Okay again, time by time, [ low spark ] car getting smaller. But meanwhile, we are selling more -- that very difficult for the past. I'm very confident we completely turn around by generation 2, which already almost, let's say, 94% completed product development.

Yes actually, JPY 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 JPY 20 billion. And then if we can pile up another JPY 20 billion, that is going to be JPY 1 billion increase from now. So that's why we want to eliminate this JPY 20 billion Japanese a lot as soon as possible by accelerating the launch of Gen2. So that's our strategy from now.

Our next question is from John Ho of Janchor Partners.

Excellent, I just wanted to follow up on the E-Axle questions. Did you say that in June quarter this year, we will be gross profit breakeven from minus 10%? Did I hear that correctly?

Yes, that's exactly I said, but that is my challenge, okay. I cannot commit to you because -- I can commit to you if market price doesn't move. Day by day, I'm seeing rare 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%. I would say, my confidence level is 85% sooner or later I think it's breakeven.

I see. Can I also ask on your Page 13, you showed a donut market share? We are clearly #1 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 1 or 2 years?

Yes, let me reply it 2 way, okay. Officially, we don't know, but of course, we communicate very closely. At least A is much breathing than us and B, maybe similar to us. C, D, we don't know but probably breathings.

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?

Since we say traction motor E-Axles, those are all E-Axle which are motor, inverter, reducer combined. Are you asking the mix of Gen1 and Gen2 out of 650,000 units, right?

No sorry, that's all I meant was no -- what I meant was you show on Page 14, the OEM models that use our E-Axle system. So out of the 650, are they -- how much is from this list and how much is from additional OEM models that will use our system this year, yes?

Okay. We didn't observe that way, so it may not be accurate, but I think this group of 335 will grow to let's say 500,000 and 150 are like additional models from other brand.

Yes, makes sense. 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 '23, '24, '25, 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 addressable market will grow because there will be more outsourcing?

Yes, that exactly we are seeing John, actually, we are working with Type C and Type B. Title B is typically the request us to have joint ventures. So Guangzhou Motor in China is sold. And then we have a joint venture with Stellantis in France. And that will start production from this H1. And then those are no hesitation to ask next model, next model. So your question is then, we start receiving the RFQ from them. Sometimes they request only motor assemblies, okay. Sometimes they request us to deliver like a rotor assembly or a stator assembly, like a module of motors. So time-by-time, as they are finding our quality speed cost is much better than the in-house. But since they are insisting, it also need to be in-house. So while we are abandoning a very detailed assembly, the stick for final assembly, that's what we're seeing. And then that starts from low-cost models. They insist they keep our in-house motor for their high end. And but this invasion will continue towards 2030. I think 2030 and no one making a motor by themselves because finally, scale merit is everything for this cost.

Yes, yes. So you don't think the OEMs think of this traction, E-traction E-Axle traction motor system 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?

Yes, I am 100% sure they want to keep it in-house at least next 5 years yes. But they will find their in-house cost is too high while formerly it's safe that's clearly, this electrification only occurring high end or very low end, not for medium end. So when those electrification introducing to like a, B segment car or C segment car. I think their electric power-train in-house electric power-trains too expensive. We already tested 2 OEMs with ours and roughly 60% to 120% high because of very high fixed cost because they don't have enough volumes.

Yes, one more question on traction motor. You mentioned when we introduced 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 cost lower, we will charge the same, and we will make a profit because of that?

Yes, John it's pure less cost than generation 1s. And actually, we are going to provide some price discount to customer as well. We shared this lower cost with customers, not fully of course. And then one thing I have to tell you is that currently for the Gen1, we are facing a very rapid material increase, particularly like layer metal for magnet materials. And then let's say, until middle of last year, none of the 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 parts. So lately automotive brand-by-brand, they start listening. And actually, they are paying additional costs for this material increase. So this Gen1 price is increasing. So starting point for Gen2 is increasing to. But it's pure incremental distance, and we are not going to compress because we need competitiveness anyway. So straight answer to your questions, we gained 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 introduced a fast model of this generation 2 in middle of this fiscal year, like September, October period. And then we expand those to other models.

Maybe one last question on the financial model -- the financial question I know 3 months ago, when we gave the previous quarter results, we reiterated guidance of operating profit at JPY 190 billion. That was about 3 months ago. And then obviously, we only reported JPY 171 billion. Is the main difference because of unexpected raw material cost increase or there were some other things that are temporarily hurting us that we will get back this year?

Yes actually you're right. We are short by JPY 18.5 billion against our guidance. And vast majority of the shortfall comes from small position motor and automotive maybe half-and-half. Yes, there is an impact of material cost hike. But as I said, they are suffered by material costs. But for example, ACI business, they are so aggressive to recover the material cost they suffered from previous quarters. So actually, they are positive in the material. So all portfolio of material cost have and offset impact in quarter 4, actually, the impact is not much in a single quarter. The majority of the shortfall comes from -- maybe unexpected volume though 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 -- I mean sales in 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 JPY 6 billion for the China lockdown impact in the sales. And also maybe Nagayasu-san will explain a little bit more in the market situation. Our business HDD spindle motor business is keep declining in the quarter 4. As you know, the HDD spindle motor business -- the cash cost for us. And the volume reduction by previous growth, about 25% is a significant hit in our small precision motor. And on top of that, other small precision motor products such as farm motor or sub motors or thermal solutions other than those so on and so forth, severely impacted by a tip shortage by customer. This quarter was a big disaster for us. So this kind of the combination hit our top line in small position motor. And in automotive as I said, we are anticipating more sales recovery, especially in Europe, but that was not happening, actually lower than expected. And also our traction motor business, we keep investing to accelerate some of the developments. So, all of this impact comes to the shortfall of JPY 18.5 billion against the outlook that, we announced in the second half end of the second half.

Then literally last moment, we had Ukraine and the corona strategy policy from China.

Will we make that JPY 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 delayed. Is that fair to say those are mostly delayed as opposed to a permanent loss?

No, it's definitely not permanent loss we can recover. As Yokota-san said, that we are strongly negotiating with customers. We don't make them know right. We got very patiently asking help because we are losing a lot 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 to acknowledge that this is extremely unique from before. So they are listening and accepting for price increase. And then timing was delayed. So we're expecting those are effective from Q1 many. And also for the traction motor side, we lost over 200 OEM 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 it's disaster, but we're estimating those will finish by somewhere in this H1.

Right, it's a JPY 210 billion forecast incorporating some disruptions already?

Yes, I think it's delayed -- that those situations has been reflected in JPY 210 billion, right.

Yes, that's exactly yes because it is continuing a little bit in April and maybe a bit of May?

Yes, I think it's really a difficult question for us because as Mr. Seki explained several minutes ago, our 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 is to be reflected into JPY 210 billion our forecast or how much should be forget. What we can do is that if this kind of risk realized during the operation day-by-day, we will find a solution to mitigate the 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 to answer your question, we don't have crystal ball I'll just say foresee how long does it take to comprehend this kind of a crisis, and it's -- we think the impact to be the current level or no deeper than current situation. That's what we believe.

We know you guys are working very hard. We appreciate it. It is an uncertain world.

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 every day. As Nidec, I think our performance in '21 is very miserable. Although we made a new record by 4 years' time, but I expected much higher earnings as you said, at least like 1,900 of yens. So this year, as a pride of Nidec, we really have to make this happen. So we have a margin in back of this. And then to be honest, straight answer to your questions, we emitted some impact to the Ukraine and China in Q1 a lot in Q2, much less, and we are not emitting 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-san said.

We have few more minutes to take questions from participants. [Operator Instructions] We will take additional questions from Ramsai.

So, I mean looking at the balance sheet, the inventory is almost increased 50% compared to last year. So is it that the accumulation of the raw materials or someone of the products for the future manufacturing or can you explain the inventory on the balance sheet?

Okay, this is Yokota speaking. Let me answer your question. We can break it up in the 3 pieces for the inventory increase from previous quarter end to this fiscal year end. 3 pieces mean one first piece, first up is proportional increase by our turnover. So as you remember, our turnover increased from JPY 1.6 trillion to JPY 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 material shortage or a material price hike or supply, how should I say, supply chain congestion. In order to prepare for this kind of situation, we pile up the inventory, how should I say, intentionally that's we say 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 would say those parts is roughly 1/3 each, let's say, 1/3 each. So the last box I mentioned should be eliminated and that is also including the impact of our portal lockdown or China lockdown or -- anticipate how should, I say…

Sudden customer request.

Not expected the sudden council by the customer at the end of the fiscal year. This fiscal year-end, we suffered this situation based on the China lockdown and also maybe other areas as well. So and also -- some efficiency in our value chain supply chain control and we're piling up stock in our production line or supply efforts or I mean finished goods. So I'll say, out of total inventory increase, we will surely try to eliminate 1/3, which is bad inventory we consider, and we will clean up as soon as possible, especially at quarter 1. So how fast we can eliminate in quarter 1 is a key for action.

And then Ramsai of course, while we see a settle down of Ukraine, the corona from China and material hike, logistic congestions, we can eliminate other box, which is strategic inventory, which usually we don't need. We need very special because of current situations.

And somewhat elementary question. So I'm hearing, we are reading something around supply chain issues in the industry, especially in Europe. So are you facing some supply issues in procuring some of your raw materials from China or some other parts of the world?

Ramsai, you are asking the supply chain issue in Europe due to what kind of incident Ukraine loss of crisis or other?

In general, I mean in shipping related or it may be related to Ukraine issue?

Okay. No, it's difficult to tell you overall stations. But at least, we are seeing longer lead time from like Shanghai to Germany and with more cost. What we are hearing is Korean shipping a lot of product to Europe from Korea. Usually, they use the Russian-led weight. 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 -- 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. That's a very big impact, but more impact is energy side. I don't know, Ramsai, where you’re living, but our colleague in Germany and Italy, and they said that energy costs becoming double to triples. So that's impacting heavy and logistics.

Especially the gas price is crazy high in Europe right now due to the impact of our current conflict.

And last question is on China. So recently, China has somewhat I mean they're reducing the disruption I mean they're allowing some economic activity and they allowing companies to - open the industrial activities. So having seen improvement in China's economic activity for Nidec in the recent weeks?

Again, area-by-area, it's different. But fortunately, we don't have actual manufacturing operation in Shanghai, which is most severe lockdowns. But nearby Shanghai, it's 1.5-hour drive to the Southwest. We have a Pinghu, which is biggest our operations. And then in the Pinghu, we have a very strong collaboration with local government. And at this moment time-by-time, we have like a short lockdown, but we don't have -- we are not experiencing lockdown fortunately. But we don't know tomorrow yes. So and then like we have a SIM in Fuzhou as our area, we have a traction motor operation in Guangzhou. So far, all of those are operating time-by-time, we have some parts delivery shortage because supplier side is locked down. So we don't say no impact. We are receiving impact. But for our operations, all are working, not completely lockdown. Of course, Shanghai area is different. We have a big sales office in Shanghai and then all of them are staying their apartment. They can go out from their rooms, but they can work from rooms.

And we are running out of time, and next will be today's last question. That is from Janchor's John.

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 2, 3 months. Can you talk about the impact of this very fast-moving yen on our operation, if there's anything to call out?

Exchange rate.

Yes actually, we have shared the impact of data and sensitivity in the Pages 3 in the bottom. But overall, what I can say is maybe you can imagine the big heavy industrial automotive type of company in Japan, their profit, currency and the cost of currency is different. They are exporting it comes from Japan, for example, their cost currency Japanese yen and their revenue currency is the U.S. So their U.S. revenue is boosted because of a rapidly weakening yen they get a lot of benefit. As you can see, our sensitivity in sales is big because we have big, 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 currencies are matching most of the cases. So that's why our sensitivity in revenues quite limited. Of course, we will translate the local currency into 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 the impact on any exporting -- the company from Japan is getting the benefit of a weakening yen while we have quite a limited impact on profitability side because our cost of currencies and revenue currencies are much -- in most case not all the case.

Same, many of Japanese industry enjoying this weekend, but we can't because we are much healthier than them.

Yes, this makes sense. As investors, we shouldn't worry about it. I mean I can see you're saying JPY 1 billion of OP impact. So even the yen was 120 we are only going to increase our profit by about JPY 11 billion. It doesn't change it that much?

That's right.

I see and there's no…

Even it go up to like JPY 100 per dollars you don't have to worry about us.

Yes, there is no hedging issues either, right, there's no hedging issues either because we got our operations yes?

Right yes I mean we don't have such impact and operations side, and this situation is you're making preorder and I keep smiling. So that's what we can say.

Yes, okay. So overall, it sounds like it is a challenging -- it's a very challenging time. Now it sounds like maybe a challenging you've ever seen, but you feel reasonably good that you are managing well. Is that a fair summary qualitatively?

Yes, what I can say is the revenue currency cost of currency based on our production policy, local manufacturing, local sales, the impact is quite limited. But rapidly weakening yen will also affect Japanese economy and some cost increase in Japan. So that may have indirect impact on our side. So we are not quite a risk-free from that situation. But what I can say is exposure is quite limited.

Now we would like to conclude the conference call.

Sorry. I expected someone ask me because no one made a question. So let me share what Nagamori-san explain for the CEO replacement. And then basically, he said that under current situations, time by time, I expected disaster coming. If we look back last year, material is keep increasing in Southeast Asia attacked by pandemic. And then now we are seeing a war and severe lockdown in China. So this is very much against to our business. Under these situations, he believes -- he either need a more rapid decision times, this shows speed. So of course, I thought I have a good speed, but the years she knows much better than Nidec from corner-to-corners, while I know many from automotive side, some for ASM, but not so much for group company or precision motor. So now he said that -- for limited time like 3 years, he better to take back CEO to him, and he can make a rapid decision under these circumstances. And meanwhile, traction motor is so important for our future. And then at this moment, while I'm doing CEO jobs, I don't have enough time to take care of them. So while Mr. Nagamori-san take this role I can spend more time for traction motor to pull ahead this business profitabilities. And then he said target in 3 years - within the 3 years, if our share price going back, business settles -- I'm grown up and then I make result from traction motors that's going back to original situations. And at very last, he clearly said that all analysts and medias. He is 77 years old, don't think he's aging. He said he has a full of energies of course, he can't do 24 hours, 7 days work, but he is good enough to run these companies. So message is, don't worry, okay.

Thank you very much, Mr. Seki. And I'd like to appreciate all of your participation. Since you have any further questions, please do not hesitate to contact Nidec Corporation on your sales or report to your sales representative at Mitsubishi UFJ Morgan Stanley Securities. Thank you, everyone, for joining the conference call today. And now you may disconnect.

Thank you, everyone.

Thank you Bye-bye.

It's a good chance to purchase our share now.