Dear all, thank you very much for joining Nidec's conference call. I'm Yoichi Orikasa, General Manager, Kyoto Branch of Mitsubishi UFJ Morgan Stanley Securities. As we kick off the conference, I'd like to ask you to make sure all the materials are ready in front of you. If not, please download the files on Nidec's homepage right now. Please note this call is being recorded and the conference materials will be posted on Nidec's homepage for the coming week for investors and analysts who are not able to join today's call. Now, I would like to introduce today's attendee from Nidec Corporation, Mr. Akinobu Samura, Senior Vice President and Chief Financial Officer. First, Mr. Samura will make a presentation. After his presentation, we will move on to a Q&A session and Mr. Samura will answer your questions. Mr.
Samura now present Nidec's Q3 fiscal year 2022 results, future outlook, and management strategy. Mr. Samura, please go ahead.
Okay. Good day everyone and welcome to today's conference call. My name is Akinobu Samura, Chief Financial Officer of Nidec. I'll be your main speaker today and answer your questions with the help of Mr. Hironari Noguchi as an interpreter. Please see slide 3 for the financial year 2022 nine months results. As shown on slide 4, the nine months of net sales stood at a record high of JPY 1,699.7 billion at 20.8% higher year-on-year. The nine months operating profit decreased 6.8% year-on-year to JPY 124.4 billion.
However, the nine months profit before income taxes and the profit attributable to owners of the parent increased 9.7% year-on-year to JPY 141.9 billion. 4.8% year-on-year to JPY 104.1 billion respectively, both stood at a record high. We are implementing WPRX, the drastic reform of profitability to tackle the recent deteriorations of market environments with aims to reduce the fixed cost significantly and to make a V-shaped recovery in financial year 2023. Based on Q3 results and the Q4 demand outlook, we have made revisions to financial year 2022 annual forecast.
On slide 6 and 7, you have step charts, showing the net sales and operating profit year-on-year and quarter-on-quarter respectively, by product groups which exchange rate effect eliminations and the structural reform expenses. As you see the upper chart of slide 7, the quarterly sales of all of the segments except for electronic and optical segment components and other declined due to recent deteriorations of market environments. The overall operating profit on the lower chart declined due to the decreased OP in Small Precision Motors, automotives and Appliance, Commercial and Industrial or ACI, as well as structural reform expenses. Please see slide 8. We have started WPRX, the drastic reform of profitability amid adverse market conditions in the second half of financial year 2022.
As explained on slide nine, WPRX is a drastic reform of profitability to tackle economic downturn caused by the expansion of COVID-19 in China and the economic shrink in Europe through prolonged Russian invasion of Ukraine, as well as polarization caused by technological innovation. With the idea of technology creates cost competitiveness in mind, we are going to accelerate development of products that can overwhelm competitors with our technologies and to implement structural reform to reduce fixed cost through automation with our technologies and streamlining operations. Please see slide 14. The number of EV models adopting Nidec's E-Axle has increased by 3- 14 models compared with the previous quarter.
The annual sales of EVs with our E-Axle grew 175% year-on-year in calendar year 2022, and the latest December sales hit record high. Please see slide 15. The E-Axle market in China is about to enter the growth stage on a full scale. The number of market entrants, including OEMs, full self-manufacturers, motors is increasing. Increase in the number of competitors in such a growth stage is within our expectation at the time of strategy creation. As our strategies for this growing market, firstly, we ensure speedy implementation of large-scale capital expenditure before the demands arrive at countermeasures for market expansion.
Secondly, in order to expand our customer base and geographical market areas, we will be targeting 5 major customers in China, 2 existing and 3 new customers, and acquiring new orders from European and U.S. OEM. Please see slide 16. Global sales volume of our E-Axle is expected to continue to increase at a pace that exceeds the growth rate of the BEV market. We are targeting to sell 4 million units of E-Axle in financial year 2025, which consists of Nidec PSA Emotors, a joint venture with Stellantis, and customers in China and other areas. Please see slide 17. We are preparing for V-shaped recovery in financial year 2023 by posting large structural reform expenses in the second half of financial year 2022. Please see slide 18.
Our paradigm shift from ICE or internal combustion engine vehicles to EVs is rapidly accelerating in two-wheels and small cars as well. We are focusing on the 2 largest markets of India and China in both electric two-wheeled vehicles and small EVs. We are planning the mass production in financial year 2022 for 11 projects, including 6 related to electric two-wheeled vehicles and 5 related to small EVs. We have added in-wheel motors for electric motorcycles in India. With regard to production, we have converted the former HDD factory in the province of Zhejiang, China, to that of micro-mobility, and we are planning to double the floor area of our Indian factory. Please see slide 19. In the Small Precision Motors segment, we are implementing business portfolio transformation amid HDD motor market structural change.
Please see slide 20. In ACI, we are executing structural reform in overseas businesses and looking to enter a new phase of growth. While gaining market share outside Europe that is shaken by the conflict, we are going to accelerate top line growth through 3 new strategy in the fields of generators, battery generator storage system, battery charger for EVs, et cetera. For the air conditioner market, we are going to expand the business globally, mainly for industrial use. Assuming a higher raw material cost continues for the time being, like in the old businesses, we are going to accelerate the improvement of profit structure through passing that onto selling price and reducing the manufacturing cost. Please see slide 21.
Despite the weaknesses in the appliance and the commercial areas, due to loss of demands, driven by COVID-19 and the negative impact of a prolonged Russian invasion of Ukraine on the European market, we are going to continue our efforts to improve profitability. Please see slide 22. In other product groups, the operating profit ratio, since financial year 2021, is keeping high level of over 15%. Please see slide 23. Nidec's Machine business group, which consists of Nidec-Shimpo, as Nidec Machine Tool and Nidec OKK, is going to expand and improve product portfolio through steady organic growth and M&A and realize high growth of the machinery businesses.
Firstly, in the machine tool business, we are planning M&As to expand the product lineups of machine tools and explore overseas markets. Supporting overseas sales expansion of Nidec Machine Tool and Nidec OKK by acquiring Pama in Italy, which has a strong sales network in highly growing markets such as China, et cetera. Secondly, in the press machine business, orders for machine for manufacturing counts and EV-related parts, such as the motor core, battery, et cetera, are increasing. We are going to strengthen production and sales through collaboration among our major brands. Thirdly, in the reducer business, we are launching Komagane business facilities in Japan with an aim to increase supply capacity of high-precision reducers and planetary reducers for the domestic market, and aiming to gain market share of reducers for six-axis robots.
Please see slide 24. We have purchased the shares of Italian machine tool manufacturer Pama and its 9 affiliates, and executed a transfer agreement on the stock acquisition. Pama is one of the most well-known companies in the machine tool industry for the wide range of product lineups and high level technological capabilities of its large machine tools, particularly horizontal boring-milling machines. The company is also known for its solid sales and service networks in Europe and other places such as China, the U.S. and India. Following completion of acquisition of Pama...
Following completion of the acquisition of Pama, through reciprocal usage of management resources between Pama and our two machine tool companies, Nidec Machine Tool and Nidec OKK, we are able to pursue synergies in all areas of sales, manufacturing and product development. After completing the stock acquisition, we are going to actively provide Pama with resources and make necessary investments in Pama to accelerate the growth of Nidec's machine tool businesses. Please see slide 25. We are tackling to build a strong corporate governance system. Following the establishment of sustainability committee that we announced in the previous quarter, we established a nomination committee last November as an advisory body to the board of directors.
With the establishment of nomination committee, fairness, transparency and objectivity are ensured in the deciding on the election policy, its standards, and the candidates of our directors and executive officers with appropriate engagement and advice from our external directors. We will continue to improve our corporate governance system even further going forward. Lastly, on behalf of the entire management team, we would like to thank our customers, partners, suppliers for their support and commitment as well as our shareholders. At this time, we would like to open up the call for questions.
Thank you very much, Mr. Samura. We would like to turn to the Q&A session. Mr. Samura will be pleased to answer your questions. Today's Q&A session is conducted electronically. If you would like to ask a question, please press the star key and one on your touch-tone phone. Again, please press star and one if you would like to ask a question. If you would like to cancel your request, please press star and two. We now pause for questions from the participants. Our first question today is from Mr. Ito of Arga Investment. Mr. Ito, please go ahead.
Yes, thank you very much. I have two questions. Regarding your big restructuring charges, I just want to first understand, is this primarily because of, you know, demand, macro demand or it's also or maybe it's more because of pricing? I think in previous quarters, Nidec has said that.
You expect higher raw material costs to be passed on to customers with a time lag. I don't really see this positive impact in the current numbers. Are you getting a lot of difficulty in passing on pricing? That is one of the reasons why you are embarking on the restructuring program. That's my first question. My second question is just for a more detailed breakdown of your restructuring costs. I think I read somewhere that it's about JPY 70 billion for the full year. If you could confirm the number, how much is in Q4 and for which particular products these charges are going to be for. Thank you very much.
First of all, I'd like to say that there is no direct relationship between price charging and the restructuring cost. When it comes to restructuring cost, the restructuring cost accounts for 70% of the entire downward revision, which is worth JPY 100 billion. There are two factors for that. One of them is automotive related to mainly in Europe and other places. In the European automotive businesses, we have encountered with the quality defect issues and other issues in our business operations. These issues have to be solved in the course of communications among the top executives and others on a daily basis.
Our corporate culture, as well as our growth model, is based on this type of communications. You know that, and this communication has enabled us to establish a very good relationship of trust between ourselves and our customers. However, over the past few years, this type of communications between top management executives has been what we have been lacking or missing. Due to this lack of communications among top executives, relatively small problems has developed into larger problems and issues in some cases. One of the examples of such a case is the quality issues that has been developed into a compensation issue. Another issue is also related to our communications with our customers.
As the production volume changes or fluctuates, sometimes we have seen in the excessive amount of equipment that is not in use. These are the issues that are mostly with the automotive businesses in Europe and other places. Another major issue is the deterioration of the market environment. This circumstance, we are going to, this year marks our 50th anniversary since our company's foundation. Therefore, to commemorate this 50th anniversary, in this year of fiscal year of 2023, we would like to make a V-shaped recovery after successfully and significantly reducing our fixed costs. This is the main primary purpose of this WPRX, which is the initiative that I have explained in my presentation at the beginning of this speech.
This WPRX is the initiative for us to significantly reduce our fixed and other costs. During this process, we are going to face a consolidation, and we're going to incur restructuring costs, and we are going to reduce the amount of so-called slow-moving inventory. These are all part of our ongoing restructure reform. Therefore, in commemorating our 50th anniversary as a company, and in order for us to be able to have a very good, secure and healthy growth for the next 50 years, we would like to go on to and go through this restructuring. Excuse me, this re-reform, structural reform, so that we can establish a very healthy, extremely healthy, financial structure.
We can go ahead in as a healthy company. Those are my answers to your two questions, sir.
Okay. Thank you. Can I just confirm that the pricing increase to customer is going according to plan? Also, can I just confirm that when you talk about the quality issues with European automotive business, this is related to maybe electronic power steering or the brake, the braking systems? Sorry, one last confirmation is When you mention the restructuring, does this also include headcount reduction? Thank you.
When it comes to the first point that you would like to confirm with us, which is the price charging, we are still experiencing the effects of this huge amount of price, the charging. Price charging is smaller compared with the price increase on a year-on-year basis, which is in the amount, which is approximately JPY 20 billion or so. That's one thing that I'd like to say. When it comes to quality-related issues, I will like to refrain from referring to specifics, but approximately 50% of the entire amount has been solved in Q2 and Q3, and the remaining 50% is still remaining in Q4.
When it comes to the third point that you would like to confirm with which is the possible headcount reduction as part of the restructuring and the streamlining, of course under the One Nidec policy, we like to utilize our equipment as well as people on a group wide basis, but some headcount reduction is part of our restructuring plan.
Thank you very much. Thank you.
Mr. Ito, thank you very much for your question. Our next question from Mr. John Hall of Junker. Please go ahead.
Yes. Hi, good evening. Thank you very much for making time, Mr. Samura. I wanted to ask you about the E-Axle business. Maybe you can describe for us the changes in the forecast for this year and next year that you have made from the last quarter, that drove that change and how we assess the prospects going forward on the E-Axle business. Thank you.
When it comes to the E-Axle business, our prediction is that we are going to reach a critical point in the year 2025, and our forecast at that time is 4 million units to sell, and this forecast remains unchanged. It's all the same. When it comes to fiscal years of 2022 and 2023, due to the spread of COVID-19 and other reasons, it is true that the market is shrinking. As I understand, when it comes to fiscal 2023, some people predict that there will be a slowdown in Chinese market.
According to what I have heard from our people working in the local places, it is also true that 1 out of 3, every 3 cars are EVs already. Therefore, even though the rapid growth rate of 2 times or 3 times a year is not going to be maintained anymore, but it is, I believe there is no doubt that the growth will continue. The one important point for us is to make a quick transition or replacement or quick transition from Gen 1 to Gen 2.
When it comes to Gen 2 products, it utilizes quite a few new technologies, and we had to take a little more time than expected in checking the performances of Gen 2 products. Therefore, this is why we had to postpone the debut timing of Gen 2 products from Q3 to Q4. Therefore, when it comes to fiscal year 2022, the rate of the Gen 2 product is going to be lower than the initially expected. However, when it comes to fiscal year 2023, our forecast remains unchanged. In other words, the on average, yes, three out of every four vehicles will be using Gen 2 products.
Therefore, we, as we have been saying from a long time ago, our plan is to generate the profit for our traction motor business in fiscal 2023. This plan itself also remains unchanged.
Right. Can I just follow up to ask a few questions? The growth rate, as you said, for EV penetration, is slowing. M Any OEMs, particularly in China, are really not making money. Recently the OEMs like Tesla and others are cutting prices. Does that put some pressure on negotiation of our Gen 2 prices? Can you give us some color on how pricing negotiation is going with our customers?
When it comes to the price reduction as the quantity increases is something we have already been thinking about as part of our strategy. As Mr. Nagamori, our chairman, has been saying, long time, then the average price of the cars will be 1/5 of what it is now. What we need to understand is that we need to be able to increase the volume and try to reduce the price. We need to wait. We need to be ahead of other people, and we wait for the arrival of the demands to come to us. That's our strategy. Therefore, Tesla's ongoing price reduction is part of this movement, in my opinion.
In comparison with the Gen 1, Gen 2's cost is 35% less. When it comes to Gen 3, its cost is 50% less than Gen 1. That's the type of product development strategy that we have in place. Therefore, as the volume increases, there will be a growing number of companies to enter the business and the cost of competition will become harsher and harsher. That's the type of thing that happens in many different markets, in my opinion. If you take a look at the slide 15 of our presentation material, detailed information is provided there.
Thank you. One last one on the E-Axle question. Is it true that some of our customers are insourcing or second sourcing from other suppliers? How do we think about that?
Of course, some customers are making these axles in-house and for some other customers, we provide them with motors or even other components. There are quite a few different types of cases. Well, what we are focused on achieving the most is to secure a good amount of quantity of our products because that's most beneficial cost-wise. Therefore, our strategy is to deliver a large amount of E-Axle units, but not only that, we will continue to deliver to our customers other components or individual components. That's how we like to, that's how we try to secure a large amount of products.
Thank you very much. If I can ask one question about the restructuring initiatives. My understanding is Nidec always have cost reduction and operational efficiency plan. How is WPRX different to, you know, our ongoing reduction plans? Can you tell us, you know, why aren't we doing it already? Why do we have to start something new now? And how much of the restructuring cost is just writing off assets that we already paid for versus requirement for cash investment for restructuring? Thank you.
When it comes to WPRX, it is not really the same as the WPRX initiatives that we have held or started in the past. Currently we are in the midst of a huge, large scale technological change. In other words, currently we are in the midst of a huge technological change. For example, the ICE, internal combustion engine, are replaced by EVs and AI or artificial intelligence is replacing human when it comes to labor. That's the type of technological change that we are currently experiencing.
Instead of trying to reduce the cost all across the board in the entire unit, we like to focus on certain businesses that we would like to focus on, and this is how we like to establish a competitive advantage over other companies. The conventional WPLX activities are aimed or intended to reduce procurement cost and increase production efficiencies. Currently, the current WPLX activities initiative is to change our products themselves.
Okay, thank you.
Thank you very much.
Thank you very much, John. Next question is from Ramsey Neelam of State Street. Please go ahead.
Okay. Thank you. I have a couple of questions. Firstly on E-Axle guidance, we have reduced guidance from 550,000 units to 420,000 units roughly, 24% decline in the units. As well as if we, if we compare on quarter-on-quarter basis is almost 70% decline from Q3. Can you explain why there is a downgrade in the guidance?
The primary reason for the reduction is the reduced demand from our customers due to COVID-19 and other elements. Another reason is that we had to delay the debut timing of Gen 2 because we had need to take time to inspect and check the technological performance of Gen 2 products.
Okay. On this question, sorry to stress on this, on the restructuring question regarding the quality issues, i s it related to EV related business or traditional automotive business that we have?
This restriction is related to traditional auto businesses.
Okay, thank you. Lastly, on the traction motor business or E-Axle business, it seems like Q3 had recorded close to JPY 10 billion losses. It is accelerated from the previous quarter. Can you give some color on why the losses are ballooning in Q3?
Of course, I believe you're talking about just the difference between Q2 and Q3, and the reason for this loss is that our customers, including GAC, are in a very struggling situation at this moment. Therefore, selling price is making some increasing again, that's one of the reasons. Another reason is that when it comes to hardly profitable models, we tend not to deliver such models and that's led us to produce less of those models. That's another reason. Another reason is that the operation ratio of the factories during the month of December, for example.
Mm-hmm. Okay. Thank you.
Thank you.
Thank you very much, Ramsey. Next question is from Brad Snyder of Egerton Capital. Brad, please go ahead.
Hi. Thank you very much for taking the time to speak to us. I have a few questions. I guess first, just wanted to know what was the operating margin for the HDD segment in the December quarter?
The HDD business, the quantity dropped significantly. Usually, 30% when it comes to margin, but due to this significant loss, now this percentage is down to 20%.
20, okay. Thank you. I think just follow up the earlier question, I don't think I heard the answer correctly, but of the JPY 70 billion-restructuring charge, how much of that amount is for inventory and other asset write-offs?
Calculation, you know, rate is as follows. We have a slow moving inventory for which we had to spend JPY 10 billion, and we have stagnant account receivables. All in all, it's approximately JPY 20 billion in total.
Okay. 20 for receivables and 10 for inventory, or 10 of each?
Yeah. The latter is correct. In other words, JPY 10 billioN for slow moving inventory, another JPY 10 billion for stagnant accounts receivables. It's JPY 20 billion in total.
Okay. Thank you. Thank you. Then just the machinery segment, I was just wondering in there, like for the sales in Q3, how much of the sales was from the acquisitions from OKK and Mitsubishi? I think it was about JPY 19 billion in Q2.
It's for this quarter from October to December, it's approximately JPY 9 billion for these two companies.
That's great. Thank you very much. Just one last question from me. I was surprised by the comments around the Gen 2 performance testing because we've been hearing about the Gen 2 for several quarters now, and I was kind of surprised that you delayed the launch by a quarter because of the testing. I would have thought that was in your plans and forecasts that it would require testing. What happened with the testing that you weren't expecting? Thank you. That's all for me. Thank you very much.
When it comes to the production of Gen 2, it started from the end of September. That was as initially planned. As I've said before, Gen 2 includes various new technologies. Therefore, some customers are extra sensitive and extra cautious and they requested us to test extra cautiously when it comes to these new technologies. Therefore, these requests differ from our customers to customers. When it comes to our primary most important customers, which is GAC, they gave us a request to be extra careful about the checking these performances at the very final moment. This, because of this request, we had to delay the start of our mass production of Gen 2 products.
This issues have almost all been solved already and, has been already decided that the mass production will start in the month of February.
That's very helpful. Thank you.
Mr. Snyder, thank you very much. As we have run out of time, the next will be the final, today's final question. Mr. Ito, again, please.
Thank you. Just want to confirm again. For your restructuring costs of JPY 70 billion, we know that at least JPY 20 billion is non-cash because it's related to inventories and receivables. Can you tell us how much in total would be cash and non-cash? Thank you very much.
Of course, the examination of these numbers are still ongoing, but overall, 15% of the entire amount is cash related and the remaining, 85% is non-cash related.
That's very helpful. Thank you very much.
Mr. Ito, thank you very much. Now we'd like to conclude the conference call. I'd like to appreciate for your participation. Should you have any further questions, please do not hesitate to contact Nidec Corporation or your sales representatives at Mitsubishi UFJ Morgan Stanley Securities. Thank you again for joining the conference call, and now you may disconnect.