Isuzu Motors Limited (7202) Earnings Call Transcript & Summary

Thank you very much for watching the Isuzu Motors Limited Earnings Presentation for the first quarter of the fiscal year ending March 2027. I would like to introduce our attendees. Yamakita, Director, Executive Officer and CFO.

I am Yamakita.

Now Yamakita will provide the explanation.

I am Yamakita. First, I will provide a summary of the first quarter. Operating income increased by JPY 17.6 billion year-on-year as the positive impact of pricing actions and steady progress in cost reduction efforts outweighed the decline in sales volume for both CV and LCV segments and the cost increases due to the Middle East situation have not yet fully materialized. Revenue reached a record high for a first quarter. Profit items below operating income reached the second highest level for a first quarter following the fiscal year ending March 2025. In terms of volume, domestic CV sales saw a year-on-year decline due to model changeovers and longer-than-expected lead times in the painting process. Overseas, shipping delays to the Middle East due to the blockade of the Strait, along with a lack of shipping capacity to various other markets resulted in a negative impact of approximately 3,000 units, leading to a decrease in volume. For LCVs, the Thai market remains in a difficult environment, staying on par with the same period last year, while exports declined primarily to the Middle East, similar to the CV segment. Foreign exchange results are as listed. Operating income for the first quarter landed at the same level as our internal plan at the beginning of the fiscal year. While the yen being weaker than assumed had a positive effect, sales volume fell below expectations due to factors such as a shortage of shipping vessels for markets other than the Middle East. Regarding the impact of the Middle East situation on earnings, we expect a negative impact of JPY 40 billion for the full year, and the first quarter result was a negative impact of JPY 7 billion. I will explain the details later, but we expect the rise in material costs to have a greater impact from the second quarter onwards, and it is occurring almost as we had anticipated. There are no changes to the full year forecast for sales volume and business performance from the announcement made in May. At this point, the situation in the Middle East has not settled and the uncertain outlook for fuel prices and geopolitics in various countries remains unchanged. For this reason, we are maintaining our full year earnings forecast as is, but we intend to provide you with an updated outlook at the time of the second quarter financial results once we have assessed the impact of the situation in the Middle East and the market conditions in each country. Next, I will explain each item regarding our first quarter results. First, let's look at the ongoing impact of the situation in the Middle East. Regarding procurement, naphtha prices rose to approximately 1.8x the pre-conflict level as of April. Since then, the situation has remained unstable with prices repeatedly fluctuating. Regarding logistics, we still cannot use the Strait of Hormuz route for shipments to the Middle East, so we resumed shipments using alternative routes in May. However, freight rates have risen to over 5x the normal level. And with the ongoing disruption, there is a shortage of available vessels. We are also experiencing rising transport costs and vessel shortages for shipments to other regions. Production and shipping for both CV and LCV have resumed, but production and shipments are limited to the number of vehicles for which we have been able to secure vessel space. Moving on, here is the profit and loss impact due to the situation in the Middle East. While we have factored in a negative impact of JPY 40 billion for the full year, the actual impact in the first quarter was a negative JPY 7 billion. The breakdown is minus JPY 0.5 billion due to increased procurement costs for crude oil-derived materials, minus JPY 2 billion due to higher transport costs and minus JPY 4.5 billion due to lower sales volumes resulting from shipping delays to the Middle East. Regarding market conditions in each country, we have not observed any major negative impacts in the first quarter. But at this point, we have not changed our view that there is a risk of market deterioration moving forward. We anticipate that the impact of rising procurement and other costs will materialize from the second quarter onwards, and we view the first quarter results as largely in line with our expectations. Although there remain many uncertainties such as material prices, maritime logistics conditions and the impact on each country's economy, we will continue to monitor the situation closely and strive to provide the necessary information. This chart shows the global sales volume for CV. For the domestic market, sales decreased year-on-year due to model changeovers and because the lead time for modification processes was longer than expected. For overseas markets, sales decreased due to shipping delays to the Middle East as well as a shortage of vessel space for shipments to various other regions caused by the turmoil resulting from the worsening situation in the Middle East. While first quarter sales in North America are at a lower level compared to the full year forecast, current orders are strong, and we anticipate a market recovery in the second half. So we have made no changes to our outlook. Please refer to the supplementary materials provided on Page 17. Next is domestic truck sales and market share. Sales remained largely on par with the same period last year across all classes. Market share decreased in the heavy, medium, 2-ton and 3-ton classes due to competition, but increased in the 1.5-ton class due to sales of the Elf Mio. Next is global LCV sales volume. The domestic market remains challenging and is on par with the same period last year, while exports decreased due to shipments to the Middle East, similar to CVs. There are no changes to the full year outlook for both domestic and export markets. This shows the sales, share and production volume of our LCVs. Although the market remains difficult, our share has remained flat. We will continue to conduct careful sales activities to prepare for a recovery in demand. Please refer to Page 19 for supplementary materials on monthly LCV retail sales. Production volume for both domestic and export markets was on par with the same period last year. Next is industrial engines and aftersales. Both businesses are progressing well and saw an increase compared to the same period last year. Next is the analysis of changes in operating profit. Despite a decrease in sales volume for both CVs and LCVs, operating profit increased by JPY 17.6 billion year-on-year, thanks to pricing initiatives, successful cost reduction activities, a favorable foreign exchange environment and the fact that cost increases due to the situation in the Middle East have not yet fully materialized. Additionally, there was a negative impact of JPY 1.7 billion from U.S. tax effects. Regarding the U.S. tax impact, we have created supplementary materials to show the trends in applied tax rates. Please refer to Page 18. For this disclosure, we have changed the presentation of the minus JPY 7 billion for the Middle East, and it is now included in each variance factor. Next is an explanation of items below operating profit. Profit before income taxes increased by JPY 6.6 billion from an operating profit of JPY 74.8 billion to JPY 81.4 billion. Profit attributable to owners of the parent decreased by JPY 30.5 billion from the JPY 81.4 billion profit before income taxes to JPY 50.9 billion. This is our cash allocation performance for the Automotive Business. In the first quarter, cash outflows for working capital increased due to the implementation of accelerated supplier payments, the impact of the Middle East situation and a temporary rise in vehicle inventory caused by shipping shortages. As a result, operating cash flow for the first quarter was in the red, but the impact of shortened payment terms has largely been absorbed, and we expect inventory to decrease going forward, so we anticipate a recovery to normal levels from the second quarter onwards. Regarding share buybacks, we are currently considering the details to be presented as soon as we assess the impact of the Middle East situation. Finally, here is the segment-specific information categorized into the Automotive Business and the Finance Business. In the first quarter, we managed to shorten supplier payment terms and increased vehicle inventory in the Automotive business through the use of interest-bearing debt. We expect operating cash flow to recover in the second quarter, and there are no concerns regarding our financial soundness. That concludes my presentation.

This concludes the Isuzu Motors Company Limited Financial Results briefing for the first quarter of the fiscal year ending March 2027. Thank you for watching.