Kia Corporation (A000270) Earnings Call Transcript & Summary

Before we begin our presentation, we'd like to provide a note to our investors. For investors' convenience, this presentation has been prepared with unaudited fourth quarter results of fiscal year 2020. Therefore, some numbers are subject to change upon review of Kia's independent auditors. Kia's business results for fourth quarter 2020 will be provided in the following order: first, sales summary; next, financial summary; next, revenue and earnings analysis; and lastly, our 2021 business plan. First is our global retail sales. In Q4 2020, emerging markets showed recovery in industry demand, while developed markets fell due to the second wave impact of COVID-19, leading to a 1% decrease in global industry demand. Kia's retail sales achieved 2.7% growth by delivering 769,000 units, mainly driven by sales increase in U.S. and India. As a result, our global market share expanded to 3.5% in Q4 and 3.7% in 2020. Going over the key markets. In the Korea domestic market, despite the strong new model effect of Sorento, Carnival and so on, production disruption due to partial strikes in the Korea plants led to a sales decrease of 5.2%. In the U.S. market, despite a fall in the industry demand, Kia recorded a sales growth of 4% on the back of new model effects of K5 and Seltos and the capacity expansion of Telluride. In Western Europe, although COVID-19 related sales activity restrictions led to weakening of sales, we were able to meet the CO2 regulation standard as green car sales portions expanded to 29%, mainly driven by strong Niro EV sales. In India, continued robust sales of Seltos, coupled with the new model effect of Sonet, enabled Kia to become the fourth biggest player within 1 year of entering the market. In China, on the other hand, despite sales expansion of new models such as KX3 and K5, our sales underperformed the industry demand growth. Next is our wholesale performance. Our global wholesale in Q4 2020 recorded 743,000 units, similar to the same period last year, due to partial strikes in the Korea plants and sales activity restrictions in some countries due to the second wave of COVID-19. While the new model sales expansion trend continued in North America and India, Korea, MENA and Latin America sales decreased due to production disruption from Korea plants. In Europe, COVID-19 lockdown in key markets such as U.K. and Germany led to limited dealer activities and sales declined by 7.5%. Next is our Q4 income statement. Despite a 2.7% decline in consolidated sales volume and a 4.9% decrease of USD to won exchange rate, RV mix improvement driven by new model effect of Carnival and Sorento and capacity expansion of Telluride in the U.S. led to a significant increase of ASP, resulting in a 5% increase of sales revenue posting KRW 16.9 trillion. As for operating profit, meaningful improvement of cost of sales ratio on the back of mixed ASP improvement, together with efficient SG&A cost management resulted in 117% increase of operating profit recording KRW 1.28 trillion, an op margin of 7.6%, up by 3.9 percentage points from Q4 2019. Our operating profit of KRW 1.28 trillion in Q4 2020 is our highest quarterly operating profit record. Next is a breakdown of our Q4 operating profit. First, consolidated sales volume decreased from Korea domestic market and other exporting countries due to partial strikes in the Korea plants and unfavorable FX conditions caused a decline of KRW 191 billion. However, efficient fixed cost decrease was more than able to offset this amount. The biggest contributing factor to our operating profit improvement was the fundamental change in profit potential which is already evident in Q3. First, profit was improved by KRW 189 billion on the back of less incentive spending thanks to the global expansion of our main new models, K5, Seltos and Sorento. In addition, the Telluride capacity expansion and the new model effect of Carnival, which began in late Q3 was fully realized in Q4, resulting in further acceleration of ASP mix improvement, contributing to a meaningful increase by KRW 493 billion. As a result, our operating profit in Q4 increased by KRW 691 billion from the same period last year, recording KRW 1.28 trillion. Next is our consolidated balance sheet. At the end of 2020, our total assets recorded KRW 60.5 trillion, up by JPY 5.2 trillion, while total liabilities posted KRW 30.6 trillion, up by KRW 4.2 trillion. The increase in assets and liabilities were primarily due to liquidity expansion by means of won currency bond issuance, bank loans, credit line withdrawals, D.A. extension and so on. As a result, liability to equity ratio increased by 11.3 percentage points, posting 102.3%. Equity increased by KRW 928 billion, recording KRW 29.9 trillion due to an increase of retained earnings resulting from increased net profit. Next is the revenue analysis. Sales revenue increased by 5%, while sales revenue portion of Korea and North America rose by 0.2 percentage points and 0.4 percentage points, respectively, thanks to ASP increase driven by sales portion expansion of RV-focused new models. India sales portion expanded by 2 percentage points, recording 5.8% on the back of sales growth of Seltos, coupled with the new model effect of Sonet. As for ASP, we broke a record high domestic market ASP of Q3 yet again, which improved by 13.4%, posting KRW 21.9 million. While export ASP also greatly rose by 12.1%, thanks to the volume increase of Niro, Seltos and Sorento, recording $18,200. By segment, the RV sales portion expanded by 6.2 percentage points to post 58.7% on the back of increased sales of Sorento and Seltos and the capacity expansion of Telluride. Next is a summary of our cost of sales and SG&A. Despite sales volume decrease and decrease of USD to won exchange rate in Q4, cost of sales as a percentage of revenue greatly improved by 2.9 percentage points, thanks to ASP increase and mix improvement. Additionally, SG&A as a percentage of revenue decreased by 1.1 percentage points, posting 10.3% on the back of less R&D spending as a result of COVID-19 and efforts to efficiently manage our costs. Next is our nonoperating items. Equity method gains fell by KRW 141 billion, recording minus KRW 125 billion, as a result of weak earnings gain from DYK and other affiliates. Financial and other income increased by KRW 81 billion, posting KRW 40 billion as DYK-related impaired losses was reflected in Q4 last year. As a result, nonoperating income in Q4 declined by KRW 60 billion, recording minus KRW 165 billion. Lastly, we would like to share our business plan for 2021. Kia is targeting 2.9 million units of wholesales in 2021, which is an increase of 12.1% by 315,000 units compared to 2020. Based on the assumption that industry demand in both developed markets and emerging markets will recover from the COVID-19 impact of last year, in 2021, our fully refreshed K7 and our largest volume model, Sportage, together with the newly launched first dedicated EV, code named CV, will be joined by global release of our refreshed K5, Sorento and Carnival to drive our global wholesale growth. By market, we expect double-digit growth from all markets, except for Korea domestic market, which enjoyed record-high industry demand in 2020, thanks to excise tax cut effect and so on. We especially look forward to strong sales momentum from North America with our new model effect of Sorento and Carnival and the launch of our dedicated EV model in Europe. Additionally, we expect strong sales increase to continue in India as well, with the full year new model effect of Sonet and continued strong sales of Seltos. We will share more details of our 2021 business plan and profitability target from our CEO Investor Day, which will be held on 9th February 2021. This concludes our presentation of our Q4 2020 business results. Thank you for your kind attention.