Mitsubishi Motors Corporation (7211) Earnings Call Transcript & Summary

Good afternoon. We'd like to thank you for joining our first quarter FY '20 results meeting. Due to the spread of the COVID-19, the global economy in 2020 is falling at an unprecedented pace and depth. Recent economic activities have gradually resumed and signs of recovery have begun to appear. However, the spread of COVID-19 continues, and it is difficult to say that automobile demand has regained its momentum. In this way, the business environment surrounding us continues to be as severe as ever before, but we view FY '20 as a year in which we will steadily implement structural reforms, and we will focus on swiftly implementing measures developed under the mid-term plan, which I will explain later. Today, we would like to discuss our first quarter FY '20 results, our full year forecast for fiscal year 2020 and our new midterm plan, Small but Beautiful. And after that, we'd like to answer your questions as much as time allows. Then I'd like to hand over the mic to Ikeya-san.

So please proceed to Page 3. First of all, in the first quarter of FY 2020, net sales were down 57% from the previous year to JPY 229.5 billion due to the impact of a sharp decline in demand for automobile globally caused by significant restraints on economic activities in each country in order to prevent the spread of COVID-19. We posted an operating loss of JPY 53.3 billion due to a substantial decline in sales. Ordinary profit was a loss of JPY 58.7 billion. In addition net income was a loss of JPY 176.2 billion due to the recording of extraordinary loss of JPY 120 billion, including restructuring costs. Please turn to Page 4. Our first quarter results were equally challenging as the global demand for automobile fell sharply. As a whole, global sales decreased by 53% year-on-year to 139,000 units. In the ASEAN market, which is our core market, the situation varies from country to country. Vietnam and Thailand are showing signs of recovery, but in Indonesia and the Philippines, restrictions on activities continue. However, the recovery in consumer purchasing power was sluggish overall, and as a result, our sales fell by 68% year-on-year to 24,000 units. For Australia and New Zealand, sales likewise declined 41% to 13,000 units. And also in Japan, the home market, sales fell 52% year-on-year to 11,000 units. The situation of sales in other regions was also severe with a decline of 40% to 60% year-on-year. Please turn to Page 5. The factors behind the year-on-year changes in operating profit are shown in Slide 5. In terms of volume mix, as I mentioned earlier, the sales volume decreased in all the regions due to the effects of the stagnation of economic activities worldwide, and the impact amounted to negative JPY 53.5 billion. Sales expenses had a favorable effect of JPY 4.1 billion, mainly due to a reduction of our advertising expenses. Cost reductions did not progress as the production volume remained sluggish due to the impact of the shutdown of operations at the plants in Japan and overseas. As a result of overall appreciation of the yen, the FX worsened by JPY 2.8 billion year-on-year despite an upturn in the cost of currency of Thai baht. Other elements, although R&D expenses improved year-on-year by JPY 3.7 billion from the previous fiscal year, the worsening of after-sales P&L and others resulted in a deterioration of JPY 5.1 billion. Please turn to Page 6. Next, Page 7, please. So this is a full-year forecast on the business performance. The economic activities of each country have gradually resumed. However, the path toward normalization is uncertain. Under such circumstances, we have formulated our business outlook for FY 2020 based on the assumption that automobile demand will gradually recover toward the second half of the fiscal year and the bottoming out in the first quarter and by the end fiscal year 2020, will return onto the level at the end of fiscal 2019. The retail sales volume is projected to decrease by 25% year-on-year to 845,000 units, with net sales of JPY 1.48 trillion, operating loss of JPY 140 billion, ordinary loss of JPY 160 billion and net income of negative of JPY 360 billion after recording an extraordinary loss of JPY 220 billion, including restructuring costs. As for our dividend per share, we expect to post a net loss over FY '20 following FY '19, and it is still unpredictable that COVID-19 will end. Therefore, we believe that securing as much cash and deposits on hand as possible after taking the cash flow and other factors for the immediate future into account will contribute to medium and long-term shareholder returns. For this reason, we expect to suspend our dividend for FY '20 following the FY '19 year-end dividend. Thank you for your understanding. Please turn to Page 8. The forecast of retail sales volume for 2020 by region is as shown in Slide 8. As I mentioned at the beginning, the demand for automobiles has declined more rapidly and substantially than ever and due to the restrictions on economic activity in each country as a measure to prevent the spread of COVID-19. The mitigation has been confirmed gradually, but it is expected to take a certain amount of time to return to the FY '18 level. We will incorporate these effects as certain -- carefully and conservatively as possible and set the sales supporting forecast for FY 2020 to 845,000 units. In ASEAN, which is our core market, although we expect recovery throughout the second half of the fiscal year, there is uncertainty about the continued spread of COVID-19, and therefore, we forecast a 19% year-on-year decrease in unit sales to 236,000 units. As a home market, Japan's total demand is on a recovery trend after bottoming out in May, however, the spread of COVID-19 continues even after the lifting of the emergency declaration, and it is anticipated that the normalization of the supply chain and the recovery of the economy as a whole will continue to be uncertain. Taking these factors, we expect to decrease sales volume in FY 2020 by 20% (sic) [ 21% ] from the previous year to 75,000. Other regions, we have already confirmed that the Chinese market is continuing to recover, and we expect our sales to recover toward to the second half of the fiscal year, too. Our sales forecast of 143,000 units is unchanged from the previous year. In Northern America, although the market as a whole seems to be recovering, concerns about the second wave have emerged, and the outlook is even more uncertain. We forecast our sales to fall 34% from the previous year to 105,000 units after carefully examining the situation. Similarly, in Europe, we continue to face substantial uncertainty and, with our strategic change in the region, we forecast a year-on-year decrease of 47% to the 115,000 level. Please turn to page 9. The operating profit forecast for FY 2020 is negative JPY 140 billion, and I'd like to discuss the breakdown of change from the JPY 12.8 billion recorded in the previous fiscal year. In terms of the volume mix, in addition to the impact of the spread of COVID-19, we will thoroughly reduce inventories in preparation for future risks. As a result, unit sales will decrease by 25% or 282,000 year-on-year, and this will have a negative impact of JPY 120 billion. Sales expenses will be concentrated in core markets more effectively to reduce JPY 5 billion as a whole. In terms of manufacturing costs, as the number of units produced in FY 2020 decreases drastically from the previous fiscal year, the reduction of material costs and in-house production costs will not progress, and production losses also occur. The -- so these will result in a total deterioration of JPY 31 billion. In terms of foreign exchange rate, we have set a conservative outlook based on the current market levels and expect a year-on-year decline of JPY 5 billion. In others, although we expect an improvement of around JPY 17 billion in R&D expenses, we expect a decrease of JPY 1.8 billion, taking into account the deterioration of after-sales P&L. This is the explanation of the first quarter results and the full year forecast. Please turn to Page 10 and the subsequent page. Next, we'd like to explain details of our new midterm plan, Small but Beautiful. Please turn to Page 11. Our mission, to generate profits through business development that emphasizes contributions to our stakeholders and society. And for that, we recognize that we should be accelerating the selection and the concentration in areas where we have strengths and we can make profit. Based on this proposition, what we must focus on delivering this midterm plan period are: one, steadily implementing structural reforms; two, enhancing growth based on ASEAN; three, strengthening our strengths in environmental technologies; and four, providing customers with safe and attractive products by further advancing our genetic four-wheel drive and off-road capabilities. Please turn to page 12. During the previous midterm plan, Drive for Growth, we planned to invest aggressively, placing emphasis on core regions and products, and focusing on expanding our market share globally. As you see on the table, net sales a little grew, but at the same time, fixed costs expanded across the board, resulting in a shortage of investment resources for the core market like the ASEAN region. At the same time, it was difficult to secure profitability in the global market. In a challenging business environment, it is not realistic for us to continue to pursue an all-around expansion strategy. As you know, we revised our strategy direction in the second half of FY 2018, after the middle of the mid-term plan period. However, due to the prior upfront investment, fixed costs as a whole increased by more than 20% in FY 2019 compared with the year before the Drive for Growth midterm plan, and the implementation of revised strategies were accelerated. However, due to sluggish growth in automobile demand and unfavorable foreign exchange rates, it became even more difficult to secure profits. In addition, the situation was even more severe due to the outbreak of COVID-19. Although the business environment is extremely uncertain, in order to pave the way for a recovery in business performance, our top priority is that based on the review of the global expansion strategy we once pursued, all the executives and employees share a stronger sense of crisis and implemented cost structure reforms with a persistent determination. Please turn to page 13. As indicated, the overall earnings recovery image will inevitably be a U-shaped recovery. First of all, we see the next 2 years as a period to reform our cost structure focused on fixed cost reductions. Thereafter, we expect to increase the visibility of the efforts of new regional and product strategies based on the selection and the concentration, and the effects of reforms in profitability will gradually become apparent. This will lead to further sustained growth from FY 2023 onwards. Please turn to Page 14. The initiatives of fixed cost reduction we are going to achieve in 2 years are shown on the slide. First, we aim to reduce indirect labor cost by about 15% by optimizing the personnel of each division through their reallocation of personnel, restraints on new hiring and the introduction of a voluntary retirement program and by reviewing the compensation system. Marketing expenses are allocated in accordance with the concept of selection and concentration so that we are able to reduce overall costs with improved cost effectiveness specifically, we will seek to maximize the cost effectiveness by shifting the focus of our advertising and promotion activities from mega markets, such as Europe, where it is difficult to make a profit, to regions, mainly the ASEAN region, where we can expect profit. Regarding depreciation and amortization, we will find out appropriate depreciation costs by optimizing investment based on future plans. As well as other initiatives, we will reduce overall development costs through selection and concentration. In particular, we will focus on products for ASEAN region and freeze the launch of new products in Europe, thereby reducing overall costs and establishing an efficient development system. Regarding the reorganization of productions, we will consolidate the production lines and build a production system that is commensurate with the number of sales volume to destination. Therefore, we have decided to discontinue the production at the PAJERO Manufacturing Company limited. General and administrative expenses will be reduced by more than 15% compared with the previous year but controlling expenses with a sense of urgency, depending on the state of the business reconstruction, and reducing office space through work style reforms. We believe that by implementing these measures, we will be able to reduce fixed costs by more than 20% by the end of FY 2021 compared to FY 2019. We will swiftly embark on measures to reduce costs and make every effort to achieve results as soon as possible. Please to turn Page 15. The structural reform framework is one of the initiatives outlined here. As the basis for each measure, under the basic policy of selection and concentration, they will shift to a business structure focused on the ASEAN region and reduce low profit businesses in order to improve operating profit. In addition, we will build efficient development, production and sales system by strengthening environmental technologies focused on PHEV, while utilizing the alliance and strengthening collaboration with partners in advanced technologies such as CASE. Please turn to Page 16. First, I would like to explain our regional strategy. We will divide the entire business into 2 regions: growth drivers and profitability improvement. In order to further strengthen our core region of ASEAN, we will intensively allocate the most of our management resources. The ASEAN-oriented products will be rolled out to Oceania, South Asia, South America, the Middle East, Africa and elsewhere to establish a second pillar, while at the same time, maximizing product value and strengthening our brand. On the other hand, we will build a structure to enable us to generate profits consistently in regions where profits remain low. Specifically, we will strengthen China as a growth driver through collaboration with partners. In Japan, our home market, we aim to achieve stable profitability by restructuring our production and sales network. In North America, we will strive to further reduce fixed costs and achieve a balance between income and expenditures. In Western Europe, we aim to improve profitability by freezing the launch of new products and drastically reducing fixed costs. Please turn to Page 17. The table in this slide shows changes in operating profit and market share since FY 2007. As you can see, operating profit on a global basis has been declining since peaking in FY 2015, but operating profit in the ASEAN region turned upward again in FY 2016 and has been growing steadily since then. While other major markets have been declining, ASEAN's market share increased significantly from 6.4% in FY 2007 to over 10% in FY 2019. From these are track records, we believe that focusing on regions centered on ASEAN rather than targeting at the global market is an important strategy for securing mid to long-term growth. Please turn to Page 18. With regard to the regional strategy in ASEAN, we were strengthening our -- we will strengthen our production operations and establish a mutually complementary structure in the ASEAN region to mitigate the impact of the fluctuation of currency exchange rates such as appreciation of the Thai baht. With regard to sales, we aim to expand sales with quality through strengthening our sales network. By strengthening production and sales, we will expand our market share in the 4 major ASEAN countries to around 11.4% by FY 2022, and take on the challenge of establishing the second or third position in each country. Please turn to Page 19. Specific strengthening measures taken in each country are shown in this slide. First, we will further strengthen our production in Thailand. We aim to improve the production efficiency by establishing a sophisticated painting plant. We will also concentrate on strengthening our sales network in Bangkok and open rural areas. In addition, we will begin manufacturing and selling the OUTLANDER PHEV in order to comply with tightening environmental regulations. In Indonesia, we will strengthen our production business, improve cost competitiveness and effectively utilize capacity. Also, we will strengthen our sales network, particularly dealership for passenger cars, and at the same time, strengthen the quality of sales at each dealer. On top of that, we will strive to maintain monthly sales levels of the XPANDER series and grow it into a long-selling product series. Through these measures, we aim to increase our market share to 11.4% by FY 2022. In the Philippines, we will commence production and exports of small commercial vehicles, L300, to ASEAN country. In Vietnam, we will offer cost-competitive products by maintaining a high market share of the XPANDER as well as the XPANDER CROSS we launched recently. And by increasing the number of models produced locally, such as the XPANDER, which we have started local production in July. In addition, we will start a preliminary study of the establishment of a new plant in preparation for the full-fledged motorization. Please turn to Page 20. In Japan, our home market, we definitely need to reorganize both production and sales operations, and we believe that this will enable us to achieve stable profitability. Regarding production, we decided a production shutdown at PAJERO Manufacturing Company Limited and integrate it into Okazaki plant, considering the necessity of integrating and closing our production lines based on our regional strategy. We expect that this will result in a substantial improvement in the operating rate and an increase in productivity. We will also accelerate the reorganization of our sales companies, which we have already begun in the current fiscal year and improve their efficiency. Specifically, we will consolidate unprofitable dealer and strengthen partnerships with leading independent dealers. Furthermore, as measures to improve the profitability, we will improve our branding power by strengthening sales of eco-friendly products focusing on PHEV technology, introduce a sales incentive system and margin scheme incorporating the principle of competition, and strengthen the sharing and subscription business. Please turn to Page 21. Next, I would like to explain our product strategy. First, we will position the period from FY 2020 to 2022 as Phase I and enhance a lineup of environment-friendly vehicles by fusing proprietary technologies with alliance and partner technologies. Specifically, practically from FY 2020 to 2021, we plan to launch the Eclipse Cross PHEV and a new OUTLANDER, and to launch new EVs through joint development with our partner, Guangzhou Automobile Company Limited, in the Chinese market where environmental regulations are expected to become the most stringent in the world. After that, towards FY 2022, we will introduce a new OUTLANDER PHEV built on more refined PHEV technology. And as part of collaboration with Nissan, we have started a study of co-developing an EV version of Kei-car. Please turn to Page 22. We will define the period from FY 2022 onwards as Phase II to strengthen an ASEAN product lineup. In the pickup truck segment, we plan to launch the next Triton in the fiscal 2022. And then from FY 2023 onwards, in the MPV segment, we plan to develop and launch an XPANDER HEV in the next-generation XPANDER. In the PPV and SUV segment, we plan to develop and launch a new PAJERO SPORT. And on top of that, a brand-new model for ASEAN. We will do our utmost to further strengthen our brand in each segment in the ASEAN region. Please turn to Page 23. The core of our technological strategy is also based on selection and concentration. In other words, we will further refine our competitive-edge technologies in order to increase profitability of our core models for the core markets. At the same time, we will utilize advanced technologies in the alliance to promote efficient and highly productive development. Specifically, we will work to improve the performance of the next-generation diesel and frame models, and to promote electrification focusing on next-generation PHEV and HEV in order to cater for the rise of EVs. Furthermore, in order to deliver the sophisticated services demanded by the customers, we will establish a system that enables us to continuously introduce attractive products through utilizing new alliance technologies such as autonomous driving and EVs. Please turn to Page 24. The alliance has been important tools for us. And we believe that in the future, we will be able to maximize synergies through more efficient use of the alliance. In order to create further synergies with Nissan Motor, we started a study of strengthening our collaboration in competitive-edge technologies, such as autonomous driving, connected vehicles and EVs as well as in mutually complementary capabilities for our powertrains and platforms. On the regional axis, we will strengthen collaboration in ASEAN and Japan. Specifically, we will further strengthen our OEM business. We are also exploring how we can expand collaboration in the production business. In Japan, we will further strengthen our Kei-car business. As for the strengthening of collaboration with Renault, as we announced in the recent joint interview of the alliance, we will strengthen our commercial vehicle segment in the Oceania region by receiving an OEM supply of Express in Australia. Please turn to Page 25. For us, strengthening collaboration with partners is essential to creating new growth drivers, specifically, in the ASEAN region, we will study how we can increase profitability in existing countries and strengthen production operations in Vietnam, Malaysia and Myanmar, where growth potential is expected by deepening cooperation with Mitsubishi Corporation, our partner, in both production and sales. In addition, we will cooperate in fostering the second and third pillars by deploying the best practice we cultivated in ASEAN to Africa, South Asia and other areas. In addition, we will work to expand sales of core models and strengthen pickup trucks fleet business for mining industry in Peru and Chile in South America. To comply with the environmental regulations in China, which are set to become the most stringent in the world in the future, we will promote joint development with Guangzhou Automobile Corporation Limited. We will also establish a new R&D center to increase local development efficiency. Please turn to Page 26. Regarding the management indicators. Amidst the ongoing harsh business environment, we will boldly review and improve our cost structure, while at the same time, strengthening existing areas and sowing seeds for the future growth and gradually recovering profitability. By steadily implementing the measures I have outlined, we aim to increase operating profit margin to 6% by FY 2025. Our earnings recovery is U-shaped, as I mentioned before. As a first step, we aim to achieve an operating profit of JPY 50 billion and an operating profit margin of 2.3% in FY 2022. Please turn to Page 27. As you are well aware, restrictions on mobility and stagnation in economic activities in each country associated with the prevention of the spread of COVID-19 have had a significant impact on automobile demand. The various restrictions implemented in each country are gradually eased, but the expansion of the second wave and the arrival of the third wave are expected in the future, and the path to recovery is not easy. It is assumed that it will take a certain amount of time for economic activities to completely return to the pre COVID-19 level. In this challenging environment, in order to secure stable earnings in the future, we are determined to implement structural reforms based on selection and concentration and firmly establish a foundation for the recovery of business performance as the top priority in the current midterm plan. We would like to meet the expectations of all stakeholders by overcoming these difficulties for the time being, while also taking into account the financial stability that form the foundation of our business and then regaining our corporate values. Although the structural reform will inevitably be painful, all executives and employees are determined to steadily implement it. I would like to ask all of our stakeholders for their understanding and support. Thank you for your attention.