Mitsubishi Motors Corporation (7211) Earnings Call Transcript & Summary

Good evening, everyone. We would like to thank you for your joining our FY '20 first half and second quarter results meeting. In 2020, the global economy started off with an unprecedentedly slow start due to the spread of COVID-19 infection. Although we have started to see some signs of gradual recovery, the infection is spreading again in some regions and restricted measures are being introduced, again, to contain the spread of the virus. In this way, the environment surrounding us is still challenging and uncertain. But the structural reforms announced in the first quarter are progressing steadily in line with the plan. In addition to the results for the first half and the second quarter of fiscal year 2020, I would like to talk about the progress of structural reforms today. After that, I would like to take your questions as much as time allows. Now I would like to hand over the microphone to Ikeya-san.

This is Ikeya speaking. So Page 3. So first, to summarize our first half and also second quarter performance of FY 2020. Due to the impact of the spread of COVID-19, the global demand for automobiles was sluggish, resulting in net sales of JPY 574.9 billion and an operating loss of JPY 82.6 billion. The ordinary profit was negative JPY 87 billion, and the net income was negative JPY 209.9 billion, mainly due to impairment losses recorded in the first quarter. Sales volume was 351,000 units globally, down 41% from the previous year. In the second quarter, July to September period, the net sales were JPY 345.4 billion. Operating loss was JPY 29.3 billion. Ordinary loss was JPY 28.3 billion. Net income was negative JPY 33.7 billion, and unit sales volume was 212,000 units. Although we observed a recovery trend in earnings from the first quarter to the second quarter, the situation remained challenging. Please turn to Page 4. The factors behind the year-on-year changes in operating profit are as shown in this slide. In terms of the volume and the mix, as I mentioned earlier, the impact of stagnant global economic activity led to a decline in all regions with the impact amounting to a negative JPY 93.7 billion. The sales expenses improved by JPY 7.1 billion due to a reduction of sales expenses associated with the decrease in unit sales. Cost reductions were affected by planned production adjustments at domestic and overseas plants. Thus cost reaction did not make progress. FX deteriorated by JPY 1.1 billion year-on-year as a result of the overall trend of yen appreciation, although an upturn in the Thai baht was confirmed, which is the cost currency. R&D expenses improved by JPY 14.2 billion year-on-year as a result of efforts in reducing them. However, overall other expenses deteriorated by JPY 3.6 billion due to deterioration of the sales business of JPY 9.2 billion, which is in line with a decline in the number of units sold. And please turn to Page 5. Regarding global demand for automobiles, some developed countries are beginning to show signs of recovery, but our sales volume in the first half declined 41% year-on-year to 351,000 units, mainly due to delayed demand recovering in ASEAN. In the ASEAN region, 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, overall conditions are severe. And as a result, sales in the ASEAN region fell 53% year-on-year to 71,000 units. In Australia and New Zealand, the lockdown is being lifted in stages. But the recovery in total automobile demand was moderate, and our sales also fell 33% to 30,000 units. In Japan, although the impact of the spread of COVID-19 on the economy subdued, demand in our main [ stage ] segment did not recover in the first half. Our sales fell 48% to 27,000 units. The situation of sales in other regions were also severe, and the year-on-year decline was more than 30%. Please turn to Page 6. Next, we would like to explain about the full year forecast for FY 2020. Please turn to Page 7. As I mentioned earlier, economic activity in each country has resumed one after another. However, with the end of infections not being anticipated, all of these activities have only been resumed in stages and the pass toward normalization is uncertain. In such an environment, as we announced at the first half result meeting, we have formulated our business outlook for FY 2020 based on the assumption that the automobile demand will gradually recover towards the second half of the fiscal year after bottoming out in the first quarter and by the end of fiscal 2020, we'll return to the level at the end of fiscal 2019. In the first half, particularly in the ASEAN region, which is our core market, the recovery was relatively slow, and sales and associated profit were weak due to the impact of these factors. However, we are able to proceed almost as planned with the cost structural reforms and inventory reductions that were planned at the beginning of the fiscal year. Although the outlook is uncertain due to factors such as the second or the third wave of COVID-19, we have made steady progress in reforming our cost structure, so we maintain our full year forecast at this time. Please turn to Page 8. Although we do not change our full year forecast for FY 2020, but we have revised some of the variance factors. In terms of volume and mix, we anticipate that the sluggish economy caused by COVID-19 will prolong since ASEAN countries are revising downward their forecast for the total demand. On the other hand, developed countries in Europe and also North America recovering faster than expected. We gave careful sought to these changing circumstances and concluded that these should not have a serious impact on operating profit variance factors. And also for the ForEx exchange, we have updated currency exchange rate as shown in this slide to reflect the current market level. As a result, we now expect a ForEx impact of negative JPY 2 billion year-on-year operating profit. Kato-san, please.

Now I would like to explain about our sales by region. Please turn to Page 10. In the first quarter of FY 2020, global automobile sales declined sharply due to the impact of stagnant economic activity caused by the spread of COVID-19. Subsequently, in the second quarter, the lockdowns in each country were gradually relaxed. And a recovery in demand emerged mainly in developed countries and some emerging countries. On the other hand, the second wave of the pandemic is ramping up, particularly in Europe and uncertainty over the future is again becoming stronger. Despite such a challenging environment, we have prioritized measures to steadily expand sales in the future, such as improving quality of sales by strengthening our dealer network as well as enhancing digital marketing and reducing inventories. These measures have progressed almost as planned. Our sales conditions in the first half of the fiscal year were harsh in some reasons, but sales in some regions exceeded expectations. As a result, overall sales were generally in line with the plan. Regarding our full year sales, we lowered our forecast for unit sales in line with the total demand forecast in ASEAN and other regions where the market is slow to recover, resulting in a global volume of 824,000 units, which is down from the initial forecast of 845,000 units at the beginning of the fiscal year. Please turn to Page 11. Next, I would like to explain the progress of structural reforms. Please turn to Page 12. As indicated, all structural reforms have progressed faster than planned or as planned. We also expect most of reform costs to be recognized during the current fiscal year. Regarding the reduction of fixed cost, the new midterm plan, "Small but Beautiful" sets a target of a 20% reduction from the fiscal year 2019 by the end of fiscal year 2021. Despite the extraordinary factor caused by the COVID-19, we achieved a 20% reduction from the previous fiscal year in the first half due to the acceleration of various measures. In terms of specific implementation status, we are making progress on schedule with respect to indirect labor cost through headcount rationalization, including reallocation, restrained on new hiring and voluntary retirement plan as well as the revision of the compensation system, and we expect to achieve the plan. With regard to marketing costs, in line with the basic concept of selection and concentration, we controlled costs in non-core regions and concentrated a portion of them in core regions, thereby improving cost effectiveness and at the same time, reducing the overall budget. As announced in the first quarter, depreciation cost is expected to be reduced by 12% compared to the previous fiscal year through impairment losses on fixed assets. Similarly, we reduced development costs for non-core regions and concentrated a portion of the spending on core regions, thereby establishing a system that enables us to develop products in line with our strategy. As a result, we expect a 13% reduction compared to the previous fiscal year. Regarding the restructuring of the production system, as announced in July, we expect to increase the overall utilization rate and reduce depreciation costs by suspending production at PMC. As for general and administrative expenses, reductions progressed more than we anticipated in all items, including reductions in expenses, mainly travel expenses and outsourcing expenses and consolidation of subsidiaries and other facilities into the head office building. Please turn to Page 13. As I mentioned in July, during the current midterm plan period, we are committed to providing customers with reliable and attractive products through the promotion of environmental technologies in which we excel, and the evolution of our GeneTech for WD Technologies and off-road performance. In addition, in the new environmental package announced recently, the promotion of electrification focus on PHEV is stated. In line with these plans, we plan to launch our new Eclipse Cross, including PHEV model in the second half in the global market. In addition, in order to prepare for increasingly stricter environmental regulations in ASEAN, we will gradually expand sales of OUTLANDER PHEV in ASEAN countries. In addition, we will begin producing OUTLANDER PHEV in Thailand in December. We continue to develop technologies and expand our lineup of environmentally friendly models in accordance with our plan. Please turn to Page 14. Global automobile demand has been gradually recovering, particularly in developed countries. And it looks like the global market has taken a step toward normalization. However, in recent days, the second or third wave of COVID-19 is spreading mainly in Europe. And in some countries, restrictions on activities have resumed. In addition, it is still difficult to say that the uncertainties of the future, such as the impact of the U.S. presidential election results have been dispelled. In addition, the pace of recovery in ASEAN, which is of paramount importance to us is relatively slow, and I think you are very worried about it. However, in order to manage this uncertain situation, we believe that our highest priority is to steadily implement structural reforms based on selection and concentration and to firmly establish a foundation for recovery in business performance. Based on this recognition, we focused on implementing measures in the first half of the current fiscal year. As a result, reforms has progressed more than originally planned, and we are now seeing a path toward improved profitability. First, we will work together to ensure that the plan for the current fiscal year is achieved. Needless to say, while taking into account the uncertainty about the future and the financial stability that forms the foundation of our business, we intend to weather this difficult situation and meet the expectations of all our stakeholders. I would like to ask all of our stakeholders for their continued support. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]