Mitsubishi Motors Corporation (7211) Earnings Call Transcript & Summary

Please turn to Page 3. First, please refer to fiscal year 2020 third quarterly -- quarter summary. Sales decreased 43% year-on-year to JPY 952.8 billion due to sluggish global demand for automobile resulting from the spread of COVID-19. Operating loss, mainly due to global sales stagnation, was reduced by company-wide efforts to reduce overhead and fixed cost and with restructuring activities. However, the cumulative third quarter operating loss amounted to JPY 86.7 billion. Ordinary profit was negative JPY 92.9 billion, and net income was negative JPY 244 billion, mainly due to the recording of an external ordinary loss from the implementation of a structural reform. Free cash flow turned positive from the second quarter and the cumulative negative free cash flow shrank significantly. Sales volume was 569,000 units globally. In the third quarter, from October to December, net sales were JPY 377.9 billion. Operating loss was JPY 4.1 billion. Ordinary loss was JPY 5.9 billion and net loss was JPY 34.1 billion. And unit sales was 218,000 units. Earnings momentum have improved since hitting bottom in the first quarter as we confirmed a return to profitability in December. In the third quarter, we were able to recover to the point where we are close to profitability. Please turn to Page 4. The factors behind the year-on-year changes in operating profit are shown here. In terms of volume and mix, a decrease in unit sales had a negative impact of JPY 120.9 billion. However, there was a positive impact of JPY 6.3 billion due to improvement in the regions and model mix, resulting in a total negative impact of JPY 114.6 billion. Despite an increase in sales expenses in some regions associated with new car sales, sales expenses improved by JPY 6.3 billion from the previous year due to the effects of restraints in line with the plan. Cost reductions, et cetera, were largely affected by production adjustment in the first half of this year and the effect of material cost reduction shrink. Structural reforms and R&D cost reviews, which we have been working on since the beginning of the term, proceeded at a faster pace than expected and produced significant positive effects. And in other elements, including the deterioration in aftersales business and increase of quality costs, the cumulative total worsened by JPY 18.2 billion year-on-year. The Thai baht, which is a cost currency, showed an improvement, but there was no impact on earnings due to the impact of the deterioration in the U.S. dollar, Russian ruble and other currencies. Please turn to Page 5. This slide explains the factors behind year-on-year changes in operating profit for the third quarter of fiscal year 2020. In terms of volume mix, the impact of lower sales was partially offset by improvement in the mix of regions and models and the improvement in marginal profit from cost structure reforms. The negative profit impact was limited to JPY 20.9 billion. Although we were able to control sales expenses in line with our plan, there was an increase in sales expenses for the new car launch in some regions, which caused a slight duration in sales expenses. Cost reduction, including materials, were affected by lower capacity utilization, resulting in a decrease in profit of JPY 4.2 billion. On the other hand, the positive effects of structural reform amounted to JPY 12.3 billion. The decrease in R&D expenses reflect the difference from the third quarter of last year in which major product development project was nearing its final stage. New product development of ASEAN is project -- for ASEAN is progressing faster than expected. Overall, yen appreciation had an impact, but the favorable trend in the Thai baht, which is a cost currency, contributed to JPY 1.1 billion year-on-year profit increase. Please turn to Page 6. Our total sales in all regions decreased by 35% from the previous year to 569,000 units. Global automobile demand is on a recovery trend in China, the United States and other countries, but the recovery in the region where we excel has been delayed. The core market for us, ASEAN countries, hit bottom in the first quarter, but the pace of recovery has not reached the initial expectation. Thus, our cumulative sales were 132,000 units, down 43% from the previous year. In Australia and New Zealand, a moderate recovery continues, and the decline of our sales tended to improve from the first half of the year. Our sales were down 28% from the previous year to 49,000 units. In Japan, overall demand for automotive was recovering, but the impact of the spread of COVID-19 has been increasing again recently. We are implementing structural reforms such as restraining fleet sales and rising selling prices, which resulted in a 37% year-on-year decrease to 43,000 units. The new Eclipse Cross PHEV we launched in December last year was well received by the automotive media. And with the increasing customer interest in EVs, we have made a strong start. In other regions, there was no significant change in the external environment. And in all regions, there was a decrease of around 30% compared to the previous year. Please turn to Page 7. Next, I would like to explain our performance outlook for the fiscal year 2020. Please turn to Page 8. As mentioned earlier, in the winter, when virus becomes more active, national mobility restrictions are becoming more stringent. In addition, uncertainty in the external environment has again intensified, including a shortage of supply in the semiconductor supply chain due to strong demand. On the other hand, we have been able to implement our cost structure reforms faster than anticipated. And even taking into account the harsh sales conditions, there is a clear prospect that we will be able to curb losses compared to our initial plan. Contributing to the recovery in earnings are restraining on discounts and revisions to initiatives for fleet sales. We have revised down the full year unit sales forecast from 824,000 units to 802,000 units. And accordingly, revised down the full year net sales forecast from JPY 1.483 billion to JPY 1.460 billion, taking into account risk items such as the re-expansion of COVID-19 and changing -- changes in import duty measures in ASEAN regions. On the other hand, we are making steady progress in improving profitability. Operating losses revised upward from the previous forecast of JPY 140 billion to a loss of JPY 100 billion. Ordinary losses revised upward from JPY 160 billion to JPY 120 billion. And net losses revised upwards from JPY 360 billion to JPY 330 billion. Although the uncertain external environment continues, we will continue to work together on the structural reform in order to achieve the new full year earnings forecast. Please turn to Page 9. In line with the revision of the full year operating profit outlook, we have also revised the factors behind changes compared to the previous fiscal year. In terms of volume and mix, we expect a slight deterioration from the previous forecast due to the revised impact of the decrease in unit sales and the review of the mix and selling price improvement. With regard to selling expenses, we have revised selling expenses in each country in line with our basic policy of selection and concentration, and we are expecting a positive effect in line with the previous forecast. Regarding cost reductions, production adjustments in line with sales reduction and inventory reduction plans following the COVID-19 prevented material cost reduction activities from progressing as usual. However, the impact is expected to improve compared to the previous forecast due to the success of efforts to curb plant-related expenses. We anticipate significant positive effects from the progress of structural reforms and the concentrated R&D investment in core regions and products as scheduled. Other items incorporate risks such as aftersales business and quality-related expenses. Regarding the impact of foreign exchange rates, we have revised the full year rate for each country, again, in line with the current market environment as shown on the slide. As a result, we expect a negative effect of JPY 600 million year-on-year. Please turn to Page 10. The factors behind changes from the previously announced forecasts are as follows. In terms of volume and mix, we will limit the impact of the decline in sales through improving mix and revising selling prices, et cetera, to a JPY 2.9 billion deterioration compared to the previous forecast. As for sales expenses, we anticipate a slight upturn from the previous plan. With regard to cost reduction, while material and other cost reductions are impacted by lower operation rates, we expect a positive effect of about JPY 15.2 billion from the previous forecast due to greater-than-expected progress in curbing plant-related expenses. Structural reforms and R&D expenditures are all on track to achieve greater-than-expected progress, so we anticipate significant positive effects. In other items, we expect aftersales business, domestic subsidiary business, quality costs, et cetera, to all improve from the previous forecast. Regarding the impact of foreign exchange rates, we have revised a full year rate for each country, again, in line with the current market environment. As a result, an upturn of around JPY 1.4 billion is forecast compared to the previous forecast. Please turn to Page 11. The forecast of retail sales volumes for FY 2020 by region is as shown in this slide. As I mentioned at the beginning, there is a possibility that the recovery in automobile demand will again slow down due to the expansion of mobility restrictions in each country as a measure to prevent the spread of the COVID-19, the transformation of import tariff measures in ASEAN and the shortage of supply in semiconductor supply chain. Based on these impacts, we revised our sales outlook for FY 2020 from 824,000 units to 805,000 (sic) [ 802,000 ] units. In ASEAN, which is our core market, the recovery trend in Vietnam and Malaysia has been apparent. In Indonesia, stricter mobility restrictions have been adopted to combat COVID-19, and the economy has been sluggish as a result. In the Philippines, the pace of recovery in demand has slowed down due to the restrictions on economic activities and the issuance of safeguards. In addition, the spread of COVID-19 is again expanding in Thailand, and there are concerns that sales will slow down in the future. As a result of factoring these elements, we lowered unit sales forecast from the previous plan to 196,000 units. On the other hand, in Australia and New Zealand, the recovery trend is continuing, albeit moderately. And our sales are gradually recovering. Therefore, we will slightly raise the full year forecast to 70,000 units. In Japan, where demand for automobiles was recovering, uncertainty increased, again due to the impact of the state of emergency issued at the beginning of the year. Sales of the new Eclipse Cross, which we launched in December 2020, have been strong. But taking into account the impact of the worsening external environment, we'll keep the full year forecast of 75,000 units unchanged. In addition, the Chinese market continued to recover from April onwards. However, although we halted the significant decrease in sales in the first half FY 2020, we feel that it will be difficult to dispel the decline overall and so decided to lower the forecast from the previous month to 106,000 units. In North America, the market, as a whole, is on the recovery trend. But forecast remains unchanged. This fiscal year, we prioritized strategic inventory adjustment and the improved sales quality and the previous forecast remained unchanged at 112,000 units. In Europe, in addition to the impact of the repeated lockdown, and we anticipated a significant decrease in sales due in part to the impact of our changing development strategy. However, the situation is trending gradually, and we will slightly raise the full year forecast to 146,000 units. This is our sales forecast with awareness of uncertainty in the markets in which we excel, but we will do a lot more to achieve above that. Please turn to Page 12. So next, I would like to explain our business highlights in third quarter. Please turn to Page 13. As indicated, all structural reforms have progressed faster than planned or as planned. We also expect most of the reform costs to be recorded during the current fiscal year. Regarding the reduction of fixed cost in the new midterm plan, Small but Beautiful, we set a target of a 20% fixed cost reduction by the end of FY '21, comparing to the FY '19 level. Despite the extraordinary factors caused by the COVID-19, we expect to be able to achieve a reduction of around 18% in total fixed cost compared to the previous year due to the acceleration of various measures. In terms of specific implementation status, first, we were able to optimize our work force, including reallocation, restraint on new hiring and a voluntary retirement system and as well as a reviewing of our compensation system. And these measures were conducted in accordance with the plan, and this will result in cost reduction that is slightly higher than the planned amount. With regard to marketing expenses, we expect to achieve significant reductions in our overall budget, while improving cost effectiveness by controlling costs in non-core regions and concentrating a portion of those costs in core regions. This is in line with the basic concept of selection and the concentration. As announced in the first quarter, depreciation and amortization will be reduced as planned through impairment losses on fixed assets. Similarly, we worked on selection and the concentration on the development cost, curbing development cost for non-core regions and concentrating investment in core regions, thereby establishing a system that enables us to develop products in line with our strategy. As a result, we expect to achieve reductions that exceed our plans and more efficient development. Reductions that exceeded the plan will lead to strengthening of our strategic products in ASEAN. And also, that will be used as an investment for future development strategies, such as complying with carbon-neutral requirements. Regarding the restructuring of the production system, as announced in July, we made a decision to suspend production of PMC and consolidating the production line, thereby putting in place a high-capacity utilization system in line with sales. As for G&A expenses, we can expect substantial reduction due to greater-than-expected reductions in all items, such as travel expenses and outsourcing expenses and also consolidating subsidiaries and other offices into the head office building. Please turn to Page 14. Among the elements we should focus on during the current midterm plan, which I mentioned in July, we will deliver to our customers attractive products that enable them to experience a sense of security and driving enjoyment through the promotion of the environmental technologies that we excel at and also evolving our [ genetic ] 4-wheel drive technologies and off-road performance. In line with this major policy, the new environmental plan package announced recently were calling for the promotion of electrification focused on PHEV technologies. As already mentioned, in the third quarter FY 2020, we began sales of the new Eclipse Cross model, which also added to the -- added to PHEV model. In addition, we began producing and selling OUTLANDER PHEV in Thailand in preparation for increasingly stringent environmental regulation. In the domestic markets, we have upgraded our eK X and eK X Space to equip safety features and have launched the special edition model of G Plus edition. And we have also launched a full model change of compact minivan, Delica D:2 at the end of December. On February 17, Japan time, we are planning to hold an online presentation meeting for the Crossover SUV OUTLANDER, which has undergone a full model change. We plan to follow up and announce a streaming link later to you so that you can see the presentation. We plan to launch the new OUTLANDER globally, starting with the United States and Canada and Puerto Rico. We continue to develop technologies and expand our lineup of environmentally friendly models in accordance with our plan. So last page, Page 15. Although the global automobile demand is gradually recovering, particularly in developed countries, the second and third wave infections of the COVID-19 seems to have resulted in stricter restrictions on activities in each country again. Currently, the impact of the shortage in the supply chain for semiconductors is beginning to affect on the automobile production and the environment surrounding also remains challenging and uncertain. Even in this environment, we have made it our highest priority to steadily implement the structural reforms and centered on selection and concentration and to firmly establish a foundation for recovery in business performance. We have been implementing these measures thus far. As a result, the reforms have progressed faster and deeper than expected. And in the current third quarter, we are able to revise upward our full year forecast as we saw a clear earnings improvement. In particular, we felt that greater-than-expected progress in structural reforms led to a major improvement in profitability despite the significant declining unit sales in the third quarter. We will continue to promote structural reforms without relaxing our policies and further solidify our profitability in FY 2021. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]