Mitsubishi Motors Corporation (7211) Earnings Call Transcript & Summary

Good evening. Thank you for participating in the FY '20 financial results meeting today. Now the COVID-19, which has been ramping around the world since the beginning of last year, has had a major impact on the global economy and demand for automobiles. At last, vaccination began in each country, and it seems that it is gradually regaining stability. However, conditions still remain unpredictable, such as the spread of new variants of COVID-19. FY '20 marks the 50th anniversary above foundation and was a year of change, the first year of our new midterm plan. Under the new midterm plan, which called for further promotion of selection and concentration, the first priority was to implement cost structure reform, and we immediately embarked on measures. And I think that we made smoother progress than expected and successfully took the first step. Today, we would like to talk about the results of fiscal year 2020, the forecast of fiscal year 2021 and an update to our new midterm plan, small and beautiful (sic) [ Small but Beautiful ]. Afterwards, as much as the time allows, we would like to take your questions. Now Ikeya-san, the floor is yours.

First of all, we would like to explain our global total sales for fiscal year 2020. Our total sales in all regions decreased by 29% from the previous year to 801,000 units. First, in the ASEAN region, which is our core market. Although there were differences among countries, including Indonesia, where severe condition continued and Vietnam, which succeeded in curbing COVID-19, the pace of overall recovery was slow, as I mentioned earlier. And in addition, Thailand, where economic activity has stagnated again since the end of last year due to the re-expansion of COVID-19 continues to face severe conditions. On the other hand, in Indonesia, where the recovery was slowest, signs of the recovery were finally confirmed. As a result, sales in FY 2020 fell 35% year-on-year to 189,000 units. In Australia and New Zealand, automobile demand continues to recover gradually. And we also posted sales in line with the market recovery, falling 18% from the previous year to 72,000 units. In Japan, our home market, overall demand for automobiles recovered to a certain level. However, we prioritized structural reforms such as restraining fleet sales and reviewing selling prices, and our product lineup was insufficient in the segments that was driving the recovery of the market. As a result, sales fell 23% year-on-year to 73,000 units. In other regions, sales in China and North America declined by a little less than 30% year-on-year as a result of prioritizing improvements in the quality of sales like in Japan. Sales volume in other regions, including Europe, Latin America, Middle East and Africa were in line with the decline in the market. Next page, please. Please refer to the FY 2020 full year results summary based on the actual unit sales. As mentioned earlier, the global sluggish demand for automobiles due to the spread of COVID-19, which had emerged since the beginning of last year, is gradually regaining stability in developed countries. However, the recovery in the markets in which we excel was delayed and the conditions remained severe. On the other hand, while there were no noticeable new car launches, our results bottomed out in the first half due to the effects of reducing sales expenses and improving the grade mix, and we saw a significant improvement from Q3. As a result, net sales for the full year decreased 36% from the previous year to JPY 1.4555 trillion. Operating profit was nevertheless affected by these factors. However, our company-wide efforts to reduce expenses and fixed costs and structural reform activities contributed in reducing the loss to JPY 95.3 billion, which is an improvement from the full year forecast of JPY 100 billion in operating loss announced in February. Ordinary profit was negative JPY 105.2 billion, and net income was negative JPY 312.3 billion, mainly due to the recording of an extraordinary loss from the implementation of structural reforms. Free cash flow turned negative again in the fourth quarter, partly due to expenditures for recording structural reform-related costs. But the overall improvement trend continued and the cumulative negative amount shrank significantly. And in Q4, which is January to March, net sales were JPY 502.7 billion. Operating loss was JPY 8.6 billion. Ordinary loss was JPY 12.3 billion and net loss was JPY 68.3 billion. And unit sales were 232,000 units. Bottoming out in the first half of the fiscal year, earnings momentum has steadily recovered. Please see Page 5. The factors behind the year-on-year changes in operating profit are as shown in the slide. In terms of the volume and mix, a decrease in unit sales had a negative impact of JPY 136 billion. However, an improvement in mix and selling prices had a positive effect of JPY 8.4 billion, which reduced the deterioration to JPY 127.6 billion compared with the previous fiscal year. In line with our plan of selection and concentration, sales expenses in noncore regions were kept down, while concentrated investment in core regions led to an increase in profit of JPY 8.1 billion over the previous fiscal year. Cost reductions worsened JPY 22.2 billion year-on-year, mainly due to material cost savings, reduced by the prolonged impact of production adjustment in the first half of fiscal year 2020. Structural reforms, which we have implemented since the beginning of the fiscal year, progressed at a faster pace than we expected, and those produced a positive effect of JPY 35.6 billion. In addition, R&D expenses improved by JPY 18.9 billion due to the streamlining of R&D through selection and concentration. Other elements worsened by JPY 24.6 billion on year, mainly due to deterioration in after sales business and quality-related expenses. Although, the yen continued to depreciate, resulting in a positive effect of JPY 3.7 billion from the previous fiscal year. Page 6, please. This slide explains the factors behind year-on-year changes in operating profit for the Q4 of FY 2020. The volume and the mix were affected mainly by a decrease in unit sales, resulting in a decrease of JPY 13 billion in operating profit. Sales expenses increased slightly in Q4 due to the launch of new cards and the resumption of marketing activities through lockdown mitigation. However, we were able to control overall expenses in line with the plan and generating a positive effect of JPY 1.8 billion. And cost reductions, such as material costs, were affected by lower capacity utilization and by soaring raw material prices, resulting in a decrease of JPY 13.3 billion. R&D expenses were slightly negative year-on-year, mainly due to the impact of the development of new products now under way for the ASEAN region. Other impacts were also negative year-on-year, mainly due to deterioration in warranty claim expenses and deterioration of domestic subsidiary business. On the other hand, structural reform activities continued to have the effect of increasing a profit by JPY 10.1 billion. And ForEx also had a positive effect of JPY 3.7 billion due to the impact of the yen depreciation trend. Page 7, please. So in fiscal year 2020, we also focused on reducing inventories. As a result, as shown in the graph, we were able to reduce more inventory than planned, resulting in healthy level inventory. We will continue to collaborate with each region at all times in an effort to maintain healthy inventory levels and expand sales with quality. And next is, I would like to explain our financial outlook for FY 2021. Please look at Page 9. The global automobile demand, which fell in 2020 due to the spread of COVID-19 will not recover to its previous level, but is expected to recover to a certain extent, partly due to the support of economic stimulus measures in each country. On the other hand, the current business environment surrounding us remains unstable due to the spread of COVID-19 variants and surging commodity markets and the risk of supply chain disruptions, mainly due to a shortage of semiconductor supply. Despite this uncertain external environment, we expect FY 2021 performance to be JPY 2.06 trillion in net sales, JPY 30 billion in operating profit, JPY 26 billion in ordinary profit and JPY 10 billion in net income by recovering sales in our core regions and by continuing to promote structural reform sustainably. And retail sales are forecasted at 957,000 units. Regarding the forecast for dividend per share, we consider the return of profits to shareholders to be one of our important policies, and our basic policy is to pay dividends based on maintaining a stable dividend and in consideration of our business performance, financial condition and other factors. However, it is still unclear whether we will constantly secure funds for dividend payments. We are therefore, sincerely regret that we forecast no dividend payment for FY 2021. We will endeavor to resume dividend payment as soon as possible, and we ask for your continued understanding and support. Page 10, please. As I mentioned earlier, the difficulty of forecasting the future is increasing on a daily basis. The COVID-19 crisis is still unpredictable and a worldwide shortage of semiconductors is expected to have a major impact on automobile manufacturing, including us. On the other hand, the automobile market is on a recovery trend. In particular, the ASEAN market, which is our core region, which had been slow to recover, is also showing recovery, except for some areas. Taking into account these changes in the external environment, the introduction of our flagship model of new OUTLANDER and the renewal products in the focused ASEAN region, we are forecasting unit sales in fiscal year 2021 of 957,000 units, an around 20% increase from the previous fiscal year, as you can see in the slide. In ASEAN, which is our core market, we anticipate a 47% year-on-year growth in sales to 277,000 units due to a visible recovery in the delayed market, the effects of renovation of existing models and the strengthening of our sales network. In another core market, Australia and New Zealand, we forecast a 26% year-on-year growth to 91,000 units due to the forecast of continued recovery and the scheduled launch of the new OUTLANDER and other models. In Japan, the home market, although the impact of the spread of COVID-19 is uncertain, we forecast that the overall recovery trend will continue due to the expansion of vaccination. Accordingly, we forecast a 29% year-on-year increase in sales to 94,000 units. In addition, in the Chinese market, which is already recovering, we forecast a slight decrease of JPY 0.1 million year-on-year. In North America, where we have confirmed a favorable start for new OUTLANDER, we forecast a 36% increase to 154,000 units. And in Europe, where we froze the development of new models, we forecast a 13% (sic) [ 14% ] decrease to 125,000 (sic) [ 124,000 ] units. Page 11, please. The factors behind the year-on-year changes in the operating profit forecast for FY 2021 are shown in the slide. In terms of the volume, mix and the selling prices, a total positive effect of JPY 90 billion is expected, mainly due to the expansion of sales mainly in the ASEAN regional core market, which is on the recovery trend despite some impact from the shortage of semiconductors. Regarding selling expenses, as in the previous fiscal year, we will drive cost effectiveness by concentrating expenditures on core regions and sales of new vehicles. Cost reductions are expected to have a positive FX, totaling JPY 12.7 billion by promoting activities to reduce procurement costs, despite the negative impact of soaring raw material prices and the shortage of semiconductors. We expect R&D expenses to deteriorate slightly compared to the previous fiscal year due to progress in development for core regions and segments. In addition, an upturn of JPY 17.8 billion is assumed due to the full year effect of structural reform costs. Regarding the impact of foreign exchange rates, an upturn of JPY 21 billion is forecast based on the assumption that the yen will continue to depreciate as a whole. And next page, please. In FY 2021, we will continue to strengthen our products. The new OUTLANDER is an iconic driver for the future turnaround. In the World Premiere event held on the Amazon's online site in North America in February, there were approximately 0.6 million live viewers and more than 440,000 dedicated website viewers as of the end of March, both of which were more than double of our expectation of the target. Customer feedback at retail outlets are extremely positive as well, and we feel a great response. In addition, the new OUTLANDER PHEV model will be launched globally, starting with Japan this fiscal year. We will introduce a dramatically revamped XPANDER for the ASEAN region, our core market. In addition, we will expand the sales countries of the new PAJERO SPORT and MIRAGE models. We will also expand export of the XPANDER from the ASEAN to other regions, including the commencement of exports to Mexico. Next, we will give you an update on our midterm plan, Small but Beautiful. Kato-san, please?

Our structural reform activities announced in July last year have progressed more than originally anticipated, and we were able to achieve a reduction plan of 20% or more in 2 years, 1 year ahead of schedule. Although there were some painful measures, such as the implementation of the voluntary retirement system, we achieved a reduction of approximately 10% from 20,000 headcount on a global basis. All of the reorganization of the production system has also progressed as planned. In addition, many fixed cost reduction measures taken in the previous fiscal year, such as the recognition of asset impairment losses, are expected to result in greater reductions because they will be effective throughout this fiscal year. On the other hand, we will aggressively invest in growth from this fiscal year, such as advertising costs for new car launches and new product development to launch from FY 2023 onwards. However, we plan to cover these investments with the full year contributions of fixed cost savings and reduced the total value to roughly the same level as the previous year. Please go to the next page. In Europe, where we decided to freeze the development of new products, we also began reorganizing our sales network. As we have already announced, we have decided to withdraw from the new car sales business in 15 out of 32 countries by 2023. And at the same time, in order to optimize our product lineup, we have decided to receive an OEM supply of 2 models from Renault, our alliance partner. Through the implementation of these measures, we will optimize development resource as a whole and improve European business profitability, and we'll continue to carefully examine the potential for future business in preparation for stricter environmental regulations and changes in market trends. Next page, please. In the core region of ASEAN and Oceania, we will implement initiatives that are appropriate for each country in order to further increase our market share and expand sales. First, the market environment in Thailand and Philippines, where we were exposed to fierce competition amid COVID-19 in FY 2020 is expected to remain harsh in fiscal year 2021. We recognize that it will take a certain amount of time to regain market share, although we are implementing measures to address this issue. Against the backdrop of a challenging business environment, we will prepare for a turnaround and accelerate the strengthening of our sales network. On the other hand, we anticipate that strong sales momentum will continue in FY 2021 in such countries as Indonesia, where the market is recurring steadily due to luxury tax exemption and the measures to relax down payment limits for automotive loans; Malaysia, where sales and profits continued to expand through a strong sales of XPANDER and TRITON; and Vietnam, where we achieved record-high unit sales amid remarkable market expansion. In addition, in New Zealand, where we achieved record-high market share in the last fiscal year and in Australia, where the exchange rate moved favorably, we will further expand unit sales through the introduction of new OUTLANDER and Eclipse Cross PHEV, which have been very well received after the launch. In this way, in countries in such a difficult environment, we will steadily implement measures. And in other countries where we can expect opportunities, we will firmly seize opportunities and do our utmost to achieve the plan for the current fiscal year. Please go to the next page. Next, I would like to talk about future product development. Since the announcement of our new midterm plan last year, we have focused on core regions where we can leverage our strengths and have redefined our Mitsubishi Motors-ness for sustainable growth over the medium to long term. First of all, we believe that the ideal form we aim for Mitsubishi Motors-ness is safety, security and comfort, focusing on the environment. Specifically, we intend to manufacture cars that will enable our customers to experience our strength in electrification technologies, SUV technologies with a high level of off-road driving power and comfortable performance in functional and pleasant interior. Next page, please. The first thing is our policy for environmental initiatives. In November of last year, we set the target shown on the slide in the new environmental plan package. To achieve these goals, we will set up electric vehicles for all models by 2030. In addition, we will actively introduce electric vehicles to countries and regions where infrastructure is being developed in regulations are being further strengthened. At the same time, we plan to strengthen our competitiveness by introducing PHEVs and EVs in advance for countries and regions where infrastructural facilities and environmental regulations are still in the development stage and will progress in the future, while offering products that meet regional demands. Next page, please, page 19. Now as you know, we are a pioneer in EV manufacturer, and we have technologies and know-how that we can be proud of all over the world. In 2009, we launched i-MiEV,the world's first mass-produced EV, and open the door to popularization of EVs. Later, we introduced Minicab MiEV to expand the field of commercial use of EV. In PHEV, the OUTLANDER PHEV launched in 2013 is the world's first SUV-type plug-in hybrid and has become the world's best-selling plug-in hybrid vehicle with #1 global unit sales in cumulative terms since its launch. In fiscal year 2020, we added a new PHEV to Eclipse Cross and received strong orders, both domestically and in Europe. And during the current fiscal year, we plan to introduce a PHEV model of the new OUTLANDER, which was recently launched. In addition, as I mentioned at the announcement of the midterm plan this fiscal year, we are also advancing joint development with Nissan of Kei-car EVs and plan to further strengthen our lineup of electric vehicles. Please go to the next page. We believe that our strength for electrification is to have various options through the Alliance and our proprietary technologies. Specifically, while utilizing our proprietary technologies of PHEVs and EVs, we can also leverage the electric units and components of other companies in the alliance or provide models developed in our PHEV and front-rear units to other companies. In the future, we believe that the Alliance group will be able to stand its more efficient electric units and components. By combining these wide-ranging component option, we will meet the needs of each country and region and successively roll out attractive product that incorporates the unique characteristics of Mitsubishi Motors-ness. Please go to the next page. We believe that initiatives that are rapidly advancing towards zero-carbon society present a major opportunity for us. Of these, we think that light commercial EVs are one optimal solution to the last one mile in logistics. The Minicab MiEV is highly regarded as an easy handling commercial EV because of power of the motor, quietness and the convenience of not requiring refueling. Due to the growing interest in carbon-neutral society, business opportunities are increasing, including ones with the Japan Post to which we have already delivered our EVs. By June this year, we will have introduced 200 units on a trial basis to about 20 companies, and we will work together with some companies to improve our products. We plan to collect product requests and introduce improved models that reflect our customers' various requests within 2 to 3 years. Commercial mini EV business negotiations have also begun in ASEAN, where logistics networks will be established in earnest in the future. Going forward, we will further make product improvements and carry out demonstration tests to contribute to society with companies in various industries. Please go to the next page. We believe that PHEV at the core of our electrification technology is the immediate optimal solution to a rapidly spreading decarbonization society with the advantages shown in the slide. First of all, we would like to highlight the smallest environmental burden, that is, the priority in terms of the Life Cycle Assessment. CO2 emission of PHEV, based on Life Cycle Assessment is less than BEV at the moment, and it is superior in total environmental performance. Next, in ASEAN, the core region for us, where environmental regulations will be tightened in the future, countries will begin to develop infrastructure. In such an infrastructure environment, we assume that plug-in hybrids that can be charged at home and can drive on gasoline and generate power on their own, will be one good solution. By incorporating these superior PHEV into SUVs that can maintain high-performance in any road condition, we will promote them as the only model having driving performance that can take drivers anywhere without worrying about electricity shortage. Next page, please. In addition, through products equipped with our electric power technology, we intend to provide a variety of value to all users for their environmental efforts. For example, for corporations, we believe that it will be useful in reducing CO2 associated with business operations. We also believe that it can be used as a source of electricity in an emergency. For municipalities, we anticipate that we will be able to provide added value, including the supply source of electricity in the event of disaster and electricity support during the transportation of vaccines for COVID-19, which are becoming fully fledged. For consumers, it is not only useful for achieving SDGs at the personal level, but it can also be a source of electricity in the event of disaster. In addition, we are advancing V2X initiatives as a secondary utilization of the contribution to the community. Specifically, we are proceeding with the experiment to use EV as an adjustment resource for electricity, and we intend to further develop it as a business. Next page, please. In this slide, we introduce specific examples of our contributions to society through our electric power technologies. We have already concluded disaster agreements with 113 local governments, and we are aiming to conclude contracts with local governments nationwide by fiscal year 2022. In addition to operations in the event of a disaster, we are participating in local government disaster prevention drills and increasing opportunities to promote understanding of power supply functions. In the event of a disaster, PHEVs can supply more power by using power generation by the engine and can become an optimum power source. In addition, as released on April 28, we decided to lease OUTLANDER PHEV to Minato Ward as a vehicle for vaccination for COVID-19. In addition, we have received inquiries from multiple local governments, and we intend to respond to them sequentially. These efforts will be part of DENDO Community Support Program, which we have been promoting since August 2019. We will continue to pursue the potential of mobility and create a vibrant society through the promotion of DENDO Community Support Program. Next page, please. Other than that, we will further refine the -- refine Mitsubishi Motors-ness. One part of that is that we have decided to relaunch a Ralliart brand for customers and Mitsubishi Motors plans who want to add to Mitsubishi Motors-ness even more. In the future, we plan to develop items as genuine accessories for a wide range of models, and we would like to take opportunity to be involved in water sports as well. As I mentioned at the time of last year's midterm plan announcement, we have been accelerating development in order to further enhance our products in FY 2022 onwards. In ASEAN, starting with the next-generation Triton, we will renovate our existing products and strengthen our product lineup. In addition, we will gradually launch completely new products utilizing the ASEAN performance plan. We will do our utmost to further strengthen our brand by enhancing our lineup in each segment. We also plan to introduce cars that embody Mitsubishi Motors-ness in other regions as well. Please go to next page. Finally, we created a video for the development of the OUTLANDER PHEV in order to share with you our enthusiasm for development, which is our crystals. We have posted a limited release link in today's presentation material that was posted on our website. So please take a look at it later. In fiscal year 2020, we prioritize strong for reforms focused on selection and concentration. As a result, reforms progressed faster than expected, and we were able to exceed our initial target for the full fiscal year. We also believe that the effect of the structural reform will continue to contribute to the improvement of our profitability in the current fiscal year and beyond. On the other hand, global automotive demand is polarized between countries that are recovering, particularly in developed countries where vaccination has progressed and other countries that are still experiencing stagnant economic activity due to the spread of new coronavirus variant. In addition, the impact of the shortage of semiconductors and soaring material prices is extremely serious in the current fiscal year, and the environment surrounding us remains challenging and uncertain. However, even in this challenging environment, we believe that our profitability has improved steadily over the previous year. So we will strive to achieve steady profitability in fiscal 2021. Thank you for your attention.