Mitsubishi Motors Corporation (7211) Earnings Call Transcript & Summary

I am Koji Ikeya, Executive Vice President, and thank you very much for joining us despite your busy schedule. First, I would like to give you a summary of the first quarter results. The business started in fiscal 2021 amid harsh external environments such as a continuous lockdown, mainly in ASEAN countries due to the rebound of the spread of COVID-19, and tight supply/demand conditions due to a shortage of semiconductors. On the other hand, we saw a significant year-over-year improvement in our performance due to a significant improvement in profitability resulting from successful introduction of a new OUTLANDER in North America and the sustained effects of structural reforms implemented since the previous fiscal year. Net sales for the first quarter increased 88% year-over-year to JPY 431.9 billion. Operating profit improved significantly year-over-year to JPY 10.6 billion due to an increase in unit sales resulting from the effect of the new vehicles and improvement in the country and product mix, the effects of the curbing sales expenses and the effects of cost reductions implemented since the previous fiscal year. And OP margin improved to 2.5%. Ordinary profit was JPY 11.2 billion, and net income was JPY 6.1 billion, mainly due to income tax paid. The global retail sales volume was 230,000 units, an increase of 65% year-over-year. Operating profit was recorded for the first time in 5 quarters since the fourth quarter of FY '19, and net income was in the black ink for the first time in 2 years since first quarter of FY '19. The slide you see in explain the factors behind Y-o-Y changes in operating profit for first quarter of FY '21. In terms of volume and mix, there was an improvement of JPY 29.7 billion due to a certain recovery from a substantial decrease in unit sales due to the spread of COVID-19 in FY '20, an improvement of JPY 2.8 billion in mix and selling prices, resulting in Y-o-Y improvement of JPY 32.5 billion in total. As for sales expenses, both advertising expenses and incentives were kept down, resulting in a positive effect of JPY 3 billion. Cost reductions such as material costs improved by JPY 2.2 billion year-over-year due to normalization from loss operation in the previous fiscal year despite production adjustment caused by the shortage of semiconductors and the negative impact of raw material price hike. The effects of the structural reforms implemented in FY '20 resulted in an increase in operating profit of JPY 10.7 billion. R&D expenses decreased by JPY 3.6 billion due to the completion of the development of large-scale products, having a positive effect on OP. From the second half of this fiscal year, R&D expenses are expected to be in an increasing phase towards introduction of new products. And for the full year, they are expected to rise by approximately JPY 6.2 billion. In addition to depreciation of the yen, Y-o-Y resulted in a positive effect of JPY 11.8 billion. And total OpEx (sic) [ operating profit ] increased significantly by JPY 63.9 billion. So the next page is about the total sales for the first quarter of FY '21. Our total sales in all regions increased by 65% Y-o-Y to 230,000 units. First, in ASEAN region, our core market, we saw a certain recovery from a significant decrease in sales caused by the impact of the rebound of the spread of COVID-19. In particular, a recovery trend has emerged in Indonesia, which suffered the most from the spread of COVID-19 in the previous fiscal year. As a result, sales volume in ASEAN region in first quarter was 58,000 units, up 142% Y-o-Y. Another core region, Australia and New Zealand, although small-scale and short-term lockdowns were implemented, the automotive market is all performing well. We steadily improved our market share. Both countries and our sales volume rose 92% Y-o-Y to 25,000 units. Domestic demand in Japan has been recovering from the previous year when demand was sluggish significantly under the pandemic. However, there was no recovery to prepandemic levels due to insufficient car supply caused by semiconductor constraints. We were also affected by a chip shortage, mainly in our core models. However, we increased sales by 36% year-over-year to 15,000 units through proactive campaigns and other measures to expand sales. In North America, the new OUTLANDER has been very well received since its launch, and sales increased 129% Y-o-Y to 39,000 units. In Europe, Latin America and the Middle East and Africa, economic activity remained restricted due to the impact of the spread of COVID-19, but a moderate recovery trend was seen. Meanwhile, in China, the market as a whole shifted from the phase of significant increase after COVID-19 last year to a phase of sluggish market growth due to a chip shortage. In addition to trends in the overall market, we faced challenges such as a decrease in store visit, which resulted in severe results. Please turn to the next page. Let us review sales in our core markets. First of all, in ASEAN countries, the impact of the rebound of the spread of COVID-19 has resulted in intermittent lockdowns in ASEAN countries. Overall automobile demand has also been affected, and a full-scale recovery has not yet been achieved. In particular, in Thailand, which has been recovering, and the Philippines, which has been implementing lockdowns for a long time, we recognize the pace of demand recovery has been slow. In Vietnam, where the impact was relatively minor in the previous fiscal year, the fourth wave of COVID-19 worsened from the end of April, especially in the southern region, and lockdown has been enforced again. On the other hand, Indonesia, which had been affected most severely by COVID-19 in FY '20, has been on a growing trend of recovery due to the government's luxurious tax reduction measures. The recent announcement of the extension of luxury tax exemption and other further economic stimulus measures are also positive factors for the current fiscal year. The group of small commercial vehicles not subject to luxury tax exemption is recovering more than expected, driven by the thriving mining business and the penetration of the e-commerce. As a result, our sales volume in the first quarter was 58,000 units, an increase of 142% Y-o-Y, and our market share in major countries was in the 10% range. However, as reported by media in Japan, the market environment remains uncertain due to rebound of COVID-19 infection in ASEAN countries. We'll steadily implement measures for each country while closely monitoring market trends. Please turn to the next page. Next, in Australia and New Zealand, although small and short-term lockdowns have been implemented intermittently, overall, both countries have succeeded in controlling the expansion of COVID-19, and automobile demand is also strong. First, in Australia, amid favorable market condition, ECLIPSE CROSS performed strongly and shipments of major models, mainly TRITON, expanded, resulting in a 68% year-over-year increase and a 0.9 percentage point increase in market share. In New Zealand, sales volume increased 252% Y-o-Y and market share expanded 5.4 percentage points, reflecting the success of expanded shipments of higher-margin models and the campaign for current vehicles implemented prior to the model change of new OUTLANDER. Going forward, the impact of COVID-19 will remain uncertain due to the new variants, but we do not believe that it will affect the economic activities due to the success of the measures implemented already to date in each country. On the other hand, shortage of semiconductors will continue to impose risks such as insufficient car supply. However, we will aim to increase our market share with profit by maximizing unit sales through optimizing production allocation and working to reduce incentives and improve model mix. Please turn to the next page, Page 8. Next, I will explain the state of our North American sales. Overall demand in North America grew significantly due to the progress of vaccination and active economic activities as well as income tax refund and the government grants. In addition to growth in total demand, we saw a significant sales increase driven by the new OUTLANDER whose sales commenced in April. The effects of cost structure reforms and restrained incentives based on the tightening of inventories due to semiconductor shortage led to an improvement in profitability. Going forward, we will work to maximize the effect of new product such as the new OUTLANDER while enhancing online sales and boosting digital marketing. Please turn to Page 9. I would like to explain our inventory status in this slide. As you know, we have been working to optimize our inventory since FY '20. As a result, by March 2021, our total inventory had been reduced to an appropriate level of 310,000 units. Currently, inventory levels are declining further through production adjustment due to a shortage of the semiconductors and growth in retail sales. We think this situation is unlikely to improve in the short term, and we plan to improve sales quality and profitability through the optimization of incentive and advertising expenses and inventory shortages. Please turn to Page 10. Next, I would like to explain our earnings forecast for FY '21. Please turn to Page 11. We made a good start in the first quarter, thanks to a recovery trend mainly in developed countries where vaccination has progressed and the depreciation of the yen. Based on the performance in Q1 FY '21 exceeding the initial plan, we have revised our full year forecast for FY '21 as shown in this slide. We have revised unit sales from 957,000 units to 967,000 units. Net sales have been revised from JPY 2.06 trillion to JPY 2.08 trillion. Operating profit has been revised from the previous forecast of JPY 30 billion to JPY 40 billion. Ordinary profit has been revised from JPY 26 billion to JPY 36 billion. And net income has been revised from JPY 10 billion to JPY 15 billion. Plans from the second quarter onward have been largely unchanged from the initial plans. As you know, demand will be pushed down by the rebound of COVID-19 infections. Semiconductor constraints will remain even though we expect the production situation to improve from this summer. Steel and other raw material price will hike. And we will face a further shortage of containers due to the normalization of shipments by each company. Because of those risks, the environment surrounding us remains unstable. From Q2 FY '21 onwards, we will do our utmost to achieve our revised full year forecast by optimizing costs while expanding sales of new OUTLANDER and maximizing the effect of new car launches, including the OUTLANDER PHEV model, which is scheduled to be launched in the second half FY '21. Please turn to Page 12. The sales forecast for 2021 has been revised slightly based on the latest demand conditions in each region. In our core market ASEAN region, COVID-19 is spreading again while vaccination does not progress. Thus, it will take some time until the situation stabilized. We have revised the figure from 277,000 units to 273,000 units. In Australia and New Zealand, we have revised the previous forecast of 91,000 units to 97,000 units based on the expectation strong sales in the Q1 will continue and the forthcoming new OUTLANDER launch. For Japan, although the current trend will continue, we assume that no major changes will be seen, and the trend will remain unchanged. For China and others, we anticipate it will take some time to overcome the difficult situation. Therefore, we have revised our sales forecast from 100,000 units to 97,000 units. For North America, we will increase our sales forecast slightly to 155,000 units, reflecting the strong performance of the new OUTLANDER. For Europe, the current recovery trend is expected to continue, and we have revised our forecast from 124,000 units to 130,000 units. And for other regions, we have revised it slightly from 117,000 units to 121,000 units. Please turn to Page 13. The factors behind the year-on-year changes in the revised operating profit forecast for FY '21 are shown in the slide. Volume and mix selling price are not expected to change significantly from the previous forecasts, so we expect these to generate a total profit increase of JPY 90 billion. Regarding sales expenses, considering the effect of current sales expense in Q1, we expect an improvement of JPY 3.5 billion for the FY '21, which will be a factor behind a profit decrease of JPY 6.5 billion. In cost reductions, the forecast for raw materials price hike remains uncertain. In R&D expenditure project in core regions and segments are assumed to progress as planned. Cost reductions and R&D are thus expected to remain unchanged. In regards to structural reforms and others, we anticipate a JPY 20.6 billion increase in profit, assuming we can expect positive effect that exceed expectations. In addition, we anticipate profit increase of JPY 24.7 billion in FX considering the positive impact of the Q1. Please turn to Page 14. The slide shows comparison of the revised operating profit forecast for FY '21 announced at the beginning of FY '21. We do not anticipate significant changes in volume and mix selling prices. Regarding sales expenses, we anticipate an upturn of JPY 3.5 billion considering the effect of restraints in the first quarter. General expenses and others are expected to improve by a total of JPY 2.8 billion. Regarding foreign exchange, an upturn of JPY 3.7 billion is also expected as the yen's depreciation trend was greater than expected. Next, we would like to explain our business highlights for Q1 FY '21. Please turn to Page 16. In fiscal 2021, we continue to focus on the product renovations and the introduction of new models. As we announced, we launched the new OUTLANDER in North America this spring. By utilizing digital market, we can effectively appeal our products to the target customers, and we recognize we have made a very good start. This success has led to an increase in dealer engagement as well as an increase in visitors and an improvement in our customer profile and has also contributed to increased sales of other models. Production is currently affected by the shortage of semiconductors, but we will strive to maximize the effect of the new product with high sales quality by carefully monitoring inventories, minimizing opportunity losses and curbing incentives. At the same time, we will gradually expand sales territories of the new OUTLANDER. In addition, we have successfully rolled out the new PAJERO SPORT, mainly in ASEAN countries. Sales began in Indonesia in February and have been extremely favorable despite not being eligible for luxury tax reductions. Segment share expanded significantly to over 50%. In addition, the new ECLIPSE CROSS PHEV has been rolled out in Europe and Oceania. We have received high praise from our customers with strong order intake in each region. In the second half FY '21, we plan to introduce new OUTLANDER PHEV model and our new XPANDER with significant enhancements. We also expect to launch new Kei-car EVs in early FY '22. This way, while strengthening model cycle management, we will further enhance our model lineup by steadily introducing new products that our customers are looking forward to. Please turn to Page 17. In fiscal 2021, the environment surrounding us remains harsh and uncertain, but we were able to make a good promising start, thanks to the effect of the structural reforms and the success of various initiatives to increase sales. Nevertheless, the external environment is still in a situation where both tailwinds and headwinds are going up. The new OUTLANDER, which was fully launched in April, has been highly evaluated by customers. In addition, demand for automobiles in the overall market has been recovering along with the acceleration of vaccination, and sales continue to be strong and exceed our expectations. And in the second half FY '21, we are expecting the launch of our core products such as new OUTLANDER PHEV and the renewal of XPANDER. There are both positive and negative factors, but we will do our utmost to achieve our revised plan for the current fiscal year by formally enjoying the effects of the structural reforms we have been working on since last fiscal year and further improving profitability. Thank you for your attention.