Mitsubishi Motors Corporation (7211) Earnings Call Transcript & Summary

I'm Ikeya speaking, Executive Vice President. Thank you very much for attending in our financial results presentation. Although COVID-19 was prevalent throughout the year. The risk of severe diseases has been controlled, thanks to improved vaccination rates and the development of drugs. Under these circumstances, countries around the world are using infection control and a socioeconomic's activities are gradually beginning to normalize. On the other hand, the situation in Russia and Ukraine remained no layout and logistical disruptions, soaring energy prices, inflation reaching levels not seen in decades, and sharply rising interest rates to curve such inflation have made it difficult to take control of the business environment. Thanks to the achievement of improving sales quality in all regions and promoting the marginal profit improvement strategy and the effect of yen depreciation, our FY '22 results improved significantly year-on-year. n Net sales increased 21% year-on-year to JPY 2,458.1 billion. Operating profit more than doubled to JPY 190.5 billion, and OP margin rose 3.4 percentage points year-on-year to 7.7%. Operating high since FY 2015. Ordinary profit was [indiscernible] due to tax payments and extraordinary losses mainly related to the Russian and Chinese businesses was JPY 168.7 billion. In the fourth quarter alone, we recorded net sales of JPY 652.8 billion, and operating profit of JPY 36.8 billion, and ordinary profit of JPY 27.3 billion and net income of JPY 37.9 billion. The OP margin was 5.6%. The year-end dividend payment will be resumed at JPY 5 per share. Please turn to Page 4. This slide explains the factors behind the year-on-year changes in operating profit for the full year of FY 2022. The volume and the mix selling price were negatively impacted due to the year-on-year decline in shipment volume, but the improvement in mix selling price through promoting a marginal profit improvement strategy, et cetera, resulted in a total turnaround of JPY 59.2 billion. While advertising expense increased in line with the plan, sales expenses improved by JPY 21.4 billion due to the effect of curbing incentives throughout the year. Procurement and shipment costs, deterioration in material costs due to soaring raw material prices was offset to a certain extent by cost reduction efforts. However, worsening transportation costs due to vessel shortage and also in factory expensive due to soaring energy and labor costs resulted in the total negative factor of JPY 75.1 billion. R&D expenses increased for the introduction of new models resulted in a negative factor of JPY 16.5 billion in total. Others mainly due to profit improvements in domestic subsidiaries after sales and various other areas improved by JPY 14.3 billion. For FX, the yen depreciated throughout the fiscal year resulted in a positive effect of JPY 99.9 billion year-on-year. In total, operating profit for FY 2022 increased significantly by JPY 103.2 billion. Please turn to Page 5. This slide explains the factors behind the year-on-year changes in operating profit for the fourth quarter of FY 2022. The total volume and mix and selling price showed a significant year-on-year drop in shipment volume, mainly in North America and ASEAN countries, which were affected by car supply constraints caused by semiconductor supply shortages as well as in Oceania, where supply delays occurred due to vessel shortages. On the other hand, thanks to the success of promoting marginal profit improvement strategy, mix and selling prices improved significantly. Now total volume and mix selling price has resulted in JPY 5.8 billion. Increase in operating profit. Selling expenses had a positive effect of JPY 4.2 billion, mainly due to the effect of cutting incentives. Procurement and shipment costs were negative JPY 23.3 billion due to worsening factory expenses and transportation costs, although material cost hike due to raw materials prices was partially absorbed by material cost reduction activities. R&D expenses increased by JPY 4.8 billion, in line with the plan to prepare for the new model launches, mainly due to the deterioration in after sales and increases of indirect labor costs and general expenses. Other made a JPY 9 billion negative impact. Foreign exchange rate fluctuations were a positive factor of JPY 32.5 billion. As the yen generally depreciated against major currencies. In total, the Q4 saw a JPY 5.4 billion increase in profit year-on-year. Please go to Page 6. Next, I will explain the retail sales volume for the full year FY 2022. Overall, retail sales volume was 834,000 units, down 11% year-on-year. In ASEAN, our main market, the first half of last year was affected by the shortage of semiconductors as well as production constraints imposed by the Shanghai lockdown. In the second half, the sales environment became increasingly difficult towards the end of the fiscal year as intermittent interest rate hikes, inflation and other factors reduced consumers' willingness to purchase. Under these circumstances, we focus on segments which less supply constraints and work to eliminate our order backlog resulted in a 5% year-on-year increase to 262,000 units. In Australia and New Zealand, despite the shift in demand from ICE vehicles to EVs due to the New Zealand CCD, Clean Car Discount policy, orders in general remained firm. On the other hand, logistic issues, including vessel shortages became more serious and the car supply shortage became more noticeable, resulted in a year-on-year decrease in sales volume. In Australia, particularly, were orders remained strong, back orders continue to pile up due to a lack of vehicle supply. We will continue to improve the situation. Our whole market shutdown, although there are production constraints due to the shortage of semiconductors, this has been on the recovery trend since September 2022. In addition to the strong new OUTLANDER PHEV, we launched eK X EV in June, and we launched the Minicab-MiEV, in November, expanded the EV product lineup, one of our strengths. And the preorders for the new Delica Mini, began in January 2023 have also been strong. In North America, although there was a decline in demand until last summer due to a shortage of car supply caused by semiconductor supply issues. There have been signs of recovery in demand since then. Amid limited inventories, we curbed fleet sales and prioritized dealer sales resulted in a 15% decrease year-on-year. As for other regions, such as China, where we struggled in the intensified competition, Europe where the model lineup was reused and the vehicle supply has been suspended in Russia. Sales in both regions were down significantly from the previous year. Sales in Latin America and the Middle East and Africa increased slightly. Page 8 shows the forecast. In FY 2022, through the marginal profit improvement strategy as well as favorable exchange rates, we were able to overcome supply constraints and the raw material and transportation cost hikes and achieved a significant increase in profit. In FY 2023, the impact of semiconductor and vessel shortages will remain despite the recovery. And in addition, concerns about the macroeconomic slowdown and further instability will also remain. We assume that the business environment will remain uncertain. In this environment, we intend to secure stable earnings based on the management structure that has become leaner and more agile under the previous midterm plan, while responding relaxable to changes in the external environment and the strengthening investments for the next stage of growth. Specifically, we will strike to curve cost by eliminating waste. And at the same time, we will put the efforts to increase sales volume by recovering production and securing vessel capacity in response to the improved supply of semiconductors and addressing the shortage of car supply. In addition, we will ensure the necessary investment for launching new models on schedule so that we can introduce high-quality products as planned and expand our sales. We will also continue to pursue our marginal profit improvement and by the reinforcing the Mitsubishi Motors brand, strengthened a value appealing business as well. Through this effort, as shown in the slide, we aim to secure net sales of JPY 2.7 trillion, operating profit of JPY 150 billion, ordinary profit of JPY 150 billion and the net income of JPY 100 billion. To our regret, we have stopped paying dividends due to the negative distributable amount on non-consolidated basis required for dividend payments since the end of FY 2019. However, as announced in our new midterm plan, challenge 2025 in March as we are now on track to pay a stable dividend from FY 2023 and onwards, we have decided to resume dividend payments starting from the year-end dividend of JPY 5 per share for FY 2022. For FY 2023, based on our basic policy of maintaining stable dividends over the long term, we plan to pay an annual dividend of JPY 10 per share after comprehensively considering our future business and investment plans. Based on the assumption to keep paying stable dividends, we intend to determine its dividend policy while addressing the balance -- assessing the balance between changes in the business environment, investing in growth for the future and the need to build up equity capital. Please turn to Page 10. This slide shows the factors behind the transition in the operating profit forecast for FY 2023 from the previous year. As for the impact of the volume mix selling price, despite the limited cost supply due to the shortage of semiconductors and shipping capacity by further expanding sales of the new OUTLANDER, maximizing the effect of new models scheduled for launch and promoting the improvement of sales quality, we assume a total positive impact of JPY 115.8 billion, mainly due to an expected increase in incentives as a result of the changes in the competitive environment and an increase in advertising expenses mainly for new model launches. Selling expenses are expected to increase (sic) [ decrease ] by JPY 37.9 billion year-on-year. As for material and transportation costs due to negative factors such as soaring material costs due to inflation and worsening factory expenses caused by rising energy and labor costs, we expect a total negative impact of JPY 27.8 billion. R&D expenses are on an increasing trend towards the launch of new models scheduled for this fiscal year and beyond, resulting in a negative factor of JPY 11.3 billion in profit. Regarding others, we expect increases in quality-related costs in direct labor costs and general expenses due to worldwide inflation, assuming to have negative impact of JPY 28.7 billion in profit. Foreign exchange rates are expected to have a negative impact of JPY 50.6 billion based on the current exchange rate. Please turn to Page 11. In FY 2023, we plan to launch a series of new models that embody the Mitsubishi [indiscernible], mainly in the ASEAN region, contribution of the [indiscernible] has made a strong start to Japan sales growth and expansion of the new OUTLANDER, we are forecasting leases of -- sales of 917,000 units globally. Next, CEO, Mr. Kato will explain the key initiatives for achieving the plan. Kato-san, please. Please turn to Page 13.

On March 10, we announced our new midterm business plan challenge 2025. This slide shows the major management KPIs for a single fiscal year in chronological order from FY 2019 onward as presented at the time of the announcement with the current fiscal year forecast newly added. In the final year of the new midterm plan, we plan to secure the profit and free cash flow shown here after absorbing an annual increase of about JPY 50 billion in R&D expenses from the FY 2022 results and an increase of about JPY 25 billion in depreciation expense due to increased CapEx and other cost increases, including advertising expenses, others in FY 2023, we must continue to secure solid earnings and cash flow by the accelerating investment. In addition to the success of new models that are scheduled to be launched, we believe that on the region of access, growth in ASEAN and improved profitability of domestic operations will be the key to achieving our goals. Please turn to Page 14. First, let me explain our business in the ASEAN region. Although there is some variation in total demand in ASEAN countries, we expect that TIV in the 5 major countries will remain at about the same level as in the previous year due to inflation and rising interest rates. In this environment, we are targeting an approximately 19% increase in vehicle sales and volume to 311,000 units. TIV in Thailand is expected to recover moderately. In July, we will finally launched the long-awaited new TRITON. To maximize sale after the launch, we will manage smooth inventory clearance of the older TRITON. And at the same time, we will further expand our market share in the largest pickup segment in the Thai market by promoting marketing activities we lead to each region and segment, which we have put effort on since last fiscal year. In the second half of the year, we plan to introduce a fast HEV model, the Xpander HEV which will be the first HEV model for our company, and we will continue to enhance the lineup of xEV study with test model. At the same time, we will strengthen the foundation of our sales and enhance the sales activities of each dealership through digital tool and marketing to aim for higher overall market share. TIV in Indonesia is expected to continue to be weak in the first half of the year and is gradually recovering in the second half of the fiscal year. With a slight decrease from FY 2022. Under such circumstances, we aim to expand our market share by strengthening the customer touch points, including online. In addition to service promotion events centered on event marketing. In addition, this fiscal year, we plan to strengthen the passenger car segment and increased sales volume by introducing a new mass production model of the XFC Concept,which is a strategic vehicle for the ASEAN region. In the Philippines, despite the slowdown in demand for new cars in neighboring countries, our recent strong demand trends are continuing, and it is predicted that the TIV level will exceed the pre-COVID level. We will expand our sales network, which includes leadership improvement through the sale and staff training and at the same time, we will continue our 60th anniversary promotions and increase touch points with the customers through sales of limited edition models and revitalized demand. We will also expand the sales of existing models and maximize the sales of new models that are scheduled to be introduced thereby, further expanding our market share. TIV in Vietnam has been deteriorating since October last year. And although it is expected to recover from the second half of FY 2023, the situation is still uncertain. We will focus on promoting sales and we'll expand that, which has been well received by increase in contact with our customers and dealers through a variety of events. We will then ensure successful rollouts of the new expanded costs. Also, we will further expend our data network. In Malaysia, TIV is expected to decline by about 15%, partly due to the government's economic stimulus measures, such as the SST or sales and service tax exemption implemented in FY 2022. To maximize the strong sales of our mainstay products, Xpander and TRITON, we will aggressively hold events such as the test drives in addition to dealer events. Please proceed to Page 15. Next, I would explain our priority measures for domestic business. Although TIV in Japan has been on a recovery trend since FY 2022, the shortage of semiconductor supply has not yet been resolved, and the production is expected to remain affected. In addition to the electric vehicle lineup, such as the new OUTLANDER PHEV model, Eclipse Cross PHEV Mode and eK X EV, the addition of the new Delica Mini to the product lineup will further accentuate Mitsubishi Motors now. The new Delica Mini, which is scheduled to go on sale in May is a car that meets the needs of the customers who want to a car like this and has made a good start with cumulative orders exceeding the 10,000 units since pre orders began. Going forward, we will continue to promote the Delica brand to build a the product series appeal with the Delica D5, which we'll mark at 61st anniversary of its launch to achieve a synergistic effect. Looking ahead to mid-long-term growth, we will develop and strengthen our foundation in every aspect of our product sales and the structure to shift from price appeal across volume appeal. Please turn to Page 16. Next, I'd like to explain our strategies in each region. In Oceania, where there were shortages and serious delays in the supply of vehicles in the previous fiscal year, we are working urgently to include back orders and establish a brand as PHEV leader for the various promotions. In Europe, the modern lineup will be strengthened with the addition of a COLT to ASX, which was launched in April. We ensure the success of each rollout and improve the customer experience. In North America, although there is a downside risk due to rising interest rates and the economic downturn, TIV is forecasted to be generally on par with the previous fiscal year. On the other hand, market competition is expected to intensify again as each OEM recovers production. In this environment, we will strengthen our sales initiatives to maintain the strong sales momentum of the new OUTLANDER series. In addition, we will promote brand reconstruction by improving customer service, et cetera, while also enhancing online sales and strengthening digital media marketing. In other leverage regions, such as the Middle East, Africa and Latin America, we'll focus on segments where demand is strong and take on the challenges of selling our products to private customers by appealing to our productivity. Please turn to Page 17. As stated in our midterm plan announcement, we plan to introduce 1 to 2 new models each year starting this fiscal year. This slide shows the product rollout scheduled for the 3 years of the new midterm plan. Please turn to Page 18. The new models scheduled for launch during FY 2023, as shown on this slide. This fiscal year will be rolled an unusually large number of new models, particularly in our mainstay ASEAN region, we will leverage the successive launch of new vehicles to strengthen the Mitsubishi brand. The new ASX, which has been in full scale sales in Europe since April is receiving a steady increase in orders and has exceeded our expectations. In Europe, the new COLT will be added in fall to strengthen our product lineup. In Japan, the new Delica Mini was officially announced in April, and the preorders began in January. It has already received orders for more than 10,000 units, the car is stylish and the [ churning ] expression, SUV like styling with a powerful driving appeal and spacious and comfortable interior. That is hard to believe for many cars have been very well received and are addressing a real deal of attention from customers. In July, the new TRITON will finally be launched and was exhibited at the Mitsubishi XRT concept at the Bangkok International Motor Show 2023 in March, where its exterior design, particularly the front end, was well received and we've got a great response. The all new fifth-generation TRITON, which has undergone full model change in about 9 years will be launched in Thailand this summer, followed by an expansion to ASEAN countries, Oceania and other markets. In addition, we are planning to accelerate our business in ASEAN countries in Oceania by launching the mass production XFC Concept and the XPANDER HAV, fast HAV model shortly. Next page, please. Last fiscal year, the entire company worked together to all issues, including efforts to reduce costs and promote status quality improvement activities in each country and coupled with a foreign exchange tailwind, we were able to end the year with a record high profit. At the same time, we believe that the company's potential has also come along and we are ready to enter a new stage. On the other hand, business environment surrounding our company continues to be uncertain and unstable. There is an on time to wait for the development of electric vehicles and the carbon neutrality. And there are fears of a global economic recession due to price hikes caused by soaring energy and raw material prices and the tightening of monetary policies to cause such hikes as the water changes by the minute, we must also change ourselves. We also need to further strengthen our management foundation to be prepared to meet the challenges of the new era. Our midterm business plan challenge 2025 has been formulated to accomplish these challenges. In the current fiscal year, the first year of the plan, we expect to still face a harsh business environment, but we need to secure profits by establishing a lean and agile management structure while accelerating the investments necessary for the next era of growth. We will also build long-term relationships on the trust with our customers and promote our brand value to the products and technologies that are unique to Mitsubishi Motors. This fiscal year, we have entered a new stage. We will achieve our FY 2023 target, the first year of our midterm plan by demonstrating the potential that we have cultivated thus far and by working as one to take on the challenges of further progress and the growth in the next era. Thank you very much for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]