Mitsubishi Motors Corporation (7211) Earnings Call Transcript & Summary

Matsuoka-san, please.

Please turn to Page 3. Thank you for your participation in our FY '24 full year results meeting despite your busy schedule. In FY 2024, we faced a challenging sales environment due to the delayed recovery in total automotive demand in Thailand and Indonesia as well as intensified competition resulting from the easing of global vehicle supply constraints. Despite these conditions, during the first half of the year, we were able to steadily increase our earnings, supported by favorable FX rates, even when fixed cost rose due to inflation. However, in the second half, the standout appreciation of Thai baht, our cost currency, turned the exchange rate impact negative. Despite the challenging environment, we successfully translated increased unit sales driven by new models into solid earnings. In parallel, we implemented thorough cost and expenses reductions. As a result, we exceeded the full year operating profit forecast that had been revised in Q3. Net sales remained on par with the previous year at JPY 2,788.2 billion. Operating profit was JPY 138.8 billion with the operating margin of 5%. Ordinary profit was JPY 98.6 billion and net income was JPY 41 billion. Although retail sales volume fell slightly short of our revised forecast, it increased by 27,000 units year-over-year to 842,000 units. As initially forecasted, we will increase the annual dividend by JPY 5 from the previous fiscal year to JPY 15 per share. Please turn to Page 4. In this slide, you can see the factors behind year-over-year changes in OP for FY 2024. Volume/mix and price and others contributed to a positive impact of JPY 3.7 billion year-over-year. Within this, volume/mix had a negative impact of JPY 9.3 billion, mainly due to decline in wholesale volume in the Middle East, Africa, Europe and Oceania and other regions. On the other hand, price and others contributed a positive impact of JPY 13 billion driven by continued price improvements and favorable shifts in grade mix, particularly in Japan and North America. Sales expenses had a negative impact of JPY 45.3 billion year-over-year. While we partially offset the increase in incentive spending mainly in North America due to intensified competition by curbing advertising expenses, the overall impact remained significantly negative. Procurement cost and shipping cost had a negative impact of JPY 2.6 billion. Although we were largely able to offset the impact of inflation, increased shipping costs and higher factory expenses through procurement cost reduction, the net effect was still a slight decline in profit. R&D expenses increased as planned, resulting in JPY 12.1 billion decline in profit, and other items deteriorated by JPY 8.8 billion due to higher personnel costs, environmental-related expenses and FX impact on supplier procurement. However, this was more than JPY 7 billion reduction from our initial forecast. The negative impact of the current cost currency Thai baht was offset by the U.S. dollars and other currencies, resulting in a favorable effect of JPY 12.9 billion year-over-year. Please turn to Page 5. This slide explains the factors behind the year-over-year change in OP for the FY 2024 Q4 alone. Up to Q3, volume/mix and price had been a cumulative negative factor of JPY 15 billion, but this trend shifted significantly in Q4. Thanks to increased sales of higher-margin models, particularly newly launched vehicles, the year-over-year impact turned positive by JPY 18.7 billion. Sales expenses deteriorated by JPY 7.1 billion, mainly due to an increase in incentives in response to intensified competition in markets such as North America and Oceania. Procurement cost and shipping cost worsened by JPY 7.2 billion due to the concentration of cost settlements in Q4, reflecting material cost increase caused by inflation. R&D expenses resulted in JPY 1.1 billion negative impact. Other expenses contributed a positive impact of JPY 4.4 billion, reflecting smooth progress in cost reduction initiatives. As per foreign currencies, while we were able to partially offset the negative impact of the appreciation of Thai baht by U.S. dollars and other currencies, the net effect was JPY 4.4 billion negative impact. Please turn to Page 6. I'd like to explain our global retail sales volume for FY '24. Despite the challenging market environment, we focused on expanding market share in our core markets by refreshing our models, accelerating electrification and strengthening our sales network. As a result, although we slightly fell short of our revised forecast, retail sales increased year-over-year in regions such as ASEAN, Japan and North America. In Europe, total demand declined due to deteriorating economic sentiment in major countries and increased uncertainties stemming from political instability, leading to a decline in retail sales. In China and others, sales were halved year-over-year as a result of drastic structural reform implemented in FY 2023. Next, our CEO, Mr. Kato, will explain our plan and key initiatives for FY 2025. Kato-san, please.

Please turn to Page 8. Due to the international economic turmoil triggered by U.S. tariff policies, global economic uncertainties have increased in 2025. As shown in this slide, our financial forecast for FY 2025 is as follows: net sales of JPY 2.95 trillion, operating profit of JPY 100 billion, ordinary profit of JPY 90 billion and net income of JPY 40 billion. This guidance reflects the anticipated impact of U.S. tariffs as of the current point of time. Given the current uncertainty in the global economy, we will provide a timely update to our earnings forecast on a quarterly basis throughout the year. Regarding dividends per share, we plan to issue a dividend of JPY 10 per share for FY 2025 at this moment. Although the impact of U.S. tariffs remains difficult to gauge, we will strive to maintain an annual dividend of at least JPY 10 regardless of the circumstances while continuing to execute concrete measures to support future earnings recovery. We sincerely ask for the continued understanding and support of our shareholders. Please turn to Page 9. This slide shows the factors behind the transition in the operating profit forecast for FY 2025 from the previous year. We expect a positive impact of JPY 73.5 billion from volume/mix and price and so on. Although the overall economic environment remains challenging, we expect the full year contribution of new models launched at the end of last fiscal year, along with the impact of new models scheduled for launch this year, to support the profit growth in ASEAN, Oceania, Europe and Japan. Selling expenses are expected to have a negative impact of JPY 13 billion. While we anticipate an increase in incentive costs due to intensified competition, we plan to partially offset this through more efficient and restrained advertising expenditures. Regarding procurement and shipping costs, although we expect upward pressure from enhanced product competitiveness and inflationary factors, we aim to largely offset these through procurement cost reduction activities. However, a slight negative impact is still anticipated. R&D expenses are expected to improve slightly year-over-year. Others include expected increase in environmental compliance costs, which will be partially offset by reductions in general and administrative expenses, resulting in a total negative impact of JPY 6.1 billion. Regarding the impact of exchange rates, we expect a negative impact of JPY 51 billion, assuming a modest yen appreciation compared to the previous year. Regarding the impact of U.S. tariffs, we have estimated the impact based on assumed economic slowdown in the U.S. and regions with high dependencies on the U.S. market. We anticipate a decline in wholesale volume. However, through cost-cutting measures, we expect to absorb part of this impact, estimating the net effect at JPY 40 billion. Given the heightened risks of economic downturn in FY 2025, we will work toward achieving an operating profit of JPY 100 billion by thoroughly reducing costs and expenses. Please turn to Page 10. This slide presents our retail sales volume forecast for FY 2025. We aim to maintain and expand both market share and sales volume in ASEAN, Latin America, Middle East, Japan and Europe through the refreshing of existing models and the introduction of new models. Next, we will explain the key initiatives to achieve the forecast. Please turn to Page 12. First, the ASEAN and Oceania regions that are the growth drivers for us. In FY 2025, the overall sales environment in ASEAN countries is expected to remain challenging. In Thailand, household debt remains at a high level and a recovery in the macro economy is not anticipated. In Indonesia, concerns are rising over economic stagnation due to tax increase and redistribution policies under the new administration. Vietnam and Malaysia may be affected by reciprocal tariffs involving the United States. On the other hand, the Philippines is expected to maintain a robust market environment. Amid these conditions, we aim to expand sales volume by leveraging the launch of new models, improving our sales network and collaborating with local financial institutions. At the same time, we will pursue profit growth through rigorous cost and expense reductions. In the Oceania region, the business environment is expected to remain challenging in FY 2025. This is due to Australia's economic downturn resulting from persistently high policy interest rates and the sluggish Chinese economy, the Australia's key export destination. Under these circumstances, we will prioritize maintaining our market share by strengthening the sales of the all-new TRITON, now available in all grades, and the new OUTLANDER series. Please turn to Page 13. Next is Latin America, Middle East, Africa that are the leverage regions. In the Latin America region, automotive demand in Brazil, which is our core market, is expected to slow due to persistently high policy interest rates. However, leveraging our strong brand presence in Brazil, we aim to sustainable growth by continuously introducing new models and strengthening private use sales of higher-end grade of the new TRITON. In the Middle East, the sales environment surrounding us is not expected to change significantly in FY 2025, and we anticipate conditions to remain roughly in line with the previous year. We will continue to focus on our core models, the OUTLANDER and the MONTERO SPORT, while promoting deeper market penetration of new L200/TRITON launched last year. With a robust model lineup now in place, we will enhance our brand and service performance through market-appropriate pricing strategies and effective advertising campaigns. Please turn to Page 14. Next, the regions promoting advanced technology, Japan, North America and Europe. The domestic market is expected to remain roughly in line with the previous fiscal year. We will further strengthen our growing brand power through models that embody Mitsubishi Motors-ness and leverage new models as a catalyst to further expand sales and maximize the positive impact on our broader product lineup. At the retail level, we will accelerate digitalization to improve sales efficiency. To prepare for the continuous rollout of new models, we will be working toward longer-term growth through network expansion and enhancement of our service capabilities. The North American market remains highly uncertain due to tariff risks, the possibility of high interest rates and the risk of an economic slowdown. In addition, market competition is expected to intensify. However, with the significantly enhanced OUTLANDER series as our core product, we will maintain sales momentum while responding in a speedy manner to market changes and prioritizing profit assurance. In Europe, automotive demand is expected to decline slightly year-on-year with growing uncertainty due in part to the impact of U.S. tariffs. In this environment, we will promote the expansion of sales for the OUTLANDER PHEV launched at the end of last fiscal year and ensure the successful rollout of upcoming new models to meet customers' needs. Please turn to Page 15. In fiscal 2025, sales of the OUTLANDER series which was launched at the end of last fiscal year and the XFORCE HEV which made its world debut in Thailand in March 2025 will begin in a full-fledged manner. In addition we will launch the mass production model of Mitsubishi DST Concept, which was unveiled for the first time in the Philippines last year, in Indonesia and other ASEAN countries. We will continue to enhance our product lineup through full model changes of Kei passenger cars for the domestic market, challenges in new segments, renewal and enhancement of existing models and utilization of alliances. Please turn to Page 17. Next, we would like to review the progress of the midterm business plan, Challenge 2025. Looking at the trends in our KPIs so far. In the first year of the plan, FY 2023, we focused on improving the quality of sales and net revenue strategy. As a result, we were able to increase revenue per unit and maintained an operating profit margin at the 7% level. On the other hand, in fiscal 2024, in addition to the delayed recovery of the ASEAN market, increased incentives in the United States and higher material costs reflecting inflation forced us to report a decline in profit compared to FY 2023. Meanwhile, with no signs of a full-scale market recovery in Thailand, Indonesia and other countries, uncertainty is growing in other regions as well and the sales volume and profit target for fiscal 2025 are expected to be delayed from the schedule. On the other hand, our shareholders' equity has steadily increased since the formulation of the current midterm plan, and we are making solid progress towards achieving our financial KPI. Please look at Page 18. In this slide, it shows the factors affecting the 2025 operating income forecast compared to the midterm business plan KPI. Regarding the market environment, the total demand in Thailand and Indonesia fell approximately 50% and 36%, respectively, below the midterm plan, resulting in an estimated decrease in income of approximately JPY 70 billion. Our performance was affected negatively by a decline in market share in Thailand and Indonesia, but we offset that significantly by improving unit sales and market share in the Philippines and Vietnam. However, the impact of delays in the launch of some models remained, resulting in a total loss of JPY 30 billion. In the procurement cost, we anticipated a cost increase primarily attributable to higher material costs which are driven by inflation and raw material price hike, resulting in a total negative impact of JPY 40 billion. Regarding ForEx, the depreciation of the yen against major currencies is expected to have a positive impact of JPY 60 billion. Please turn to Page 19. Next, I would like to talk about the progress of key measures. First, the promotion of BEV development, including our in-house made BEV. Under the midterm business plan, we were planning to launch nine EV models, including our two in-house built BEV models over the 5-year period. The growth of BEVs has plateaued worldwide and PHEVs and hybrids are being reevaluated as more realistic environmental technologies. In light of these environmental changes, we have decided to leverage OEM products from our partners to respond to markets that require BEVs for the time being, and we concentrate on the development of PHEVs and hybrids, where we have a competitive edge. Please turn to Page 20. Next, so the second point is strengthening profitability in the ASEAN through continuous introduction of new ASEAN products. The ASEAN region remains a core market for us. However, over the past 2 years, the growth has not met the expectations in our midterm plan. In the sluggish Thai market in particular, the entry of numerous new brands leveraging BEV tax incentives has led to oversupply and intensified price competition, causing market disruption and raising concerns about a prolonged downturn. On the other hand, the Philippines and Vietnam are contributing to strengthening overall earnings in ASEAN by significantly expanding our market share as planned amid steady market growth. Regarding models for ASEAN, development workloads are increasing and market introductions are delayed due to increasingly sophisticated intelligent demands for automobiles. As a result, the time line for expanding sales volume through successive model launches has been taking longer than initially expected. In addition, as part of our regional strategy, we successfully completed our withdrawal from the Chinese market in the first year of our medium-term plan and have moved on to the aftersales phase. And although it was a painful management decision, we believe that it was the appropriate policy change for our company given the current status of the Chinese automobile market. Please turn to Page 21. The third measure or the third item is strengthening brand power through the introduction of models that embody Mitsubishi Motors-ness. In recent years, many new brands, including Chinese brands, have entered into emerging markets such as ASEAN, intensifying competition. As a result, there is a greater need than ever to strengthen the brand power. We have been strengthening our brand power by introducing models that embody the Mitsubishi uniqueness. In Japan, our home market in particular, awareness of DELICA MINI and TRITON is growing and our brand power is increasing. As a result, we improved the market share by about 1% in 2024 compared to the 2020 level. We will continue to introduce new models through the Japanese market in order to further expand our market share and sales volume. In addition, we plan to apply the successful strategies from Japan to other countries, aiming to improve our brand power on a global scale. Please turn to Page 22. As stated in Challenge 2025, we will accelerate our efforts to take on new business models and monetize them through various partnerships. First, in the ASEAN region, we established Mitsubishi Motors Finance Philippines Corporation, a dedicated auto finance company in partnership with local financial institution, Security Bank. The company began operations this spring, offering financing services exclusively for our brand. And in Australia, we have invested in FleetPartners Group, a leading provider of automotive financial services. Through this partnership, we aim to expand our fleet or commercial sales business and further increase both sales volume and profitability in the Australian market. In Japan, we launched a commercial smart charging service utilizing connected EV technologies in collaboration with Kaluza Japan, MC Retail Energy and Mitsubishi Corporation. Additionally, in partnership with Yanekara, we delivered EV charging infrastructure and services to Kurashiki City. And this includes the implementation of controlled charging operations for government vehicles at the Kurashiki City Hall parking lot. Going forward, we will continue to collaborate with various partners, explore new businesses, establish a solid business foundation and aim to create sustainable corporate value. Here is the overview of our product rollout strategy. During the Challenge 2025 current midterm plan period, we have focused on launching ASEAN strategic models and rolling those out to various countries as well as introducing electrified vehicles prioritizing HEVs and PHEVs. And we will continue to strengthen our ASEAN strategic vehicles in fiscal 2025 and beyond. These models will also be rolled out to Latin America and the Middle East, Oceania and Japan, contributing to improved profitability. For global models, we will strengthen and expand our product lineup through both our own brand and collaborations with various partners, tailoring our offerings to meet the needs of each region. Through these efforts, we aim to build a resilient global portfolio capable of adapting flexibility (sic) [ flexibly ] to economic fluctuations. Please turn to Page 24. To build a comprehensive global model lineup, collaboration with partners is essential. We will continue to accelerate our efforts through various partnerships to enhance our product lineup and strengthen and monetize regional business operations. In Europe, we aim to expand our model lineup in Europe by receiving CSUV and BEV OEM supplies from Renault, our Alliance partner. With Nissan, we will promote joint development and production of next-generation pickup trucks globally as well as collaboration and business expansion in the EV field. In Japan, we'll promote joint development and production of Kei cars. In North America, we plan to supply PHEV systems for ROGUE in 2025 and receive OEM supply of a BEV based on the next-generation LEAF in 2026. Additionally, we have begun discussions to co-invest in Nissan's U.S. plant to jointly produce and sell next-generation SUVs under both brands. In Oceania, we plan to provide OEM supply of pickup trucks in 2025. And furthermore, in the Philippines, we are scheduled to receive OEM supply of vans in 2025. With Hon Hai Precision Industry, we will receive OEM supply of EV developed by Foxtron, their subsidiary company, and plan to start selling them in the Oceania region from the latter part of 2026. And going forward, we will continue to work in collaboration with Nissan Motor and Honda Motor under a strategic partnership framework aimed at the era of intelligent and electrified vehicles with the goal of continuously creating new value. Two years have passed since the launch of our midterm business plan, Challenge 2025. And during this time, we have faced significant changes in the automotive industry. Despite such a dynamic environment, we believe that our ability to respond swiftly and flexibly to these changes has gradually contributed to the stabilization of our business foundation. From an economic standpoint, the first half of FY 2024 progressed steadily, supported in part by favorable exchange rates. However, in the second half, the effect of interest rate cuts began to taper off. The yen shifted toward appreciation and the announcement of new U.S. tariff policies triggered growing uncertainty in the global economy. Looking ahead to FY 2025, we expect the business environment particularly for the automotive industry to remain challenging and highly volatile. Nevertheless, we will continue to respond swiftly to changes, maximize the effect of new model launches and maintain strict cost control in our efforts to sustain this fiscal year's performance. That said, it remains extremely difficult to predict the entire performance for the current fiscal year at this stage, and we ask for your understanding that the performance guidance disclosed today will be reviewed every quarter. Thank you for your kind attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]