Nissan Motor Co., Ltd. (7201) Earnings Call Transcript & Summary

Ladies and gentlemen, as it is time, we'd like to start the presentation of the financial results for Nissan Motor Co. for the first half of fiscal year 2020. We are very grateful for the very large number of participants that are connected to the system. In the light of the recent situation, we would like to have today's press conference based on Internet system as well as live distribution, but appreciate your kind understanding. First, let me introduce the attendees from our side. First, Mr. Makoto Uchida, CEO; Mr. Ashwani Gupta, COO -- Chief Operating Officer; and Mr. Stephen Ma, who is our CFO -- Chief Financial Officer. So we look forward to your participation. And I would now like to invite Mr. Uchida to say a few words. Mr. Uchida, the floor is yours.

Thank you for joining us today. Before we begin, I would like to express our sincere gratitude to all those around the world who have been hard at work every day, managing the impact of the COVID-19 pandemic. COVID-19 cases are surging in many regions, but especially in Europe and the United States. Nissan places the highest priority on the health and safety of all those who we work with and serve, including our customers, staff and their families, dealers and suppliers. We are doing our utmost to prevent infections while running our operations. Nissan launched Nissan NEXT in May with a clear focus on immediate recovery while putting the business back on the path to growth. I am pleased to announce that Nissan has made steady progress in the past 6 months. COO Ashwani-san will now present the highlights of our performance and financial results for the second quarter and the first half of fiscal year 2020. Then I will discuss the outlook for the full fiscal year. Ashwani-san, over to you.

Thank you, Uchida-san. We will explain now the results of first half of financial year 2020 and we will start with an overview on the business performance. When we look at the global automotive market trend, especially during the pandemic and post-pandemic, the global auto markets are rewinding back and in 2020 September, they are at same level as last year in 2019. If we look at, deeply, into the 3 core markets in China since April, the markets are higher than last year. In United States in September 2020, the markets are at same level of last year. However, in Japan, we still see that markets are behind than last year. During the pandemic and post-pandemic, the priority for Nissan, #1 was people safety, #2 was cash security. And we focused on 3 things during the pandemic and post-pandemic. The first is our production plans. Following the global market trend, in September, our production plans globally are at 87% of last year, which are growing to above 100% in December, which demonstrate the fact that our production is following the global automotive trend. The second thing is about customer touch points. Globally, we are at 98% of our dealerships, which are fully operational. Nissan took the opportunity to capitalize the digital platform to have the seamless customer experience. In H1, Nissan sold 161,000 cars utilizing the digital experience, which is 11.5% of our sales in H1. Using this experience also, we saw significant change in the customer behavior. For example, in China, 33% of our cars went through the digital experience, whereas in United States, we see reduction in the transaction from purchasing -- consideration to the real purchase. Post-pandemic, this has become a new normal, and Nissan is going to deploy globally the digital customer experience. As the new products with the new technologies are the foundation for bringing the sustainable, profitable growth in Nissan NEXT, as we announced in May, we could start the production of 6 key models globally and I would like to say thanks to our employees, suppliers, dealers, and all the stakeholders who helped us during the crisis to launch these productions. We launched all-new Roox in Japan. We launched all-new Sentra in Mexico. We launched all-new Kicks e-POWER. We started the production of all-new Rogue in Japan and United States, new Navara in Thailand, and all-new Nissan Magnite in India. Now let's look at the 3-core markets' business performance for Nissan. At first, because of pandemic, let's see the recovery of Nissan from quarter 1 to quarter 2. When we look at the global automotive market, the global market grew by 62.8%, where Nissan retail sales increased by 64.1%. When we look at the detailed markets, China grew by 77.8%, whereas Nissan grew by 88.7%. In Japan, the market grew by 42.6%, and Nissan increased by 43.1%. And North America, where we decided to focus on quality of sales, the North American market grew by 31.7% in retail and Nissan grew by 34% in retail. However, the U.S. fleet market grew by 50.4%, but the Nissan fleet sales reduced by 49.2%, which is the consequence of the decision Nissan took to focus on quality of sales. To go more deeper, let's see where is the U.S. business performance. As you can see, our retail sales in the United States are growing month-on-month. And most important, following the quality of sales, our fleet mix in quarter 2 was down by 20 points. On the other side, our rental volumes reduced by 90% with respect to the last quarter. We also focused on inventory optimization to focus on quality of sales, but also to improve our cash flow. And in United States, we reduced our inventory by 28%, which is equivalent to 28 days. Again, focusing on quality of sales, the incentives were reduced by 5% and the net revenue per unit was increased by 3%, in line with our business mindset change from volume to value. Now when we look at the network power, this is a clear demonstration of dealer engagement and satisfaction. In February, we launched Nissan campaign, focused on dealer financial health. As a result, NADA survey demonstrates the increase of franchise value of Nissan by 40%. The Dealer Reputation Score, which shows the satisfaction of dealer with the customers, Nissan became #1 brand in United States to have the reputation score. And as a consequence, our dealers in United States, average profitability increased by 2.2 points. After brand power, Nissan is starting to build up the foundation in the United States and this can be only demonstrated at first by the customer recognition and the institutions' recognition. Nissan products and services were recognized by various institutions and customers. Nissan received J.D. Power IQS, Nissan received J.D. Power Vehicle Dependability Study, Nissan received J.D. Power APEAL Study, and most important, 7 of our products are now Consumer Reports recommended. Now look at our 2 core models in United States. At first, Sentra. Thanks to quality of sales, our residual value is higher than the market. And as a consequence, we are improving our net revenue per unit on this car. The second example is all-new Rogue, which we just launched, and we have gained our residual value in line with the market. And there is a tremendous positive acceptance by the market for all-new Rogue. Now looking at China business performance. Following the market, Nissan is growing month-on-month with respect to last year since April. However, during the pandemic and post-pandemic, we did see incentives significantly increasing in the market. However, Nissan, keeping the focus on quality of sales, is growing profitably in China with a growing market share. China being one of the leader for CASE, Nissan in terms of autonomous driving features, which is the state-of-art technology ProPILOT, we saw 8% penetration in China for our autonomous driving features. When it comes to connected, more than 2 million cars in China are fully connected. And we are going to expand the CASE application in China moving forward. Finally, our home market, Japan. The Japan is categorized into 2 segments: kei car and registered car. Thanks to the launch of all new kei series, Nissan has significantly grown in the kei segment, especially filled by all-new Roox, which has made a growth, especially in September, higher than last year. On the registered car, Nissan is facing the challenge because of the aged product lineup. However, with the recent launch of Kicks e-POWER and very soon launch of all new compact car, we are confident that we will gain profitable market share in Japan. In Japan, Nissan is recognized as a technology brand and Nissan wants to focus to build the state-of-art technologies in Japan, demonstrate to the customers. And as a result, on connected where Nissan has started generating revenue using connected services, we have more than 6,000 subscribers. On the autonomous driving, Nissan is #1 sales in the world's first hands-off driving, with a clear human-centric approach where Nissan is applying ProPILOT in the kei car, but also in the top of the line Skyline. And today in Japan, 31% of our cars are fitted with hands-off driving features. The next one is Shared. Nissan launched e-mobility in Japan, with more than 16,000 customers. And most important, 90% of the customers are willing to use it again. Nissan also used shared mobility during the pandemic to offer test drives to the potential customers. And after this success, Nissan is going to expand the shared services in Japan. And final, the most, Nissan being pioneer in battery EV, Nissan still remains the #1 in battery EV in Japan. On the other side, Nissan's unique technology of e-POWER has reached 21% of penetration, which clearly demonstrates the customer recognition of Nissan technology as a technology brand in Japan. As a part of community service, where Nissan is -- where Japan is prone to the natural disasters, Nissan is contributing to the community by providing the electric vehicles and we have signed 100 agreements with cities and the companies. To summarize where we are on Nissan NEXT, which is our business transformation, if we talk about 3 main pillars, the first, quality of sales, we reduced our rental mix, we reduced our incentives and finally, we were able to increase our net car sales revenue by 1.5%. In case of, again, quality of sales and focusing on free cash flow, our inventories globally reduced by 26%. And most important in Nissan NEXT, we announced that we are going to reduce our fixed cost by JPY 300 billion. In quarter 2, we could reduce our fixed cost by 12%, which clearly demonstrates that we are on-track to achieve our fixed cost reduction in line with Nissan NEXT. When we look at the details, in manufacturing, the decisions we took to close Indonesia plant, Barcelona plant, and some of the lines around the world helped us in reducing the fixed costs, and it is going to continue. In terms of product, we decided to exit some of the nonprofitable segments like Van segment in United States. In terms of marketing and sales, we also focus and prioritize our investments in the core segments and the core markets. And general and administrative expense also we reduced by 11%. So with these 3 pillars, we are confident to be on track to achieve Nissan NEXT. As a result, if we look at our financial performance for the first half, our net revenue for the second quarter is JPY 1.9 trillion. Our operating profit minus JPY 4.8 billion, which is significantly better from quarter 1, thanks to the fixed cost reduction, quality of sales. When we look at our nonoperating, we are positive JPY 5.2 million, which includes profit and loss in companies under equity method, including our Chinese operations. Our net income significantly improved from quarter 1. However, it remains negative at negative JPY 44.4 billion. When we look at the transition with respect to the 2019 quarter 2, we have a significant reduction in the volumes because of the global market during the pandemic. However, thanks to the quality of sales and fixed cost reduction, we were able to mitigate a significant amount of drop because of the global markets, and that's how we finished with minus JPY 4.8 million of operating profit in quarter 2. When we look at our free cash flow, our free cash flow for the quarter 2 is positive plus JPY 311 billion. However, the quarter 1 was negative. And in total, our first half free cash flow is minus JPY 504.6 billion. But the most important thing is the net cash inflow from P&L items in second quarter was positive JPY 0.1 billion. And this demonstrates that Nissan operations have started generating the net cash in the operations. Finally, coming to the liquidity status in short term and midterm and long term, we continue to strategically accumulate liquidity despite the difficult business environment from COVID-19. At the end of September 2020, cash and cash equivalents were over JPY 2.3 trillion and net cash totaled JPY 505.8 billion for the automotive segment. Furthermore, we still have unused committed credit facilities of approximately JPY 2 trillion as of September 2020. In response to COVID-19, we raised JPY 895 billion through financial institutions between April to September 2020. In September, we issued bonds to raise long-term funding of approximately JPY 1.1 trillion. As bond insurance have longer tenure, we have enhanced our long-term liquidity. In summary, operations of quarter 2 and the first half has demonstrated business operations recovery. However, we are fully aware of the challenges in front of us and we will keep focusing on improving the operational efficiency, having a focus on people safety and the cash security. Now I will turn to Uchida-san to walk through the outlook for the remainder of FY '20.

Yes, thank you very much. Let me talk about the full year forecast for the fiscal year 2020 and the forecast for the TIV. Looking at full fiscal year, Nissan forecast global TIV to be 75.9 million units, 11% down from the prior year. The full year guidance is slightly better than what we announced July. However, market outlook remains uncertain due to COVID-19 and we will be keeping close watch over how global markets continue their recovery from the impact of the pandemic. Based on the TIV assumption, Nissan's global retail volumes is expected to be 4,165,000 units, a decline of 15.5% from the previous year, which is 1% better than the previous projection, reflecting an initial market recovery. During the second half, Nissan will remain committed to not chase volume for the sake of volume and will continue to focus on better quality of sales. Given the current circumstances, Nissan revised its full year guidance as follows: Nissan is forecasting net revenue of JPY 7.94 trillion, reflecting the latest sales forecast that is 2.1% better than the initial expectation, excluding China. We foresee an operating loss of JPY 340 billion, which is JPY 130 billion better than the previous projection, demonstrating the steady progress of Nissan NEXT. We expect a net loss of JPY 615 billion, which is JPY 55 billion better than our previous estimate. Compared to the previous guidance announced in July, the anticipated movements and profit drivers are as follows: an increase in raw material prices is forecasted to have a negative impact of JPY 11 billion, mainly due to the cost of precious metals. On the other hand, higher sales volume is expected to produce a positive impact of JPY 29 billion. Selling expenses are expected to have a positive impact of JPY 15 billion primarily due to the reduction in incentive spending per unit. Sales finance, Monozukuri, fixed and other costs are expected to have a positive impact of JPY 97 billion. This includes a release of loss provisions for sales finance as well as the additional impact of fixed cost reduction. As we stated in May, we are aiming to reduce fixed costs by JPY 300 billion versus fiscal year 2018 and we are on track. This slide outlines operating profit variance analysis, comparing the revised forecast with the prior year. Our sales volume is expected to reach the prior year level in the second half of the year, but will not completely offset the decline we saw in the first 6 months, particularly during the first quarter. As a result, we are forecasting a negative impact of JPY 396 billion from the volume-related items. JPY 15 billion of positive impact comes from the reduction in selling expenses. Monozukuri, fixed costs and other items continue to be major contributors to our profitability with a positive impact of JPY 136.5 billion. This comprises our revised full year guidance. Overall, Nissan NEXT transformation plan is steadfastly progressing. As Ashwani showed, we are making good progress across our business operations with our plan across several key metrics. However, given the persistent uncertainties related to the pandemic and global economy, it is imperative to put even more focus on financial discipline and strengthening our sustainable business foundation. Nissan is working intensively, particularly on the following key areas: we are reducing fixed costs without compromise to improve our cost base through tight inventory control and production capacity optimization. We continue normalizing sales in North America while pursuing better quality of sales worldwide. It is critical to sustain the momentum built in the second quarter towards the second half of fiscal year 2020. Rather than unthinkingly pursuing sales volume growth, we aim to achieve steady growth while ensuring profit per unit. To achieve this, we will introduce highly competitive new models in our core markets. In the United States, last month we launched our top-selling Nissan model, the all-new Nissan Rogue, in the end of October. And the new Rogue has received a great reception from customers. We are also going to update our product offering in the SUV and pickup segments to drive our performance recovery in the United States. Within this calendar year, we will launch the long-awaited all-new compact car in Japan, our home market, along with the recently launched new Kicks e-POWER. The significantly updated new compact car is expected to give a large boost to our presence in the market. In the other markets, Nissan is launching Nissan Magnite compact SUV in India. And we are also planning, before the end of fiscal year, to reveal the Infiniti QX55 and latest model of the Qashqai, which continues to drive our sales in Europe. We expect these new models to support our bottom line between the fourth quarter of 2020 and the first half of 2021, going forward. All these demonstrates that Nissan will continue to update and enrich its lineup by launching new products. Though the business environment remains uncertain, we are steadfastly progressing our ongoing efforts that are focused on core markets, core products and core technologies to achieve 2% operating margin in fiscal year 2021 on a pro forma basis, which is one of the milestones defined in Nissan NEXT. I believe that the most important factor for our performance recovery is to restore the confidence of our customers, suppliers, dealers and all our stakeholders. To this end, Nissan is strengthening its business foundation together with our partners as we rediscover Nissan's DNA as an innovator and a challenger. We are undergoing a cultural transformation with a renewed Nissan Way, a common value shared across Nissan globally and the corporate purpose that guides us on where we need to head. We will also continue to strengthen our relationships with suppliers and dealers, and work with them to bolster our business model. I strongly believe that Nissan has to retain its Nissan-ness to be a credible company, a brand that you can always trust and count on. I am committed to steering Nissan in the right direction to gain your trust back. As we outlined in Nissan A to Z, Nissan is demonstrating untiring efforts to innovate with the Ariya crossover EV. The recently revealed Z demonstrates Nissan's passion as a bold challenger. Nissan is committed to building models that embody Nissan-ness in the new era. Let me close with one representation of this with our commercial on the all-new Rogue, which went on sale late last month in the United States. [Presentation]

Thank you for your kind attention. We would like to begin entertaining questions.

[Operator Instructions] Let us start. Asahi Shimbun, Kamizawa-san. Kamizawa-san, please go ahead.

Yes, Asahi Shimbun, Kamizawa is speaking now. The first question, between the first half and the second half, I would like you to elaborate on this. In the first half, compared with the prior year, the volume is not growing as much as the competitors and the financial results are challenging. You are shifting from the expansion strategy. And the results in first half of the year, how do you assess the performance in the first half? For the second half, you made upward revision. But compared with the competitors, it seems like you're struggling because the growth looks stagnant compared with other carmakers 2% operating margin in 2021. In order to pursue this, how do you see the projection going forward? There's another thing. North America fleet is reduced by 20 points you said. Last year, it used to be more than 30% of proportion. And the second question, funding is my second question. Net cash is improving, but you are borrowing a lot of money from banks, so you have to pay a lot of interest rates. And what is the burden of interest rates on the financials? What's your projection on this? These are my questions.

Yes, thank you for the questions, Uchida-san. With regards to the second question, CFO, Mr. Ma will be answering, starting with the first question from me, first half of the year. What we presented today, in the second quarter, we are making a steadfast progress in better quality of sales. Instead of pursuing excessive sales, without setting unrealistic sales goal or stretch sales target, we are enhancing the quality of sales, so that we can increase the revenue or profit per unit. So to this end, in the second quarter, the goals that we defined for Nissan NEXT, which was about better quality of sales is reflected. We are seeing the results. That's how I assess the results for the first half of the year. And the question is how to continue this momentum of better quality of sales. This is very important. For the second half of the year, the profit growth seems slow. That's what you said. But as I said, going forward, we are going to do many new products. And from the second half of the year, Rogue in North America and the new compact car coming in Japan, we are going to be on the [ product ] offensive. And we'll be spending investments going forward. By making these investments, we are trying to attain this profit-making in 2021. Of course, Nissan is still making losses. So we will continue tightening the control on fixed costs, while we enhance the revenue per unit and attain 2% or profit-making in 2021. And the fleet proportion, with regards to this one, Ashwani-san will answer this.

Thank you for this question. As you know that in U.S., fleet has got a different definition. You have 3 kinds of fleets. You have the rental fleet, you have the commercial fleet and you have the captive fleet. So when we say that fleet mix went down by 20 points, this is the mix of the fleet. But when we look at only the rental fleet, which is always making a damage on the profitability, that rental fleet went down significantly by 90%. So that's the difference between the fleet mix and the rental.

Second question, Ma-san?

As you rightly point out, we have taken on additional funding this year. And as you know, during the pandemic, nobody can tell and predict the future. So there's a lot of uncertainty. We want to make sure that we have proper and ample liquidity. So that's why we went out to get funding, additional funding. And the additional funding allows us a lot more freedom, more flexibility in handle, and help us in the transformation of the company in line with Nissan NEXT. So we have restructured that, so it's much more long term in nature. So we have long-term liquidity. The rates that we have is competitive to our credit rating and is -- if you look at what our competitors have raised in terms of U.S. dollar Eurobond, in those markets, we're actually very competitive versus what they have raised during this time. And finally, we have also gained this long-term funding to make sure that we diversify our funding source. So now we just don't rely on one single source or just banks for our funding requirements. So hope that answers your question. Of course, with this additional funding, we will get a little bit more interest cost. And you will -- but given that global interest rate is lower, the net effect is not as much as it will be in other cases.

From Yomiuri, Mukoyama-san. Mukoyama-san from Yomiuri Shimbun Newspaper.

Mukoyama from Yomiuri Shimbun. Can you hear my voice?

Yes.

I have 2 questions, if I may. My first question, a question to you, Uchida-san. Well, there was an upward revision. What is the greater factor driving your upward revision this time around? And also, recently in Europe, U.S. and Japan, there is the risk of further expansion or resurgence of COVID-19 pandemic. So what is the basis of your decision to conduct an upward revision in your guidance? My second question, this is for Mr. Gupta. Second question for Mr. Gupta. You talked about U.S. operations or Chinese operations in your presentation. When it comes to U.S. and China, can you talk about the -- can you talk about the progress, if you will, of the Nissan NEXT program for each region, China, U.S. and in the major regions as well?

Let me respond to your first question about the reasons driving the upward revision. At the end of July, we were observing TIV, but the TIV situation has recovered compared to the situation back in end of July. So that is why with this outlook, we decided to carry out this upward revision. Furthermore, for one thing, our sales financing, the provision for bad loans, the provision for sales finance is much lower than we had anticipated. We gave you the OP variance analysis earlier. So those factors are factored in. And on top of that, we talked about Nissan NEXT. Ashwani talked about Nissan NEXT, and KPI is doing very well. So we want to maintain the strong momentum for KPI and observe the pandemic situation. At the same time, we'll make efforts to lead to further growth. And based on that, we decided to announce the upward revision in our guidance this time around. But at the risk of repeating myself, we are still not making a profit at this juncture. So that being the case, we want to make sure that we're able to produce as positive results as much as possible. We will not be complacent. Ashwani-san?

Yes. Thank you for this question. So I would like to answer your question in a summary. What is Nissan NEXT? So Nissan NEXT is rationalization and sustainable growth. So at first, where we are on rationalization? Rationalization means why we have to do it. We have to align our organization, our capacity in line with 5.4 million sales volume. To do that, we have to first exit from the product segments where we are not profitable. That's what we did with Datsun in some of the markets, we did with vans in the United States, and also we did with some of the other segments. Second, as a consequence of exiting the nonprofitable product segments, we have to align our manufacturing capacities. We closed Indonesia. We decided to close Barcelona. We decided to close the third line in Canton and many other things, decisions which we took in terms of manufacturing. So this is all about the rationalization. On the other side, in parallel with the rationalization, what we said in Nissan NEXT is we want to have a sustainable growth by sowing the seeds for the future. How we are going to do that? Number one, the new products. We are going to launch 12 new products in the Nissan NEXT. This is what we explained just before and we are absolutely on track. Number two, core technology. As we explained, we will focus on Nissan unique technology, which is e-POWER, autonomous driving on ProPILOT. And number three, on the core markets, which is China, U.S. and Japan. Now answering to your question, in United States, we are growing, but we want to focus on quality of sales. And month-on-month, we are growing. But what's very important is how we are growing, keeping the product power, but also the network power, which is the dealer engagement and the satisfaction. And we showed today that how it is improving. However, we have to go, and we will keep our eye on the ball and move forward exactly with the same principle, which is quality of sales. Coming back to China, post-pandemic, we have seen clearly the change in the customer behavior and that's where we are seeing that entry segment and the higher segments are growing. And Nissan is aligning its business strategy in China. Even if we are growing higher than the last year, we want to maximize our brand as a technology brand. And as a result, we are going to launch e-POWER and we are already there with autonomous driving features like ProPILOT. And this is what Chinese customers are looking for from the Japanese brand like Nissan. So putting in perspective, in all the core markets we are growing profitably. And on the other side, when it comes to rationalization, we are implementing everything which is needed to align with 5.4 million.