Mitsubishi Motors Corporation / Earnings Calls / August 1, 2021

    Koji Ikeya

    I am Koji Ikeya, Executive Vice President. And thank you very much for joining us, despite a busy schedule. First, I would like to give you a summary of the first quarter results. The business started in the fiscal 2021 amid harsh external environments such as the continuous lock-down mainly in ASEAN countries to do the rebound of the spread of COVID-19 and tight supply/demand condition due to a shortage of semiconductors. On the other hand, we saw a significant year-over-year improvement in our performance due to 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 ¥431.9 billion. Operating profit improved significantly year-over-year to ¥10.6 billion due to an increase in unit sales resulting from the effects of the new vehicles, an 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 ¥11.2 billion, and net income was ¥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 five quarters since the fourth quarter FY19 and net income was in black ink for the first time in two years since the first quarter FY19. The slides you see explain the factors behind a YoY changes in operating profit for first quarter of FY21. In terms of volume and mix, there was an improvement ¥29.7 billion due to a certain recovery from a substantial decrease in unit sales due to the spread of COVID-19 in FY20 and improvement of ¥2.8 billion in mix and selling prices resulting in a YoY improvement of ¥32.5 billion in total. As for sales expenses, both advertising expenses and incentives were kept down, resulting in a positive effect of ¥3 billion. Cost reductions, such as materials costs, improved by ¥2.2 billion year-over-year due to normalization from loss operations in the previous fiscal year, despite production adjustments caused by the shortage of semiconductors and the negative impact of raw material price hike. The effects of the structural reforms implemented in FY20 resulted in an increase in operating profits of ¥10.7 billion. R&D expenses decreased by ¥3.6 billion due to the completion of the development of large-scale products having a positive effect on OP. From the second half in this fiscal year, R&D expenses are expected to be in increasing phase toward the introduction of new products, and for the full year, they are expected to rise by approximately ¥6.2 billion. In addition, the depreciation of the yen, YoY resulted in a positive effect of ¥11.8 billion in total. OP increased substantially by ¥63.9 billion. So the next page is about the total sales for the first quarter of FY21, our total sales in all regions increased by 65% YoY to 230,000 units. First, in the 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 the ASEAN regions in first quarter was 58,000 units, up 142% YoY. In 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 in both countries, and our sales volume rose 92% YoY 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 pre-pandemic 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 to15,000 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% YoY 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 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 lock-downs 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 had been recovering, and the Philippines, which has been implementing lock-downs for a long time, we recognize that 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 the COVID-19 worsened from the end of April, especially in the southern region, and lock-downs have been enforced again. On the other hand, Indonesia, which had been affected most severely by COVID-19 in FY20, has been on a growing trend of recovery due to the government's luxury tax reduction measures. The recent announcement of extension of the 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 e-commerce. As a result, our sales volume in the first quarter was 58,000 units, an increase of 142% YoY, 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 infections in ASEAN countries. We will 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 lock-downs have been implemented intermittently, overall both country have succeeded in controlling the expansion of COVID-19, and automobile demand is also strong. First, in Australia, amid favorable market conditions, ECLIPE 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% YoY and the market share expanded 5.4 percentage point, reflecting success of expanded shipments of higher-margin models and the campaign for current vehicles implemented prior to the model change of the new OUTLANDER. Going forward, the impact of the COVID-19 will remain uncertain due to the new variant but we do not believe that it will affect the economic activities and to the success of measures implemented already to date in each country. On the other hand, shortage of semiconductors will continue to impose risks such as an insufficient car supply. However, we will aim to increase our market share with profits 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 speed of our North American sales. Overall demand in North America grew significantly due to the progress of vaccination and active economic activity as well as income tax refunds 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 FY2020. As a result, by March 2021, our total inventory had been reduced an appropriate level of 310,000 units. Currently, inventory levels are declining further through production adjustment due to a shortage of the semiconductors and the 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 amid inventory shortages. Please turn to Page 10. Next, I would like to explain our earnings forecast for FY21. 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 FY21 exceeding the initial plan, we have revised our full-year forecast for FY21 as shown in the slide. We have revised unit sales from 957,000 units to 967,000 units. Net sales have been revised from ¥2.06 trillion to ¥2.08 trillion. Operating profit has been revised from the previous forecast of ¥30 billion to ¥40 billion. Ordinary profit has been revised from ¥26 billion to ¥36 billion, and net income has been revised from ¥10 billion to ¥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 constrains 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 2Q FY21 onwards, we will do our utmost to achieve our revised full-year forecast by optimizing costs while expanding sales of the 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 FY21. 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 we 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 in the forthcoming new OUTLANDER launch. For Japan, although the current trend will continue, we assume that no major changes were seen and the trend will remain unchanged. For China and others, we anticipate it will take a certain 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 year-over-year changes in the revised operating profit forecast for FY2021 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 ¥90 billion. Regarding sales expenses, considering the effects of curbing sales expenses in Q1, we expect an improvement of ¥3.5 billion for the FY21, which will be a factor behind a profit decrease of ¥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 regard to structural reforms and others, we anticipate a ¥20.6 billion increase in profit, assuming we can expect positive effects that exceed expectations. In addition, we anticipate profit increase of ¥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 FY21 announced at the beginning of FY21. We do not anticipate significant changes in volume and mix selling prices. Regarding sales expenses, we anticipate an upturn of ¥3.5 billion, considering the effect of restraint in the first quarter. General expenses, and other items, are expected to improve by a total of ¥2.8 billion. Regarding foreign exchange, an upturn of ¥3.7 billion is also expected, as the yen's depreciation trend was greater than expected. Next, we will have to explain our business highlight for - during FY21. Please turn to Page 16. In fiscal 2021, we continue to focus on 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 efficiently 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 significantly to increased sales of other models. Production is currently affected by a 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 successively 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 Australia. We have received high price from our customers, with strong order intake in each region. In the second half FY21, we plan to introduce new OUTLANDER PHEV model and a new XPANDER, with significant enhancements. We also expect to launch new kei car EVs in early FY22. 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 tailwind and headwinds are blowing 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 the sales continue to be strong and exceed our expectations. And in the second half FY21, we are expecting the launch of our core product, 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 diverse 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.

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