Mitsubishi Motors Corp

TSE:7211

Earnings Call Transcript 2018-Q3

[Koji Ikeya, executive]

In spite of your busy schedule and the late time thank you very much for participating. I'm CFO, Ikeya, and I would like to explain to you about fiscal year 2017 third quarter financial results. And I will take up your questions after that.

And first of all, please open to Page 2, or refer to Page 2. For the 9 months to December 2017, we have maintained our V-shaped recovery trend. Net sales increased 13% to JPY 1,518.1 billion. Operating profit totaled JPY 64.6 billion, which equates to an operating margin of 4.3%. Ordinary profit was JPY 81.1 billion. Net income was JPY 70.1 billion. We ended up with great improvement in all financial categories compared to the same period in 2016 in which we recorded a large loss. Global sales volume rose 15% year-on-year to 777,000 units, due primarily to robust sales of pickup trucks in Thailand, stronger growth in Indonesia, where the new XPANDER was introduced and continued solid sales of the locally produced Outlander in China.

Now go to Page 3. This page provides an analysis of our 9-month operating profit variances from the same period last year. As you can see here, we have made well-balanced improvements on sales and cost reduction. And volume and model mix produced a positive impact of JPY 18.9 billion as a result of solid sales growth in ASEAN and China and a recovery in Japan. Sales expenses had a negative impact of JPY 15.8 billion, due to the increased incentives and advertisement for brand rebuilding on our main models, particularly in the U.S. and Japan.

Cost reductions produced a positive impact of JPY 27 billion. The effect of synergies included in this total was JPY 17 billion, including the synergy alliance with Nissan.

In forex, we saw a positive impact of JPY 14.2 billion as the depreciation of the Thai baht was offset by benefits from other currency movements. Others had a positive impact of JPY 43.5 billion, reflecting the large amount of costs from quality measures in markets recorded last fiscal year.

Please turn to the next page, Page 4. This page gives a summary of our balance sheet and free cash flow. In terms of cash and deposits, despite the decrease of JPY 22.6 billion from the end of the last fiscal year, the net cash position at the end of the third quarter was still as large as JPY 534.2 billion. The equity ratio was 48.1%, which indicates our sound financial condition. Free cash flow improved from large negative position, but we ended the third quarter with a negative JPY 27.1 billion, due primarily due to payments related to improper conduct of fuel economy testing last year.

We expect to return to positive free cash flow by the end of this fiscal year as we are monitoring cash flow very carefully while increasing investments. In this fiscal year, we actively invest in CapEx to ensure sustainable growth, and we will continue to use our cash for investment in effective growth strategies to enhance our corporate value.

So go to Page 6, skipping one page. Next, I will explain about retail sales volume. Sales volume for the 9 months ended in December 31, 2017 rose year-on-year in all regions. ASEAN, Australia and New Zealand, which we defined as bedrock market in the Drive for Growth mid-term plan announced in October last year, have maintained solid growth.

In focus markets, sales has been growing steadily in China. North America, which faces ongoing fierce competition was also able to exceed the previous year's sales. Even in Japan, which was defined as a recovery market, recovered from last year's slump because of the issue of improper conduct in fuel economy testing. Global sales volume increased 15% year-on-year to 777,000 units.

Page 7. In Japan -- this is region by region. And starting from Japan, sales volume rose by 24% over the same period last year, expanding sustainability because of the recovery of K cars, eK Wagon and eK Space and the contribution of the Active Gear series.

We have started preorders of our new model, Eclipse Cross in December. Sales will start in March. And taking preorders, we have opened Night Show Room, which offers a new style of vehicle selection and makes you feel -- actually feel you're actually in a dealer showroom while at home. Going forward, we will leverage this Eclipse Cross to further expand our sales.

One important initiative of the brand rebuilding will be the continued expansion of our Dendo Drive Stations. We remodeled and reopened our dealership in Matsui on February 3. This is our 25th Dendo Drive Station.

The next page, ASEAN. Sales in ASEAN continued to be strong and rose by 25% over the same period last year, surpassing total industry volume growth. We are maintaining strong sales in our main markets, Thailand, Philippines and Indonesia. In Thailand, the reinforced after-sales and the enhanced dealer network boosted pickup truck sales in the third quarter and helped achieve growth higher than TIV with Triton as the core.

In the Philippines, in which we have a high market share historically, the volume of the Pajero Sport grew significantly because of more aggressive in advertisement and test drive events, which offer the opportunity to compare our car to competitors' products. We are also strengthening the sales of Mirage and Mirage G4, which were localized last year to increase our presence and increase volume in the passenger car market where demand is improving.

In Indonesia, we launched the new manufacturing and sales company this year to renew the business model. We made a good start. The new MPV model XPANDER, among other things, is in a strong demand, and we will aim for further growth of the product.

In addition, we are promoting business expansion in Vietnam. In January, we enter into a memorandum of understanding with the government of Japan for EV expansion and started local production of our main model, Outlander.

Please turn to the next page, Page 9. Volume in China increased by 63% over the same period last year, driven by strong sales of the localized Outlander. In future, to further expand sales, we will accelerate the start-up of new dealers and increase the number of units sold per dealership thus to increase our market share. We will also provide dealers with sales reinforcement training programs to increase sales volume per dealer. Our dealer network expanded steadily from 210 at the end of fiscal year 2016 to 300 dealers at the end of December 2017. We plan to further increase the number to 400 by the end of fiscal year 2019.

The U.S. In the U.S., when TIV declined year-on-year and fierce competition continued, the growth of our key Outlander model helped the region exceed the volume of the same period last year. It exceeded by 3%. In December 2017, we launched Outlander PHEV. And in January 2018, we began shipping Eclipse Cross to the U.S. market. Going forward, we will leverage these new cars to expand sales volume.

Please turn to the next page. In Europe, while sales volume decreased in Western Europe, sales volume recovered in Russia. The overall regional volume increased year-on-year. In Western Europe, as in the second quarter, we maintained solid sales in Germany and the U.K., in which we are relatively strong but sales were sluggish in the other countries and decreased year-on-year.

Eclipse Cross, whose shipments started in October 2017, made a good start. With this good start, we expect a further sales increase. In Russia, where demand is recovering, we reinforced sales finance and advertisement. These efforts brought about a strong recovery of sales, mainly in the new model of Pajero Sport, of which we resumed production.

So it has greatly recovered. On Page 12. In Australia and New Zealand, in which we have a high market share, stable sales have continued in the recent years. Sales of mainly SUV and pickup truck, which we have a competitive advantage, increased steadily in third quarter, greatly exceeding total demand growth. Outlander PHEV was awarded the Green Car of the Year 2017 for its high environmental performance in Australia. We will continue to focus on the sales of SUV/LCV models, which are our strength and on the growing trend in Australia and New Zealand market.

Please go on to the next page. In the Middle East, TIV recovery seems to take time, but our performance exceeded the same -- exceeded sales at the same time compared to the previous year, due to the successful fleet negotiation in the Gulf countries. In Latin America, TIV is recovering. We captured the fleet demand and achieved a year-on-year increase in volume, which was driven mainly by pickup trucks.

Next, skip Page 14 and Page 15. So I would like to talk about the recent topics.

[Unknown Executive]

[Foreign Language]

[Koji Ikeya, executive]

Page 15. So we would like to explain the latest sales of 2 new models, which were launched in the third quarter, our new MPV XPANDER and our new SUV Eclipse Cross. Sales of XPANDER launched in Indonesia in October have been continuing strong. More than 58,000 orders have been placed for our new MPV by the end of January 2018.

The XPANDER will be exported to the Philippines and Thailand from 2018, strengthening our presence in ASEAN. Exports of the Eclipse Cross to Europe started in October and have already expanded to North America as well as Australia and New Zealand.

Global retail [Audio Gap] sales volume of the Eclipse Cross was more than 4,000 units at the end of January 2018. In Japan, we began taking preorders for the Eclipse Cross on December 22, 2017. The number of preorders has totaled 3,000 units and more units by the end of January 2018. The Night Show Room, which we started on January 9, is a live streaming service from our showroom on the first floor of this building. It is a new web-based initiative which enables customers to view the vehicle and ask development engineers and motor journalists questions, just by connecting the internet from their home.

We have had a total of 65,000 visits by the end of January 2018. This site -- website was originally due to be closed yesterday but remained open until today, as the financial results announcement takes place today. If you have not visited our site yet, please visit and experience our site. We have -- so -- and then in the U.S., the Eclipse Cross won the Chicago Athenaeum Good Design Award for its superb design. We are planning to deploy the Eclipse Cross in 80 markets, with the aim of further boosting sales.

Please turn to the next page. In order to improve customer loyalty and reinforce sales support for dealers by providing customers with more competitive financial services, we are taking advantage of the Alliance to offer sales finance services. And we have partnered with Nissan's sales finance subsidiary to launch sales finance services in Australia in June last year, and in Thailand, New Zealand and Canada in July last year.

In addition to these, as we made a press announcement, we have today announced our plan to collaborate with RCI Bank and Services, which is Renault's sales finance subsidiary, to launch financial services in the Netherlands. And this is the first alliance effort with Renault in the sales finance area. We will consider further expanding the regions in which we will provide sales finance services.

Please turn to Page 17. We have been working on improving our production system this fiscal year. In Japan, as the production of the Eclipse Cross began in October at Okazaki plant, the production of the RVR model was transferred from Okazaki plant to Mizushima plant on December 20. As a result, the domestic production capacity utilization has been optimized.

In Indonesia, the 2 shifts per day manufacturing operation was implemented in October, earlier than its original plan, in order to catch up with the strong demand of the XPANDER. The operation is progressing smoothly. We will continue to strengthen the Indonesia plant as an important production base in the ASEAN region and plan to raise its capacity to 160,000 units per year.

Please turn to Page 18. We have continued to promote the investment for future growth steadily. As you see on the table, the rate of progress in the third quarter was 66% in CapEx and 62% in R&D expenses. The main items of CapEx include production-related investment for XPANDER and Eclipse Cross, construction investment for new testing facilities at Okazaki, and the deployment of Dendo Drive Stations and enhancement of the dealer network for rebuilding the brand as well as investment in IT to realize our worker-friendly environment.

Moreover, we are now in the process of increasing R&D resources for the development of new models due to be launched in the next year and beyond. We are also actively promoting the outsourcing of R&D jobs by utilizing engineering companies in order to secure R&D resources.

We are hoping to further refine our SUV and electrification technologies and to merge them with AI connectivity and many other technologies to add new value to vehicles.

Next, please turn to Page 20. Given the strong sales performance and the progress of cost reduction during the 9 months through the third quarter, today we have released an upward revision to the forecast for the full fiscal year 2017. Net sales is increased by 5% to JPY 2,100,000,000,000. Operating profit is increased by 36% to JPY 95 billion. Operating profit margin is 4.5%. Ordinary profit is increased by 39% to JPY 110 billion. Net income is increased by 47% to JPY 100 billion. Sales volume is increased by 6% to 1,090,000 units.

Please turn to Page 21. As you can see, we maintained a V-shaped recovery trend to drive us to achieve the over 6% operating margin target for fiscal year 2019 in the midyear -- mid-term plan. Our initially planned operating margin was 3.5%. With today's upward revision, the operating margin is expected to reach 4.5%.

Please turn to the next page. This slide explains the factors causing the operating profit variance from the previous year. The revised full year forecast of JPY 95 billion is up JPY 89.9 billion from JPY 5.1 billion in the previous year. If you look at the breakdown, the sales-related positive impact is expected to be JPY 7 billion, because while the volume increased in ASEAN, both Asia and Japan, which are our focus regions, sales expansion activities pushed up sales expenses. Cost reductions produced a positive impact of JPY 40 billion. In forex, we see a positive impact of JPY 6 billion given the recent currency market. The exchange rate forecast for the fourth quarter is JPY 108 to the U.S. dollar, JPY 138 to the euro and JPY 3.49 to the Thai baht.

In others, while we expect to see a large increase in R&D spending and IT investment, our estimate is a positive impact of JPY 36.9 billion, reflecting the effect of the large amount of cost on quality measures in markets recorded last fiscal year. As a result, we expect to secure an operating profit of JPY 95 billion for this fiscal year.

Please turn to the next page. As we have maintained a strong recovery, we have revised the dividend forecast upward. By conserving the balance with investment for growth, we have revised the year-end dividend forecast from the previous forecast and increased JPY 3 to JPY 10.

Please turn to the next page. As we were able to exceed the plan in the third quarter, we made an upward revision to the previous quarter. During this quarter, we will make sure to accomplish this plan. We will also continue necessary investments to revive our company and to build a foundation for our future growth.

That is all for me. Thank you very much for your attention.