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Edited Transcript of 7211.T earnings conference call or presentation 6-Nov-19 10:59am GMT

Q2 2020 Mitsubishi Motors Corp Earnings Presentation

Tokyo Nov 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Mitsubishi Motors Corp earnings conference call or presentation Wednesday, November 6, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ashwani Gupta

Mitsubishi Motors Corporation - Representative Executive Officer & COO

* Koji Ikeya

Mitsubishi Motors Corporation - Representative Executive Officer, CFO and EVP of Finance, Controlling & Accounting

* Takao Kato

Mitsubishi Motors Corporation - Representative Executive Officer, CEO & Director

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Presentation

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Unidentified Company Representative, [1]

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(technical difficulty)

then first, explanation of the first half FY 2019 financial results. Ikeya-san, please?

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Koji Ikeya, Mitsubishi Motors Corporation - Representative Executive Officer, CFO and EVP of Finance, Controlling & Accounting [2]

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First, net sales in first half of fiscal 2019 declined 4% year-on-year to JPY 1.128 trillion mainly due to the deterioration in total demand in many developed countries. Operating profit declined significantly to JPY 10.2 billion from JPY 56.9 billion in the same period of the previous fiscal year, and then OP margin was 0.9% due to a decline in sales and the impact of deterioration in exchange rates. Ordinary profit was JPY 1.2 billion mainly due to the impact of foreign exchange loss on nonoperating income. Net income amounted to JPY 2.6 billion, mainly due to tax payments by overseas subsidiaries. Our global unit sales was 592,000 units, a slight 0.3% decrease from the same period of the previous fiscal year.

Please turn to the next page. Sales volume by region is as shown on the screen. Although the sales in Japan, Latin America, Middle East, Africa and others increased compared to the previous year, overall, sales declined slightly year-on-year due to sluggishness in other regions. The details will be explained by our COO, Mr. Gupta, later.

Please turn to the next page. First, net sales in the first half of fiscal 2019 declined 4% year-over-year to JPY 1.128 trillion mainly due to deterioration in total demand in mainly developed -- sales expenses declined JPY 0.7 billion year-on-year mainly due to increased spend on advertising and promotion. Cost reduction resulted in total increase in profit of JPY 7.1 billion due to efforts to reduce procurement costs as well as to control plant-related expenses.

Others posted a year-on-year decline in profit of JPY 20.0 billion due to higher R&D expenses and direct labor costs year-on-year as well as sluggish growth in after-sales profit despite revisions to investments and cost reductions. The advanced appreciation against major currency continued in the Thai baht, which is a cost currency for us, worsened. These had a substantial negative factor of JPY 22.2 billion compared with the same period of the previous fiscal year.

So next, we'll see the full year forecast for 2019. Then full year forecast. The global economy was worsened since the time we projected the annual plan. Due to prolonged tensions over the trade friction between the U.S. and China, constraints over an economic slowdown on a global basis have heightened and automobile demand has been falling. According to the harsh external environment, we have revised our full year forecast for fiscal 2019, as shown here. First, we lowered the retail sales forecast to 1,274,000 units from the initial forecast of 1,305,000 units. We expect this to be a slight increase compared to the previous year. As a result, net sales are expected to reach to JPY 2.450 trillion compared to the initial forecast of JPY 2.580 trillion.

Operating profit before tax will decrease by JPY 60 billion from the initial plan to JPY 30 billion as a result of the impact of the decrease in sales volume and a revision of the exchange rate assumption JPY 2 billion appreciation. Ordinary income was revised to JPY 20 billion compared with JPY 100 billion, and net income is revised to JPY 5 billion compared with JPY 65 billion, respectively. While the macro environment trend in the entire automotive industry continues to be challenging, we will do our utmost to achieve the new full year forecast leveraging ASEAN, our main region, as our driving force.

Please turn to the next page. IFRS result of the revision of the FY 2019 full year forecast affected behind the respective changes to the FY 2019 full year operating profit forecast announced in May are as follows: Volume mix are expected to worsen by JPY 43 billion from the previous announcement due to the revision of the annual sales plan as mentioned earlier. Meanwhile, we will reduce selling expenses by JPY 14 billion, due to a decrease in the number of units sold. We will strive to reduce costs, not only by reducing procurement costs but also by reducing factory expenses. As a result, we will make additional improvement of JPY 4 billion compared to the plan. Regarding other impacts, we expect a further worsening by JPY 11 billion. This is mainly due to lower-than-expected earnings opportunities across the value chain as the sales volume declined. The yen continued to appreciate against major currencies of sales, such as the U.S. dollar, the euro and the Australian dollar, while the cost-currency Thai baht remains strong. In view of the fact that exchange rates of both sales and cost currency will continue to depress profits in the second half of the fiscal year. Due to both sales and costs, we anticipate a further deterioration of JPY 24 billion compared to the previous plan.

Next, we will explain our regional sales strategy. Gupta-san, please?

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Ashwani Gupta, Mitsubishi Motors Corporation - Representative Executive Officer & COO [3]

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So at first, if we look at global TIV, the automotive market, with respect to the last year, it went down by 3.2%, and Mitsubishi was able to keep almost flat retail with respect to last year, which clearly demonstrates our better performance than the market conditions. As we have explained, the concern about global economic slowdown, which has become more pronounced since the second year of last year, it has had a significant impact on the sluggish growth of automotive demand. As you can see, we have confirmed a global downturn in automotive demand or a slowdown in growth in each country compared with the same period last year. Under these circumstances, the ASEAN region, where we are most focusing on, Thailand performed strongly compared to the overall market and Vietnam remains strong. On the other hand, sales in Indonesia were weaker than expected due to the impact of sluggish economic growth. The domestic market, which is our home market, achieved higher growth than the overall market thanks to the contribution of new models such as Delica D:5, eK Wagon and eK X, which were launched in early 2019.

The China business seems to have been in a stagnant phase since the latter half of 2018, and the demand has been shrinking since then. In a challenging environment, we succeeded in securing approximately the same level of sales as the last year thanks to the contribution of the Eclipse Cross local production model, which began selling in November 2018. In North America, the interest rates on auto loans have been declining due to a decline in the long-term interest rates, supporting demand and helping to maintain TIV growth comparable to previous year. On the other hand, competition in the small and medium-sized SUV market, where we are focusing on, has intensified. So we decided to not push volume but to concentrate on profit. In Europe, the penetration of OUTLANDER PHEV, which we are strategically expanding the sales, progressed as planned, and we kept #1 position in Europe on PHEV. In Oceania, the market itself grew negatively due to the economic slowdown, and our sales declined further due to the impact of intensifying price competition. In other regions, sales in the Middle East were favorable thanks to our measures to strengthen the sales of our SUVs and the pickup.

If we look at the product category, Eclipse Cross increased 49%, which is 18,700; OUTLANDER PHEV increased 24%, which is 4,800; new Triton increased 1%, 900; and our regional strategic model of XPANDER increased 27%, which is 12,300; K car increased 8%, 2,100, respectively, compared to the same period, which is first half of the previous year. As a result, the sales of our strategic models are now steadily growing in general.

So if I summarize, our strategy to focus on core markets, like ASEAN and Japan, and core products, like OUTLANDER, Triton, XPANDER, has started showing the trend in the right direction. However, because of extreme severe business environment, it is taking time. Now we would like to touch upon a summary of sales strategies for the main regions in the second half of 2019.

Let's first look at ASEAN, which is our core market. First Thailand, the TIV is deteriorating due to the sluggish exports caused by the trade friction between U.S. and China. The second, tightening of loan examinations by the financial institutions is adversely impacting the sales finance. However, Thailand market, we believe, is a temporary slowdown and should recover in the midterm. Second key market is Indonesia. We believe that, after the election and the political stability, this market will come back. The second reason is still the GDP is 5%, and this is the fourth largest populated market in the world. And we believe that it will turn up in the midterm growth. The third market, which is Philippines, economic factors are stable, TIV is growing and we are maximizing our opportunity in the Philippines through our refreshed products which we have launched recently.

Vietnam, the TIV is growing, favorable economic conditions and accelerated motorization. In this environment, we plan to launch XPANDER SUV and Mirage and Attrage in November. In addition to the strong XPANDER and the new PAJERO SPORT as well as the Triton, which also upgraded the lowrider model in July. When we look at Japan, our home market, our domestic sales plan is 115,000. We expect a decline in demand after the consumption tax hike from 1st of October. However, we will leverage the new eK Wagon and eK X to carry the momentum to a new super-height wagon, which we plan to launch during the current fiscal year as a successor of eK Space. With regard to Oceania, which is currently facing severe conditions, the forecast for the external environment remains uncertain and the price competition will continue to intensify due to the shrinking of total demand. Incorporating those rigs, we have revised the full year sales outlook to 90,000. Despite the harsh condition will continue, we will not make unreasonable wholesale shipments, and will continue to focus on selling SUV and LCV and aim to increase our market share by strengthening our accessories, services and hence relative customer satisfaction.

In the Chinese market, we have revised our full year sales plan to 173,000, considering the possibility of continued low growth amid continued trade friction between U.S. and China despite a significant correction phase will be over. On the other side, there is room for growth in the market itself, and we believe that the high confidence in Japanese brands will continue. Although there are headwinds of increasing regulatory costs, going forward, we will strive to increase sales in a balanced manner with earnings while strictly managing cost and strengthening product capabilities.

Regarding North America, although the total demand has generally remained at the same level as recent years, needless to say that the market itself is already saturated. To ensure profitability in challenging environments, we will focus on improving earnings by keeping a sound level of inventory and by strengthening sales expand and fixed cost controls. We already decided to relocate our American headquarters from California to Nashville in Tennessee. We believe that Western Europe will continue to face economic turmoil caused by geopolitical risks, such as the Brexit, for the time being as well as the low growth as in other developed countries.

At present, in order to comply with the tighter environment regulations, we are working to boost penetration of OUTLANDER PHEV. We will continue to balance earnings with brand enhancement by placing this model at the core of our European business. Regarding Russia and other countries, the market continues to slump due to the impact of VAT tax hike, the decline in crude oil prices and the foreign exchange rates and uncertainties about the future are increasing. Therefore, we will strive to maintain market share and improve the productivity of our sales network to improve profitability.

In other regions, Middle East, specifically Saudi Arabia, we'll continue to expand our sales by strengthening the sales, particularly for SUV and pickup. In the areas of Africa, we will continue to streamline the flow of our commerce and develop our business foundation, and we'll promote the optimal allocation of management resources based on selection and concentration.

In summary, with our core markets, ASEAN and Japan, and our core products, PHEV, XPANDER, Triton, et cetera, we will sail through tough business environments in rest of the markets. Thank you.

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Unidentified Company Representative, [4]

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So lastly, we will explain our business highlighted during the July-September period. Kato-san, please?

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Takao Kato, Mitsubishi Motors Corporation - Representative Executive Officer, CEO & Director [5]

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So in order to achieve one of the goals of the current midterm plan, product innovation, we have been continuously introducing new models since FY 2017. In FY 2019, in addition to the PAJERO SPORT launched in late July, we revamped (inaudible) in the summer and began global expansion. In the second half of the fiscal year, we are planning to introduce new models of XPANDER SUV, Mirage and Attrage, which will be launched shortly. In addition, we will introduce the new super-height wagon that will succeed the eK space. We showcased a concept car of it at the recent Tokyo Motor Show. Going forward, we believe it is necessary to concentrate our development efforts on segments where we can secure competitiveness. We will work through things and innovate our core products, including core products for ASEAN region and the crossover models for the global market.

Next, please. We held a ceremony at Laem Chabang Port in Chonburi Province, where the plant was located, to commemorate the achievement of 4 million vehicles exported from our MMTh plant, which we started to manufacture our products in 1988. This plant is the faster automobile manufacturer in Thailand to commence exports. Last year, the total production volume reached 5 million units, which supported our growth in ASEAN. At the MMTh factory, we have decided to invest in rationalization, including the construction of a new painting plant in order to strengthen our competitiveness in the future.

In the second half of fiscal 2020, we plan to begin knockdown production of OUTLANDER PHEV. In addition to the 5 pillars that we have been focusing on in Thailand, namely employment, human resources development, investment technology transfer and export business, we intend to increase our contributions in best use of social contribution and environment. And in Vietnam, a ceremony was held in Ho Chi Minh City to commemorate MMV's 25th anniversary since we started the business. At this ceremony, we announced that we will start production of the crossover MPV, XPANDER, in 2020 at the production base in Vietnam.

MMV is currently engaged in knockdown production of OUTLANDER. However, with the start of the production of XPANDER, we are constantly expanding MMV production capacity. In 1994, our Vietnamese business began as a joint venture with Mitsubishi Corporation and local partners to establish the production and service company, the predecessor of MMV. Along with the subsequent expansion of the automotive market in Vietnam, it is now an important business that supports our growth strategy in ASEAN.

Since the latter half of last year, we have revised our strategic direction from expanding scale to pursuing the profitability oriented small but beautiful vision and accelerated our efforts to reduce cost through regular selection of investments and other measures. As a result, we were able to reduce fixed costs by around JPY 20 billion from the plan. However, the worldwide slump in demand and unfavorable impact of the exchange rates exceeded our expectations, and revenue and expenditures are not yet sufficiently balanced. Amid the continuing downturn in the economic cycle, I believe we need to take further steps to realize a cost structure commensurate with our scale. Specifically, we will strive to optimize personnel, mainly in indirect departments, while streamlining the organization itself. In the area of development, we will invest with an emphasis on efficiency by narrowing down the regions and the models we focus on. In addition, we will make every effort by promoting cost structure reforms without exception, such as integrating and consolidating production and sales basis and revisiting advertisement and promotion expenses. On the other hand, our financial condition is stable. And we intend to maintain the current level of dividends, which is focusing on stability. Despite the challenging business climate, we have clearly defined the directions we should pursue as small but beautiful and have clearly indicated what we should do. We will work as one to implement cost structure reforms after we lay down foundation of the strategies and link it to the next midterm plan starting from FY 2020.

Thank you for your attention.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]