Earnings Transcript for 7211.T - Q2 Fiscal Year 2022

Koji Ikeya: Good evening, I’m Ikeya, Executive Vice President and CFO. Thank you very much for joining our First Half 2022 Financial Results Briefing. The business environment surrounding us such as worldwide shortage of parts supply, logistics disruptions, and Russia’s military invasion of Ukraine continue to be uncertain. Even in such a business environment, we achieved a significant year-on-year improvement, thanks to our focus on improving the quality of sales and net revenue, and favorable currency exchange rates. Net sales for the first half increased 30% year-on-year to ¥1,158.2 billion. Operating profit improved significantly year-on-year to ¥84.6 billion, thanks to improvement in the regional mix and selling prices. Operating profit margin was 7.3%. Ordinary profit was ¥101.3 billion due in part to foreign exchange rates and net income was ¥82.7 billion. For the second quarter alone, net sales were ¥629.5 billion, operating profit was ¥53.8 billion with operating profit margin at 8.5%, ordinary profit was ¥51.8 billion, and net income was ¥44.1 billion. Sales volume was 426,000 units globally. Please turn to Page 4. This slide explains the factors behind year-on-year changes in operating profit for the first half of 2022. Volume and mix and selling price combined showed an improvement of ¥38.2 billion year-on-year, this was mainly due to improvement in the regional, country and model mixes as well as improvement in selling prices. Despite an increase in advertising expenses in line with the plan, sales expenses improved by ¥9.9 billion in total, mainly due to continuous and large reduction in the incentives mainly in North America. In procurement and shipping cost, we were able to partially offset the raw material price increase by our effort in procurement cost reduction. However, additional deterioration in transportation costs and factory expenses, led to an overall deterioration of ¥35.5 billion. R&D expenses increased by ¥8.3 billion year-on-year as planned to prepare for the introductions of new models from the next fiscal year onward. In Other, improvement in after sales business and domestic subsidiary performance resulted in a positive impact of ¥5.5 billion. With regard to foreign exchange rates, the impact of the U.S. dollar and the Australian dollar in particular, brought a positive effect of ¥49.6 billion year-on-year. In total, operating profit increased by ¥59.4 billion year-on-year. Although, there are fluctuations on a quarterly basis, operating profit for the first half increased year-on-year even without the impact of foreign exchange rates, thanks to the improved volume and mix and selling price and lower selling expenses absorbing the increases in procurement and shipping costs and R&D investment. We believe this is the result of the company-wide strategy to improve our net revenue. Please turn to Page 5. This slide explains the factors behind year-on-year change in operating profit for the second quarter 2022. Volume and mix and selling price improved by ¥25.5 billion year-on-year. This was mainly due to increases in wholesale volume in ASEAN, Australia and New Zealand, and North America, as well as selling price improvements in some regions. Sales expenses improved similarly to the first quarter by a total of ¥5.3 billion, mainly due to the reduction in incentives in North America. In procurement cost and shipping cost soaring raw material prices pushed down profit by ¥20.4 billion. R&D expenses increased as planned to push down profit by ¥4.5 billion year-on-year and others improved by ¥1.2 billion, thanks to an improvement in the performance of after-sales business. With regard to foreign exchange rates, the general trend on weak yen particularly against the U.S. dollar and the Australian dollar, had a positive effect of ¥32.1 billion year-on-year. In total, operating profit increased by ¥39.2 billion year-on-year. Please turn to Page 6. Next, I would like to explain our sales volume for the first half of 2022. Overall, our sales volume decreased 4% year-on-year to 426,000 units, mainly due to constraints on production volume caused by the ongoing shortage of semiconductors. Following the first quarter, major declines came from China where the government maintains the zero COVID policy and from Europe due to reduced product offerings and suspension of vehicle supply due to the Russia-Ukraine crisis. Sales volumes in North America were also had relatively significant impact by vehicle supply shortage. In the following pages, I would like to discuss the sales status of our core markets, North America and Japan. Please turn to Page 7. First of all, I will explain our mainstay ASEAN region. In Thailand, the number of new infections of COVID-19 has been decreasing since April. The emergency declaration was lifted on September 30 and immigration restrictions were completely eliminated on October 1. On the other hand, shortages of semiconductors and other parts continued, affecting the total demand. Our main models, such as the XPANDER, the TRITON and the PAJERO SPORT are showing year-on-year increases in unit sales, but the competitive environment in the overall market is becoming increasingly fierce due to the introduction of new models by competitors. Our market share increased only slightly, partly due to the sales price increase as part of our net revenue strategy. In Indonesia, total demand is strong as the economy recovers from the pandemic but vehicle supply constraints persists due to the shortage of semiconductor parts. In addition, events like an interest rate hike announced in September, soaring consumer prices, subsidized fuel price hike began to have a negative impact on customer purchasing power. Under such circumstances, production constraints on our core model, the XPANDER were greater than anticipated due to the impact of Shanghai lock-down in the first quarter and continued component supply shortages. Although, we made a slight recovery in the second half of the period against the backdrop of strong demand, it was not enough to resolve our order backlog. In the second half of the fiscal year, we will strengthen our marketing activities in line with the introduction of new models and aim to increase unit sales at fair prices. In the Philippines, the government‘s quarantine and warning measures were relaxed since March 2022, and the Philippines International Motor Show was held for the first time in four years, helping the continuous recovery in automotive demand. The demand for new cars recovered to 88% of the level in the first half of fiscal year 2019 before the pandemic. In addition to strong orders for the new XPANDER, since its launch in May, we succeeded in maximizing the sales of the MONTERO SPORT amid the vehicle supply constraints, driving our sales and market share. Since our major models have considerable order backlogs, we are planning to increase production. In Vietnam, restrictions on social activities have been mostly lifted and the situation seems to have returned to pre-pandemic times. Transportation demand is recovering, particularly for the XPANDER and the ATTRAGE as domestic tourism demand comes back and restrictions on inbound travelers are eased. In addition, orders for the new XPANDER, which was launched in July, have been strong, significantly exceeding expectations. Similarly, the Malaysia market as a whole continued to recover steadily, and our sales also remained strong. All countries in the region are returning to the situation before the pandemic and the demand is recovering steadily. On the other hand, vehicle supply constraints still persist with no sign of resolution. We will carefully follow up on our customers waiting for our vehicles and execute appropriate sales measures. Please turn to Page 8. In Australia, total demand was on a par with fiscal year 2019, when the impact of COVID-19 was minimal. In such a market environment, we like our peers were significantly affected by the vehicle supply constraints and we are struggling to deliver products and reserve back orders. However, we were able to maintain robust sales through negotiations with logistics companies. In New Zealand, total demand was driven by PHEV and EV models, boosted by the Clean Car Discount initiatives. Following the first quarter, we increased our market share year-on-year by strengthened sales of the ECLIPSE CROSS PHEV model and the OUTLANDER PHEV model which are eligible models for the CCD program. In Australia and New Zealand, the newly launched all new OUTLANDER and the all new OUTLANDER PHEV model were both highly regarded by the marketplace and won the 2022 Australian Good Design Award. Orders in both countries have remained strong, exceeding our expectations. To minimize the impact of the shortage of semiconductors and other parts on production volume, we will secure our production volume by reviewing our vehicle specification plan to help maximize our sales volume. Both in Australia and New Zealand, we do not have a clear idea as to when the vehicle supply constraints will be resolved. Given such circumstances, we will strive to minimize order cancellations by through appropriate follow-up on the customers who are waiting for their vehicles. Please turn to Page 9. Next, I would like to discuss the current status of our North American business. As it was in the first quarter, demand was strong in the North America market but we suffered from the vehicle supply shortage due to semiconductor shortage and delay in the supply of production parts from China. As a result, our dealer inventories remained at historically low levels. We continued to be unable to increase the retail sales volume of the new Outlander, in particular, due to significant impact of inventory shortages. The new OUTLANDER PHEV model, which we announced online on October 12, is compliant with U.S. ZEV regulations. The product features of PHEV and S-AWC have also been favorably received by the market. We intent to achieve sales synergies by promoting exposure of the PHEV model together with the ICE model. We acknowledge a downside risk to the total demand due to rapid and significant increases in interest rates and the possibility of economic downturn. Incentives have remained at the low levels so far in the industry average but for some segments where inventory level is coming back to normal, incentives seem to have bottomed out. On the other hand, it is still hard to determine whether sales are already slowing down because of excessively low inventory levels. We are working to move away from price differentials and with the introduction of the OUTLANDER, we will ensure that our sales are always based on product competitiveness and brand appeal. Please turn to Page 10. Finally, I would like to explain the status of our domestic market. Overall demand in Japan remained at a low level in the first half of FY2022 impacted by the lockdown in Shanghai and a shortage of vehicle supply caused by semiconductor and parts supply constraints continuing since last year. In this environment, we achieved the year-over-year growth of about 30% due to strong order intake for our flagship models such as new OUTLANDER PHEV model and DELICA D

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