Earnings Transcript for 7211.T - Q2 Fiscal Year 2023

Kentaro Matsuoka: This is Matsuoka speaking. Thank you for your participation today in our First Half FY 2023 results meeting despite your busy schedule. I am Kentaro Matsuoka, the Executive Vice President and CFO. So in the first half of fiscal 2023 I would like to explain. So in addition to the shortage of vessels and semiconductors, the total demand declined mainly in other countries and the material cost remained high due to inflation and other factors. The business environment surrounding us was challenging. Amid this business environment, our business performance grew steadily on a year-on-year basis thanks to our focus on improving the quality of sales as well as the marginal profit. The net sales for the first half FY 2023 increased by 15% year-on-year to JPY1,330.8 billion and the operating profit increased by 23% year-on-year to JPY104.2 billion and the operating profit margin was 7.8% mainly due to the improvement in the regional mix and selling prices. The ordinary profit was JPY120.9 billion due in part the impact of foreign exchange rate and the net income was JPY67.5 billion due to the booking of losses related to the china business and the payment of taxes. For your information looking at the second quarter alone the net sales were JPY695 billion and the operating profit was JPY59 billion. The OP margin was 8.5%. The ordinary profit was JPY59.1 billion and the net income was JPY19.6 billion. The retail sales volume declined by 9% to 389,000 units due to a shortage of vessels and semiconductors and the decline in total demand, as well as the impact coming from the end of product cycle. Please turn to Page 4. I would like to explain in this slide the factors behind the year-on-year changes in the operating profit for the first half of FY 2023. The combined total of the volume and the mix selling price improved by JPY53.4 billion year-on-year, of which the promotion of the net revenue strategy improved the mix selling price by JPY46.2 billion. The volume improved by JPY7.2 billion due to our leverage regions Latin America, the Middle East and Africa and North America and offset the downturn in the ASEAN region. The sales expenses pushed down the operating profit by JPY12.3 billion year-on-year due to the increase in advertisement expenses for the introduction of new models and the increase in incentives in line with the normalization of the sales environment. The procurement cost, shipping cost total worsened by JPY24.2 billion due to the deterioration in shipping cost and factory expenses, although the procurement cost reduction activities partially absorbed the impact of raw material prices which rose significantly from the second half of the previous fiscal year and the inflation. The R&D expenses increased as planned to prepare for the launch of new models from the next fiscal year onward with the year-on-year increase of JPY1.7 billion and the other expenses deteriorated by JPY4.2 billion due to an increase in expenses such as in direct labor cost and general expenses. About the ForEx, the positive impact of the U.S. dollar and euro was offset by the negative impact of the Thai Baht which is our cost currency, resulting in a positive effect of JPY8.6 billion year-on-year. In total the operating profit increased by JPY19.6 billion yen year-on-year. Please turn to Page 5. With this slide, I would like to explain the factors behind the year-on-year changes in the operating profit for the second quarter of fiscal 2023. The volume and mix selling price developed in the same manner as in the first half. Out of the total year-on-year improvement of JPY22.9 billion, the mix selling price increased by JPY20.7 billion as a result of the promotion of net revenue strategy and the downturn in sales volume in the ASEAN region was offset by sales in the leverage regions, Latin America and the Middle East and Africa and North America contributing to JPY2.2 billion to the total operating profit. The sales expenses deteriorated by JPY7.7 billion due to additional advertisement expenses and an increase in incentives in line with the normalization of sales environment. The procurement cost, shipping cost worsened by JPY9 billion in total due to the deterioration in transportation cost and factory expenses, although the adverse impact in raw material prices is showing a sign of stabilization. The R&D expenses increased as planned and as a result deteriorated by JPY2.1 billion year-on-year and the others worsened by JPY4.8 billion, mainly due to an increase in indirect labor cost and general expenses. And regarding foreign exchange rates, the U.S. dollar and the euro increased profit due to the depreciation of the yen, but the negative impact of the appreciation of the Thai Baht made a net increase in profit of JPY5.9 billion. In total, the operating profit increased by JPY5.2 billion year-on-year. Please turn to Page 6. Next, I would like to explain about global sales volume for the first half FY 2023. Overall, the global sales volume decreased by 9% year-on-year to 389,000 units, decreasing year-on-year in all regions except Japan and North America, mainly due to weaker total demand in certain regions, shortage of vessels, Gulf congestion and shortage of inland transportation capacity and the impact of semiconductors. From the next page, I would like to explain the sales status of major regions. Please turn to Page 7. First about the ASEAN region. As in the first quarter, the overall recovery in demand in ASEAN countries has been slow, except in the Philippines where steady growth has been observed. In this environment, our retail sales volume decreased by 8% year-on-year to 120,000 units. In Thailand, total demand was sluggish due to the tightening of automobile loan screening and the uncertainty of the administration after the election. In particular, the pick-up segment is affected by stricter loan screening. Because we were in the changeover period of models, both volume and the market shares decreased. At the end of July, we announced the launch of the long-awaited new Triton and we have begun sales from standard models. We plan to gradually introduce to all models including the highest grade models by the end of FY 2023. With the overall improvement, our top priority has become to assuring the start-up quality and we plan to gradually increase production of new models.

XFORCE:

XPANDER:

XFORCE: Please turn to Page 8. Next is about our domestic business. Although the TIV in Japan did not reach the level before COVID-19, it has exceeded the previous year's level consecutively since September 2022, indicating that the market is recovering. We were unable to eliminate our backlog orders due to a shortage of semiconductors and other parts. However, the overall sales volume increased year-on-year.

XPANDER,: Please turn to Page 8. Next is about our domestic business. Although the TIV in Japan did not reach the level before COVID-19, it has exceeded the previous year's level consecutively since September 2022, indicating that the market is recovering. We were unable to eliminate our backlog orders due to a shortage of semiconductors and other parts. However, the overall sales volume increased year-on-year.

Delica Mini: Please turn to Page 9. Next is the situation of our North American business. TIV in the North American market rose by 17% year-on-year, mainly due to an improvement in vehicle supply shortages resulting from a recovery in production and an increasing fleet demand. In addition to the improved inventory level in particular, we've increased sales of the Outlander PHEV, which we launched in November last year and the fleet market was recovering at the same time. As a result, the sales increased 29% year-on-year. Going forward, we will continue to closely monitor at random interest rate, the associated risks of an economic downturn and the intensified market competition accompanied by the recovery in production, while maintaining the strong sales momentum of the Outlander Series and establishing a shift to sales that do not rely on incentives. Next, Mr. Kato, our CEO, will explain the forecast for the 2023. So please turn to Page 11.

Takao Kato: In the first half of FY 2023, the vehicle supply constraints due to a shortage of semiconductors and other parts were improved. However, we recognize that the environment surrounding us were challenging, mainly due to vessel shortages and logistics bottlenecks, as well as a decline in total demand greater than expected, mainly in ASEAN countries. On the other hand, we achieved better than expected earnings results, thanks to improved mix and selling prices, which supported our profit as a result of the promotion of our net revenue strategy. Taking these factors into account, we have revised our full year forecast for FY 2023 as shown in the table, we have revised net sales from JPY2780 billion yen to JPY2850 billion. Operating profit from JPY170 billion to JPY200 billion, ordinary profit from JPY170 billion to JPY200 billion, and net income from JPY110 billion to JPY140 billion. The retail sales volume will be downwardly revised from 917,000 units to 868,000 units based on the first half sales results. In the second half and beyond, in addition to concerns about the economic downturns in each country, the macroenvironment, including geopolitical risks, remains more uncertain than initially anticipated and there are also various risks such as shortages of vessels and semiconductor and other components. We will work together to achieve the revised forecast by promoting the net revenue strategy as well as steadily introducing new models. Please turn to Page 12. This slide shows the factors behind the change in operating profit forecast for FY 2023 from the previous fiscal year. We expect a total positive effect of JPY104.2 billion from mix and selling price, mainly due to the effect of new models to be launched one after another through the second half of the fiscal year and the promotion of the net revenue strategy amid supply constraints due to vessel and semiconductor shortages. Of this positive effect on profit, JPY73.6 billion will be increased through the net revenue strategy, in other words, improving the quality of sales. As for selling expenses, although we anticipate that advertising expenses will generally remain within the planned range, the pace of increase in incentives has been relatively moderate to date. Based on that, we expect a total deterioration of JPY32.2 billion. Procurement and shipping costs are expected to worsen by a total of JPY36.7 billion, mainly due to the anticipated further deterioration in shipping costs, cost by logistics constraints. In addition, R&D expenses will remain within the scope of the initial plan and labor and general expenses are slightly revised to reflect the results for the first half of the fiscal year. Regarding the impact of foreign exchange rates, we took into account the yen's depreciations against U.S. dollars and euro and the appreciation of the Thai baht, resulting in a positive impact of JPY9.2 billion in total. Please turn to Page 13. Regarding the latest forecast of operating profit in FY 2023 factors behind changes from the forecast announced in July are shown in this slide. Taking into account the results for the first half and the situation of Thailand, Vietnam, Indonesia and other markets where the recovery in TIV has been delayed, we will revise the volume impact downward by JPY19.8 billion, while the impact of mix and selling prices is expected to be a turnaround of JPY8.2 billion. An overall negative effect of JPY11.6 billion is expected. When we are to sales expenses, an upturn of JPY5.7 billion is expected, mainly reflecting the effect of limiting incentives in first half of the fiscal year. Procurement and shipping costs are expected to deteriorate by JPY8.9 billion overall, mainly reflecting the deterioration and shipping costs such as special vessel arrangements due to a shortage of vessels. Others are expected to have a positive effect of JPY5 billion reflecting an improvement in after sales P&L compared with the initial forecast and promotion of efforts to control general expenses. The impact of foreign exchange rates is expected to be an upturn of JPY39.8 billion, reflecting mainly the strengthening of the U.S. dollar and Australian dollar. Please turn to Page 14. Based on retail sales volume results for the first half of FY 2023, we have revised our full year unit sales forecast as shown on the slide. Mainly taking into account the sluggish overall demand and delayed recovery in ASEAN, we have lowered our sales volume forecast for the European region, which has been significantly affected by the impact of logistics bottlenecks such as a shortage of vessels. In the second half of the fiscal year we anticipate our sales pace to pick up gradually by launching new models and expanding the sales territory as planned. While we must continue to pay close attention to market trends, we will execute what we need to do as planned and do our utmost to achieve our revised sales plan of 868,000 units. Next, I will explain our business highlights for the second quarter of fiscal year 2023. Please turn to Page 16. We have premiered the all new TRITON on July 26. Since then, sales started in Thailand with some versions and we plan to launch all versions by the end of this fiscal year. It will be expanded to other ASEAN countries and Oceania. The launch in Japan is scheduled for early 2024, making it the first launch in Japan in about 12 years. With sales ultimately expected to reach 200,000 vehicles in over 100 countries, the all new TRITON is an extremely important model that will provide foundational support for us as well as the first global strategic vehicle to be rolled out at the start of our growth phase. At the Japan Mobility Show 2023 currently being held, Japanese spec prototype is on display. We have debuted the all new XFORCE compact SUV at the 30th GAIKINDO Indonesia International Auto Show, the biggest motor show in Indonesia held from August 10th to the 20th. The all new XFORCE is a model for our core regions presented in our medium term business plan Challenge 2025 announced in March this year and it will be first rolled out in Indonesia, with launches planned for other ASEAN countries as well as South Asia, Latin America, the Middle East and Africa. The XFORCE has been selected as a Gold Award winner in the VMARK Vietnam Design Award, 2023 Best Transportation Design category. Its product quality has been highly evaluated.

PHEV: Please turn to Page 18. Team Mitsubishi rally at, for which we provide Technical Support, participated in the AXCR Asia Cross Country Rally 2023 held in Thailand and Laos last August with the all new TRITON and former AXCR champion driver Chayapon Yotha finished in the 3rd place overall. In this race, the team won the team award which is awarded to a team that had all of the cars on the team completed the rally and had the best total time of its top two cars. These rally cars were made based on the all new TRITON in a short period of time after a full model change with evolutions in all aspects and successfully demonstrated its performance in many areas. For all the three vehicles completed the race and it we were convinced with the fact that our direction in common fixing was on the right track. It was a very meaningful event for us. Please turn to Page 19. The automotive industry is undergoing once in a century period of major transformation in the traditional concept of automobiles as a means of transporting people and goods is undergoing a major change. At the same time, we are facing difficult challenges that cannot be overcome using automobiles and related technologies alone and we are required to overcome them by taking on new challenges that go beyond traditional frameworks. In line with our mid-term business plan Challenge 2025 announced in March 2023 we are constantly reviewing our business and considering and implementing new challenges. As part of this, two major announcements were made on October 24th. The first one is structural reform of China business. Over the past two to three years, the Chinese automotive industry has faced rapid market changes. The shift to electric vehicles is accelerating faster than expected and consumers are rapidly undergoing significant changes in their brand and segment choices. We try to recover our sales volume by releasing a new model in December 2022, but we continue to fall short of our plan and have suspended our production since March of this year in order to adjust our inventory.

software company: In the first half of FY 2023, economic growth appears to be moderately slowing down overall, as interest rates continue to rise worldwide, although there are various variations between countries and regions. Furthermore, growth rates in emerging countries, which tend to be more influenced by developed countries economies, have slowed significantly.

Delica Mini: Going forward, in addition to macroeconomic changes, geopolitical risks are also increasing and the business environment surrounding our company is expected to become increasingly uncertain. By firmly recognizing these changes and risks and responding flexibly, we will implement every initiative set in Challenge 2025 towards sustainable growth. We appreciate your continued understanding and support. Thank you.

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