Earnings Transcript for 7211.T - Q4 Fiscal Year 2022

Koji Ikeya: I'm Ikeya speaking, the Executive Vice President. Thank you very much for attending in our financial results presentation. Although COVID-19 was prevalent throughout the year, the risk of severe diseases has been controlled. Thanks to improved vaccination rates and development of drugs. Under these circumstances, countries around the world are easing infection control, and the socioeconomic activities are gradually beginning to normalize. On the other hand, the situation in Russia-Ukraine remained no way out, and logistical disruptions, soaring energy prices, inflation reaching levels not seen in decades, and sharply rising interest rates to curb such inflation have made it difficult to take control of the business environment. Thanks to the achievements of improving sales quality in all regions, and promoting the marginal profit improvement strategy, and the effect of yen depreciation, our FY'22 results improved significantly year-on-year. Net sales increased 21% year-on-year to ¥2,458.1 billion. Operating profit more than doubled to ¥190.5 billion, and the OP margin rose 3.4 percentage points year-on-year to 7.7%. Operating -- [technical difficulty] high since FY'2015. Ordinary profit was [technical difficulty] due to tax payments and extraordinary losses mainly related to the Russian and Chinese businesses was ¥168.70 billion. In the fourth quarter alone, we recorded net sales of ¥653.8 billion, an operating profit of ¥36.8 billion, an ordinary profit of ¥27.3 billion, and a net income of ¥37.9 billion. The OP margin was 5.6%. The year-end dividend payment will be resumed at 5 yen per share. Please turn to page four. This slide explains the factors behind year-on-year changes in operating profit for the full-year of FY'2022. The volume and mix/selling price were negatively impacted due to the year-on-year decline in shipment volumes, but the improvement in mix/selling price through promoting a marginal profit improvement strategy, et cetera resulted in a total turnaround of ¥59.2 billion. While advertising expenses increased in line with the plan, sales expenses improved by ¥21.4 billion, due to the effect of curbing incentives throughout the year. Procurement and shipping cost, deterioration in material costs due to soaring raw material prices was offset to a certain extent by cost reduction activities. However, worsening transportation costs due to vessels shortage and also factory expenses due to soaring energy and labor costs resulted in a total negative factor of ¥75.1 billion. R&D expenses increased for the introduction of new models, which resulted in a limited factor of ¥16.5 billion in total. And others mainly due to profit improvements in domestic subsidiaries, after-sales, and various other areas improved by ¥14.3 billion. The yen depreciated throughout the fiscal year resulted in approximately ¥99.9 billion year-on-year. In total, operating profit for FY'2022 increased significantly by ¥103.2 billion. Please turn to page five. This slide explains the factors behind the year-on-year changes in operating profit for the fourth quarter of FY'2022. The total volume and mixed functioning price showed a significant year-on-year drop in shipment volume, mainly in North America and ASEAN countries, which were affected by cars supply constraints caused by semiconductor supply shortages, as well as in Oceania, where supply delays occurred due to vessel shortages. On the other hand, thanks to the success of promoting marginal profit improvement measures, mix and selling prices improved significantly, the total volume and mix/selling price resulted in a ¥5.8 billion increase in operating profit. Selling expenses increased by ¥4.2 billion mainly due to the effect of curtailment of incentives. Procurement/shipping costs were a negative factor of ¥23.3 billion due to worsening factory expenses and transportation costs, although material cost deterioration due to raw material prices and other factors was partially absorbed by material cost reduction activities, R&D expenses deteriorated by ¥4.8 billion in line with the plan to prepare for the introduction of new models launches. Mainly due to the deterioration in after-sales, and accumulation of indirect labor costs and general expenses, other made ¥9.0 billion negatively impact. Foreign exchange rate fluctuations were a positive factor of ¥32.5 billion, as the yen generally depreciated against major currencies. In total, the Q4 saw a ¥5.4 billion increase in profit year-on-year. Please go to page six. Next, I will explain the retail sales volume for the full-year FY'2022. Overall, retail sales volume was 834,000 units, down 11% year-on-year. In ASEAN, our main market, the first-half of last year was affected by the shortage of semiconductors as well as production constraints imposed by the Shanghai lockdown. In the second-half, the sales environment became increasingly difficult toward the end of the fiscal year, as intermittent interest rate hikes, inflation, and other factors reduced consumers' willingness to purchase. Under these circumstances, we focused on segments with less supply constraints and worked to eliminate our order backlog, resulting in a 5% year-on-year increase to 262,000 units. In Australia and New Zealand, despite a shift in demand from ICE vehicles to EVs due to the New Zealand's CCD Clean Car Discount policy, orders in general remained firm. On the other hand, logistic issues including vessel shortages became more serious, and the supply shortage became more noticeable resulted in a year-on-year decrease in sales volume. In Australia particularly, while orders remained strong, back orders continued to pile up due to a lack of vehicle supply. We will continue to improve the situation. Our home market, Japan, although there were production constraints due to the shortage of semiconductors, it has been on a recovery trend since September, 2022. In addition to the strong new Outlander PHEV, we launched eK X EV in June 2022 and re-launched the Minicab MiEV in November 2022, expanding the EV product lineup, which is one of our strengths. And preorders for the new Delica Mini began in January 2023, have also been strong. In North America, although there was a decline in demand until last summer due to a shortage of cars supply caused by semiconductor supply issues, there have been signs of recovery in demand since then. Amid limited inventories, we curbed fleet sales and prioritized dealer sales, resulting in a 15% decrease year-on-year. As for other regions, such as China, where we struggled in an increasingly competitive environment and Europe where the model lineup has declined, and the vehicle supply has been suspended in Russia. Sales in those regions were down significantly from the previous year. Sales in Latin America and Middle East and Africa decreased slightly. Page eight shows the forecast. In FY'2022, through the margin profit improvement strategy as well as favorable exchange rates, we were able to overcome supply constraints and the raw material and the transportation cost hikes, and we achieved a significant increase in profit. In FY'2023, the impact of semiconductor and the vessel shortages remain despite a recovery. And in addition, concerns about a macroeconomic slowdown and the further instability will also remain we assume that the business environment will remain uncertain. In this environment, we intend to secure stable earnings based on the management structure that has become leaner and more agile under the previous mid-term plans, while responding flexibly to changes in the external environment and strengthening investments for the next stage of growth. Specifically, we will strive to curb costs by eliminating rates, and at the same time, we will put efforts to increase sales volume by recovering production and securing shipping capacity in response to the improved supply of semiconductors and addressing the shortage of vehicle supply. In addition, we will ensure the necessary investment for launching new models on schedule so that we can introduce high-quality products as planned, and expand our sales. We will also continue to pursue our marginal profit improvement, by reinforcing the Mitsubishi Motors brand and strengthening a value appealing business. Through these efforts, as shown in the slide, we aim to secure net sales of ¥2.7 trillion, operating profit of ¥150 billion, ordinary profit of ¥150 billion, and net income of ¥100 billion. To our regret, we have stopped paying dividends due to the negative distributable amount on a non-consolidated basis required for dividend payment towards the end of FY'2019. However, as stated in our new mid-term plan Challenge 2025 in March, as we are now on track to pay a stable dividend from FY'2023 and onward, we have decided to resume dividend payment starting from the year-end dividend of 5 yen per share for FY'2022. For FY'2023, based on our basic policy of maintaining stable dividends over the long-term, we plan to pay an annual dividend of ¥10 per share after comprehensively considering our future business and investment plans. Based on the assumption to keep paying stable dividends, we intend to determine dividend policy, while assessing the balance between changes in the business environment, investing in growth for the future, and the need to build up equity capital. 1 Please turn to page 10. This slide show the factors behind the transition in the operating profit forecast for FY'2023 from the previous year. As for the impact of volume and mix/selling price, despite the limited supply of vehicles due to the shortage of semiconductors and vessel capacity, by further expanding sales of the new Outlander, maximizing the effect of new models scheduled for launch, and promoting the improvement of sales quality, we assume a total positive impact of ¥115.8 billion, mainly due to an expected increase in incentives as a result of the changes in the competitive environment, and an increase in advertising expenses mainly for new model launches, sales expenses are expected to increase by ¥37.9 billion year-on-year. As for material and transportation costs, due to negative factors such as soaring material costs due to inflation and worsening factory expenses caused by rising energy and labor costs, we expect total negative impact of ¥27.8 billion. R&D expenses are on an increasing trend toward the introduction of new models scheduled for this fiscal year and beyond, resulting in limited factor of ¥11.3 billion in profit. Regarding others, we expect increases in quality-related costs, indirect labor costs, and general expenses due to worldwide inflation, assuming to have negative impact of ¥28.7 billion. Foreign exchange rates are expected to have a negative impact of ¥50.6 billion, based on the current exchange rates. Please turn to page 11. In FY'2023, we plan to launch a series of new models that embody the Mitsubishi Motorsness, mainly in the ASEAN region, contribution of the Delica-Mini which has made a strong start to Japan's sales growth, and expansion of the new Outlander, we are forecasting retail sales of 917,000 units globally. Next, we will explain the key initiatives for achieving the plan. Please turn to page 13. On March 10, we announced our new mid-term business plan Challenge 2025. This slide show the major management KPIs for a single fiscal year in chronological order from FY'2019 onward, as presented at the time of the announcement, with the current fiscal year's forecast newly added. In the final year of the new mid-term plan, we plan to secure the profit and free cash flow shown here, after absorbing an annual increase of about ¥50 billion in R&D expenses from the FY'2022 results, an increase of about ¥25 billion in depreciation expense due to increased CapEx, and other cost increases, including advertising expenses, thus in FY'2023, we must continue to secure solid earnings and cash flow while accelerating the investment. In addition to the success of new models that are scheduled to be launched, we believe that on the regional axis, growth in ASEAN and improved profitability of domestic operations will be the key to achieving our goals. Please turn to page 14. First, let me explain our business in the ASEAN region. Although there is some variation in total demand in ASEAN countries, we expect that TIV in the five major countries will remain at about the same level as in the previous year due to inflation and rising interest rates. In this environment, we are targeting an approximately 19% increase in retail sales volume, to 311,000 units. TIV in Thailand is expected to recover moderately. In July, we will finally launch the long-awaited new Triton. To maximize sales after the launch, we will manage smooth inventory clearance of the old Triton, and at the same time, we will further expand our market share in the largest pickup segment in the Thai market by promoting marketing activities tailored to each region and segment, which we have put effort on since last fiscal year. In the second-half of the year, we plan to introduce our first HEV model, the Xpander HEV, which will be the first HEV model for our company, and we will continue to enhance our lineup of xEVs starting with this model. At the same time, we will strengthen the foundation of our sales and enhance the sales activities of each dealerships through digital tool and marketing, to aim for a higher overall market share. TIV in Indonesia is expected to continue to be weak in the first-half of the year, and gradually recovering in the second-half of the fiscal year, with a slight decrease from FY'2022. Under such circumstances, we aim to expand our market share by strengthening customer touch points, including online, in addition to sales promotion events centered on event marketing. In addition, this fiscal year, we plan to strengthen the passenger car segment and increase sales volume by introducing a new mass-production model of the XFC concept, which is a strategic vehicle for the ASEAN region. In the Philippines, despite the slowdown in demand for new cars in neighboring countries, recent strong demand trends are continuing, and it is predicted that the TIV level will exceed the pre-COVID level. We will expand our sales network, which includes the leadership improvement to the sales tax training, and at the same time we will continue our fixed assets and promotions and entry touch points to the customers through sales of limited edition models and new vitalized events. We do also expand the sales of existing models and maximize the sales of new models that are scheduled to be introduced, thereby further expanding our market share. TIV in Vietnam has been deteriorating since October last year, and although it is expected to recover from the second-half of FY'2023, the situation is still uncertain. We will focus on the sales of the Xpander, which has been well received by increased customers and dealers through a variety of events. These events ensure successful rollout of the new Xpander Cross. Also, we will further expand our dealer network. In Malaysia, TIV is expected to decline by about 15%, partly due to the government's economic stimulus measures such as the SST, Sales and Service Tax, exemption implemented in FY'2022. To maximize the strong sales of our mainstay products, Xpander and Triton, we will aggressively hold events such as test-drives in addition to dealer events to aim for further market share expansion. Please proceed to page 15. Next, I will explain our priority measures for domestic business. Although TIV in Japan has been on a recovery trend since FY'2022, the shortage of semiconductor supply has not yet been resolved, and production is expected to remain affected. In addition to the electric vehicles lineup such as the new Outlander PHEV model, Eclipse Cross PHEV model, and eK X EV, the addition of the new Delica Mini to the product lineup will further accentuate Mitsubishi Motorsness. The new Delica Mini, which is scheduled to go on sale in May, is a car that meets the needs of customers who want a car like this and has made a good start with cumulative orders exceeding 10,000 units since preorders began. Going forward, we will continue to promote the Delica brand through the product series appeal with the Delica D5, which will mark the 55th anniversary of its launch, to achieve a synergistic effect. Looking ahead to mid long-term growth, we will develop and strengthen our foundation in every aspect of our products, sales, and structure to shift from price appeal to product value appeal. Please turn to page 16. Next, I would like to explain our strategies in each region. In Oceania, where there were shortages and serious delays in the supply of vehicles in the previous fiscal year, we are working urgently to improve back orders and establish our brand as a PHEV Leader through various promotions. In Europe, the model lineup will be strengthened with the addition of COLT to ASX, which was launched in April. We ensure the success of each rollout and improve the customer experience. In North America, although there is a downside risk due to rising interest rates and the economic downturn, TIV is forecast to be generally on par with the previous fiscal year. On the other hand, market competition is expected to intensify again as each OEM recovers production. In this environment, we will strengthen our sales initiatives to maintain the strong sales momentum of the new Outlander series. In addition, we will promote brand reconstruction by improving customer service, et cetera, while also enhancing online sales and strengthening digital media marketing. In other Leverage Regions such as the Middle East, Africa, and Latin America, we will focus on segments where demand is strong and take on the challenge of selling our products to private customers by appealing to our product value. Please turn to page 17. As stated in our mid-term plan announcement, we plan to introduce one to two new models each year starting this fiscal year. This slide shows a product rollout schedule for the three years of the new mid-term plan. Please turn to page 18. The new models scheduled for launch during FY'2023 are shown on the slide. This fiscal year, we will rollout an unusually large number of new models. Particularly in our mainstay ASEAN region, we will leverage the successive launch of new vehicles to strengthen the Mitsubishi brand. The new ASX, which has been in full-scale sales in Europe since April, is receiving a steady increase in orders and has exceeded our expectations. In Europe, the new COLT will be added in the fall to strengthen our product lineup. In Japan, the new Delica Mini was officially announced in April, and preorders began in January. It has already received orders for more than 10,000 units. The car's fearless and charming expression, SUV-like styling with a powerful driving feel, and spacious and comfortable interior that is hard to believe for a mini car have been very well-received, and are attracting a great deal of attention from customers. In July, the new Triton will finally be launched, and was exhibited as MITSUBISHI XRT Concept at the Bangkok International Motor Show 2023 in March, where its exterior design, particularly the front-end, was well-received and got a great response. The all new sixth-generation Triton which has undergone full model change in about nine years, will be launched in Thailand this summer, followed by an expansion to ASEAN countries, Oceania, and other markets. In addition, we are planning to accelerate our business in ASEAN countries and Oceania by launching the mass-production XFC Concept and the Xpander HEV, our first hybrid model shortly. Next page please. Last fiscal year, the entire company worked together to took order issues, including proximities and promote quality improvement activities in each country, and with the support of affording exchange curtailment we were able to end the year with a record of high profit. At the same time, we agreed that the company's potential has also come along, and we are ready to enter new phase. On the other hand, business environment surrounding our company continues to be uncertain and unstable. We are not trying to wait for the development of utility vehicles and carbon neutrality, and there appears of global economic recession due to price hikes caused by saving energy and raw material prices, and the toughening of the monetary policies to occur such hikes, as the world changes by the minute, we must also change also. We also need products and analyze the foundation to be prepared to meet the challenges of the new era. Our new business plan Challenge 2025 has been formulated to accomplish these challenges. In the first fiscal year, we expect the sales rates to decline in harsh business environment, but we need to secure profits by establishing lean management structure, while accelerating the investments necessary for the next era of growth. We will also make long-term relationships with the customers and promote new brands through the products and technologies that are unique to Mitsubishi Motors. This fiscal year, we have entered a new phase. We will achieve our FY'2023 target, the first year of our new plan, by demonstrating our potential that we have cultivated thus far, and by working as one to take on the challenges of products and services, and growth in the next era. Thank you very much for your attention.

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