Earnings Transcript for 7211.T - Q4 Fiscal Year 2023

Kentaro Matsuoka: This is Matsuoka speaking. Thank you for taking the time out of your busy schedule to attend our FY ‘23 Full-Year Earnings Call Today. In the second half of fiscal year 2023, inventory shortages caused by the shortages of semiconductors and ships have almost been resolved and the competition in our sales environment has been normalized. Due to a sharp decline in the total demand for automobiles in some ASEAN countries, our overall business environment was challenging. Under such circumstances, we reviewed every cost and focused on improving the quality of sales and the net revenue strategy. However, the results fell slightly short of the revised full-year operating profit forecast. The net sales increased 13% year-on-year to JPY2.789 trillion. The operating profit was JPY190.1 billion, and the operating margin was 6.8%. The ordinary profit was JPY209 billion, and the net income was JPY154 billion. The retail sales were 815,000 units, mainly due to the impact of stagnant total automobile and demand. Please turn to Page 4. In this slide, you can see the factors behind year-on-year changes in the operating profit for the FY 2023. The volume and mix selling price improved by JPY76.1 billion year-on-year. The volume increased JPY9 billion due to the growth in North America and Latin America and the Middle East, Africa and the domestic sales. Also, the mix selling price contributed JPY67.1 billion in profit due to the contribution of the net revenue strategy. Regarding the sales expenses, the incentives increased because, the vehicle supply shortage were resolved, and the advertisement expenses also enhanced as planned. As a result, the sales expenses reduced to the operating profit by JPY34.6 billion year-on-year. The procurement cost and shipping cost decreased by JPY40.1 billion in total mainly due to the impact of inflation and the increase in shipping costs such as special vessel allocation expenses. The R&D expenses increased as planned, resulting in a JPY7.4 billion decrease in profit. The other items deteriorated by JPY31.3 billion, mainly due to an increase in expenses such as indirect labor cost and quality cost. The negative impact of the cost currency Thai Baht was offset by the U.S. dollars and other currencies, resulting in a favorable effect of JPY37.8 billion year-on-year. Please turn to Page 5. This slide explains the factors behind the year-on-year change in operating profit for the fourth quarter FY 2023 alone. The volume mixed selling price improved by JPY11.4 billion year-on-year. Of this, the volume increased in North America, Japan and Oceania but reduced in ASEAN regions, and Latin America, Middle East and Africa resulted in a deterioration of JPY0.9 billion in the operating profit. On the other hand, the mix selling price increased by JPY12.3 billion, thanks to the promotion of the net revenue strategy. The sales expenses deteriorated operating profit by JPY12.5 billion due to an increase in incentives with the normalization of the competitive sales environment and an increase in advertisement expenses. The procurement cost/shipping cost worsened by JPY11.1 billion in total, although raw material prices have become more stable as the commodity market being restored, higher factory and shipping cost deteriorated the total amount. The R&D expenses increased and bring down the operating profit by JPY1.7 billion year-on-year, and other items deteriorated by JPY13.5 billion, mainly due to an increase in expenses such as indirect labor cost and general expenses as well as the booking of the quality related cost. Regarding the Forex, negative impact of the appreciation Thai Baht was reversed by U.S. dollars and other currencies, resulting in an increase in profit of JPY21.5 billion. Please turn to Page 6. Next, our global sales volume for FY 2023. Compared with the previous fiscal year, overall global sales volume decreased other than in North America, where the sales of the Outlander Series increased the volume, and in Japan, where the Delica Mini was well received. The overall demand in Thailand and Indonesia and the ASEAN region in particular fell sharply, and that hit hard on our business as well. In Australia and New Zealand, sales declined year-on-year due to slow inland transportation caused by the port congestion. The sales declined year-on-year as well in Latin America and the Middle East and Africa due to intensified competition associated with the recovery in vehicle supplies and the timing of model switching. In China, the structural reforms implemented in FY 2023 halved the sales year-on-year. Next, CEO Kato will present our plan and the key initiatives for FY’24. Kato san, please. Please turn to Page 8.

Takao Kato: So now, I would like to talk about the FY 2024 financial forecast. In FY 2023, starting from Thailand and Indonesia, we launched new models, Triton and Xforce. However, demand in those two markets were particularly sluggish, and we struggled to sell out the old models and also, suffered to launch new models. And as a result, we were unable to enjoy sufficient effects of new models. Despite this environment, we believe that the effects of those two new models will expand in FY 2024 as those two new models will be rolled out sequentially in the Philippines and other countries where the economies are firm. In Thailand and Indonesia, we think it will take some time for the demands to recover. On the other hand, Japan and the U.S., these economies continue to be well. Therefore, a certain level of sales volume and profits would be expected. Concerning those items, in FY 2024, as shown on the slide, we aim to secure the net sales of JPY2.88 trillion, the operating profit of JPY190 billion, the ordinary profit, JPY190 billion, and a net income of JPY144 billion. Based on this plan, we plan to increase the dividend to JPY15 per share for FY 2024. In addition, we will clarify the investment required for future growth, within this year, and we will vigorously consider more about our shareholder return policy. Please turn to Page 9. This slide shows the factors behind the transition in the operating profit forecast for FY ‘24 from the previous year. As for the impact of volume and the mixed selling price, we expect that the termination of the sales in some regions and transition to new models will reduce the sales volume, but they will be offset by efforts such as maximizing the impact of new models, which will be rolled out and improving further the quality of sales. Thus, an increase of JPY28 billion is expected in profits. The selling expenses will decrease by JPY28 billion from the previous fiscal year, mainly due to increased incentives as the sales competitive environment is being normal normalized. As for material and transportation cost, a sharp rise in material cost due to inflation and the worsening of the factory expenses due to higher energy and labor cost are expected. But, they will be countered with cost reduction initiatives so a total increase of JPY5 billion is forecasted. The R&D expenses are on an increasing trend to secure resources and achieve a sustainable growth, a drop of JPY10.4 billion in profit. Regarding others, efforts to reduce general expenses are expected to increase the operating profit by JPY5.4 billion compared to the previous year. Regarding the Forex, although the yen has depreciated since the beginning of the year, we expect a negative impact of JPY1 billion assuming a moderate appreciation of the yen. Please turn to Page 10. Following on from FY 2023, although a severe macro environment is predicted, especially in some countries in ASEAN and Oceania, we are forecasting retail sales of 895,000 units globally by implementing the planned rollout of new models such as the Triton and the Xforce in various countries. Next, I will explain the key initiatives to achieve the plan. Please turn to Page 12. First is the ASEAN and the Oceania regions that are the growth drivers for us. In fiscal 2024, it is predicted that a certain amount of time will be needed to recover market conditions in Thailand, Indonesia, Vietnam, and others in ASEAN. However, the new Triton and the Xforce began to be rolled out in various countries from the beginning of 2024, and orders in all these countries have been firm. It is expected that the effects of new launches will gradually increase with the expansion of the territory of sales. And sales of BEV, which grew rapidly in Thailand in FY 2023, have been suddenly break this year. And, it is probable that the expansion of BEV has hit the low at this moment. On the other hand, the Xpander HEV, which was launched in Thailand in February 2024, has been very well received by customers and orders have exceeded our expectations. Going forward, we will continue to introduce products that embody Mitsubishi Motors-ness in the HEV market, which is in high-demand from customers. Also, we will contribute to ASEAN’s move toward decarbonization while aiming to grow further by leveraging new products. In addition, while utilizing HEV, we will continue to prepare for reaccelerating the transition to BEV, which will be happening in the future. In FY 2024, the macro economy in the Oceania region is expected to decelerate affected by inflation and high interest rates. Despite the challenging sales environment, we will leverage the new Triton whose full-scale sales were launched in March 2024 to maintain and increase our sales volume as well as further improve our brand value. Please turn to Page 13. Next is, Latin America, the Middle East and Africa that are our leverage regions. In Latin America demand for automobiles in Brazil is expected to decrease slightly from FY 2023. However, demand for automobiles in Chile, Peru, etcetera, is expected to exceed FY 2023 due to the end of inflation and the reserve reduction of policy interest rates. Under this environment, we will strengthen sales to private customers by launching the new L200 Triton and the Outlander Sport. In addition, the Outlander, which has been well received since its launch in various countries, we will also roll-out the Outlander PHEV in-line with customer needs. We aim to increase sales volume, which accompanies improvement in sales quality. In the Middle East, the Israel-Gaza conflict is not expected to end which is great concern, but aggregate demand in neighboring countries is set to be generally close to the level of last year. In addition to the Outlander and the Xpander, which were enjoying strong sales in FY 2023, the new L200 Triton will finally be added to our lineup in the first quarter of FY 2024. We will work to maximize the effect of the new L200 Triton through rolling out promotion events in each country. In addition, in some countries we will launch the Xforce and strengthen our SUV product lineup to improve brand value and boost sales capability. In Africa, despite projected instability such as high inflation, currency instability and the general election in South Africa. The economy is expected to gradually recover from the second half of the fiscal year and the automotive demand is expected to be roughly on par with the previous year. We will work to boost our sales capabilities by launching new models such as the Outlander Sport which is Xforce and the new L200 Triton. In addition, the Xpander, which has developed the segment market after its launch, has grown into our major model in South Africa and Egypt where the markets are large. Going forward, we will work to further expand sales, which will lead to an increase in our brand value. Please turn to Page 14. Here is Japan, North America and Europe, which are advanced technology promotional regions for us. Japan domestic market is expected to remain firm due to the normalization of inventory levels of dealer companies. We have maintained strong orders and sales for the Delica Mini and the Triton, the models that symbolize Mitsubishi Motors-ness since, their launches. Leveraging these two models and with the Outlander PHEV, the Eclipse Cross, and the ever popular Delica D