Mitsubishi Motors Corp

Thank you very much for waiting. Thank you for joining our fiscal year 2020 third quarter financial results announcement call. I would like to introduce today's speaker, Koji Ikea, representative executive officer and CFO. In addition, Hiroshi Nagaoka and Yoichiro Yatabe, representative executive officers and co-CEOs. and Noriaki Hirakata, Executive Officer. They are also joining the call for Q&A session. Today, we would first like to present our results for the third quarter 2020, and then we would like to take questions from the floor. The meeting is scheduled to end at 7.30 p.m. Please turn to page three, Ikea-san, please. First, please refer to fiscal year 2023 quarter summary. Sales decreased 43% year-on-year to 952.8 billion yen due to sluggish global demand for automobiles resulting from the spread of COVID-19. Operating loss, mainly due to global sales stagnation, was reduced by company-wide efforts to reduce overhead and fixed costs and restructuring activities However, the cumulative third quarter operating loss amounted to 86.7 billion yen. Ordinary profit was negative 92.9 billion yen, and net income was negative 244 billion yen, mainly due to the recording of an extraordinary ordinary loss from the implementation of a structural reform. Free cash flow turned positive from the second quarter, and the cumulative negative free cash flow shrank significantly. Sales volume was 569,000 units globally. In the third quarter, from October to December, net sales were 377.9 billion yen. Operating loss was 4.1 billion yen. Ordinary loss was 5.9 billion yen. And net loss was 34.1 billion yen. And unit sales was 218,000 units. Earnings momentum has improved since hitting bottom in the first quarter as we confirm a return to profitability in December. In the third quarter, we were able to recover to the point where we are close to profitability. Please turn to page four. The factors behind the year-on-year changes in operating profit are as shown here. In terms of volume and mix, a decrease in unit sales had a negative impact of 120.9 billion yen. However, there was a positive impact of 6.3 billion yen due to improvements in the regions and model mix, resulting in a total negative impact of 114.6 billion yen. Despite an increase in sales expenses in some regions associated with new car sales, sales expenses improved by 6.3 billion yen from the previous year due to the effects of restraints in line with the plan. Cost reductions, et cetera, were largely affected by production adjustments in the first half of this year, and the effect of material cost reduction shrank. Structural reforms and R&D cost reviews, which we have been working on since the beginning of the term, proceeded at a faster pace than expected and produced significant positive effects. And in other elements, including deterioration in after-sales business and increase of quality cost, The cumulative total worsened by 18.2 billion yen year-on-year. The Thai baht, which is a cost currency, showed an improvement, but there was no impact on earnings due to the impact of the deterioration in the U.S. dollar, Russian ruble, and other currencies. Please turn to page five. This slide explains the factors behind year-on-year changes in operating profit for the third quarter of fiscal year 2020. In terms of volume mix, the impact of lower sales was partially offset by improvement in the mix of regions and models and the improvement in marginal profit from cost structure reforms. The negative profit impact was limited to 20.9 billion yen. Although we were able to control sales expenses in line with our plan, there was an increase in sales expenses for the new car launch in some regions, which caused a slight duration in sales expenses. Cost reduction, including materials, were affected by lower capacity utilization, resulting in a decrease in profit of 4.2 billion yen. On the other hand, the positive effects of structural reforms amounted to 12.3 billion yen. The decrease in R&D expenses reflects the difference from the third quarter of last year, in which major product development projects was nearing its final stage. New product development of ASEAN is progressing faster than expected. Overall, yen appreciation had an impact, but the favorable turn in the Thai baht, which is a cost currency, contributed to a 1.1 billion yen year-on-year profit increase. Please turn to page six. Our total sales in all regions decreased by 35% from the previous year to 569,000 units. Global automobile demand is on a recovery trend in China, the United States, and other countries. but the recovery in the regions where we excel has been delayed. The core market for us from the previous year. In Australia and New Zealand, a moderate recovery continued, and the decline of our sales tended to improve from the first half of the year. Our sales were down 28% from the previous year to 49,000 units. In Japan, overall demand for automobiles was recovering, but the impact of the spread of COVID-19 has been increasing again recently. We are implementing structural reforms, such as restraining fleet sales and revising selling prices, which resulted in a 37% year-on-year decrease to 43,000 units. The new Eclipse Cross PHED we launched in December last year was well received by the automotive media. And with the increasing customer interest in EVs, we have made a strong start in other regions. There was no significant change in the external environment. And in all regions, there was a decrease of around 30% compared to the previous year. Please turn to the page seven. Next, I would like to explain our performance outlook for the fiscal year 2020. Please turn to page eight. As mentioned earlier, in the winter when virus becomes more active, national mobility restrictions are becoming more stringent. In addition, uncertainty in the external environment has again intensified, including a shortage of supply in the semiconductor supply chain due to strong demand. On the other hand, we have been able to implement our cost structure reforms faster than anticipated and even taking into account the harsh sales condition, there is a clear prospect that we will be able to curb losses compared to our initial plan. Contributing to the recovery in earnings are restraining on discounts and revisions to initiatives for fleet sales. We have revised down the full year unit sales forecast from 824,000 units to 802,000 units and accordingly revised down the full year net sales forecast from 1.48 trillion yen to 1.46 trillion yen, taking into account risk items such as the re-expansion of COVID-19 and changes in import duty measures in ASEAN region. On the other hand, we are making steady progress in improving profitability. Operating losses revised upward from the previous forecast of 140 billion yen to a loss of 100 billion yen. Ordering losses revised upward from 160 billion yen to 120 billion yen. Net loss is revised upwards from 360 billion yen to 330 billion yen. Although the uncertain external environment continues, we will continue to work together on the structural reform in order to achieve the new full year earnings forecast. Please turn to page nine. In line with the revision of the full year operating profit outlook, we have also revised the factors behind changes compared to the previous fiscal year. In terms of volume and mix, we expect a slight deterioration from the previous forecast due to the revised impact of the decrease in unit sales and the review of the mix and selling price improvement. With regard to selling expenses, we have revised selling expenses in each country in line with our basic policy of selection and concentration, and we are expecting a positive effect in line with the previous forecast. Regarding cost reductions, Production adjustments in line with sales reduction and inventory reduction plans following the COVID-19 prevented material cost reduction activities from progressing as usual. However, the impact is expected to improve compared to the previous forecast due to the success of efforts to curb plant-related expenses. We anticipate significant positive effects from the progress of structural reforms and the concentrated R&D investment in core regions and products as scheduled. Other items incorporate risks such as after-sales business and quality-related expenses. Regarding the impact of foreign exchange rates, we have revised the four-year rates for each country again in line with the current market environment as shown on the slide. As a result, we expect a negative effect of 600 million year-on-year. Please turn to page 10. The factors behind changes from the previously announced forecast are as follows. In terms of volume and mix, we will limit the impact of the decline in sales through improving mix and revising selling prices, et cetera, to a $2.9 billion deterioration compared to the previous forecast. As for sales expenses, we anticipate a slight upturn from the previous plan. With regard to cost reduction, while material and other cost reductions are impacted by lower operation rates, we expect a positive effect of about 15.2 billion yen from the previous forecast due to greater than expected progress in curbing plant-related expenses. Structural reforms and R&D expenditures are all on track to achieve greater than expected progress, so we anticipate significant positive effects. In other items, we expect after sales business, domestic subsidiary business, quality costs, et cetera, to all improve from the previous forecast. Regarding the impact of foreign exchange rates, we have revised the full year rates for each country again in line with the current market environment. As a result, an upturn of around 1.4 billion yen is forecast compared to the previous forecast. Please turn to page 11.

The forecast of retail sales volume for FY 2020 by region is as shown in this slide. As I mentioned at the beginning, there is a possibility that the recovery in automobile demand will again slow down due to the expansion of mobility restrictions in each country as a measure to prevent the spread of the COVID-19, the transformation of import tariff measures at the end, and the shortage of supply in semiconductor supply chain. Based on these impacts, we revised our sales outlook for FY 2020 from 824,000 units to 805,000 units. In ASEAN, which is our core market, the recovery trend in Vietnam and Malaysia has been apparent. In Indonesia, stricter mobility restrictions have been adopted to combat COVID-19, and the economy has been sluggish as a result. In the Philippines, the pace of recovery in demand has slowed down due to the restrictions on economic activities and the issuance of safeguards. In addition, the spread of COVID-19 is again expanding in Thailand, and there are concerns that sales will slow down in the future. As a result of factoring these elements, we lowered unit sales forecast from the previous plant 196,000 units. On the other hand, in Australia and New Zealand, The recovery trend is continuing moderately, and our sales are gradually recovering. Therefore, we will slightly raise the full year forecast to 70,000 units. In Japan, where demand for automobiles was recovering, uncertainty increased again due to the impact of the state of emergency issued at the beginning of the year. Sales of the new Eclipse Cross, which we launched in December 2020, have been strong. But taking into account the impact of the worsening external environment, we will keep the full-year forecast of 75,000 units unchanged. In addition, the Chinese market continued to recover from April onwards. However, although we halted the significant decrease in sales in the first half of FY2020, we feel that it will be difficult to dispel the decline overall. decided to lower the forecast from the previous plan to 106,000 units. In North America, the market as a whole is on a recovery trend, but forecast remains unchanged. But this fiscal year, we prioritized a strategic wind battery adjustment and improved sales quality, and the previous forecast remains unchanged at 112,000 units. In Europe, in addition to the impact of the repeated lockdown, and we anticipated a significant decrease in sales due in part to the impact of our change in development strategy. However, the situation is trending gradually, and we will slightly raise the forecast to 146,000 units. This is our sales forecast with awareness of uncertainty in the market, in which we excel. But we will do our utmost to achieve our budget. Please turn to page 12. So next, I would like to explain our business highlight in third quarter. Please turn to page 13. As indicated, all structural reforms have progressed faster than planned or as planned. We also expect most of the reform costs to be recorded during the current fiscal year. Regarding the reduction of fixed costs in the new midterm plan, small but beautiful, we set a target of a 20% fixed cost reduction by the end of FY21, comparing to the FY19 level. Despite the extraordinary factors caused by the COVID-19, we expect to be able to achieve a reduction of around 18% in total fixed cost compared to the previous year due to the acceleration of various measures. In terms of specific implementation status, first, we were able to optimize our workforce, including reallocation, restraint on new hiring, and voluntary retirement system, as well as reviewing our compensation system. And these measures were conducted in accordance with the plan. And this will result in cost reduction that is slightly higher than the planned amount. With regard to marketing expenses, we expect to achieve significant reductions in our overall budget while improving cost effectiveness by controlling costs in non-core regions and concentrating a portion of those costs in core regions. This is in line with the basic concept of selection and concentration. As announced in the first quarter, depreciation and amortization will be reduced as planned through impairment losses on fixed assets. Similarly, we worked on selection and concentration on the development cost, curbing development costs for noncore regions and concentrating investment in core regions, thereby establishing a system that enables us to develop products in line with our strategy. As a result, we expect to achieve reductions that exceed our plans and more efficient development. Reductions that exceeded the plan will lead to strengthening of our strategic production at the end, and also that will be used as an investment for future development strategies such as complying with carbon neutral requirements. Regarding the restructuring of the production system, as announced in July, we made a decision to suspend production PMC and consolidating the production lines, thereby putting in place a high capacity utilization system in line with sales. As for D&A expenses, we can expect substantial reduction due to greater than expected reductions in all items, such as travel expenses and outsourcing expenses, and also consolidating subsidiaries and other offices into the head office building. Please turn to page 14. Among the elements we should focus on during the current midterm plan, which I mentioned in July, we will deliver to our customers attractive products that enable them to experience a sense of security and driving enjoyment through the promotion of the environmental technologies that we excel at and also evolving our genetic four-wheel drive technologies and off-road performance. In line with this major policy, the new environmental plan package announced recently, we're calling for the promotion of electrification focused on PATV technologies. As already mentioned, in the third quarter, FY 2020, we began sales of the new Eclipse cross model, which also added the PATV model. In addition, we began producing and selling Outlander PATV in Thailand in preparation for increasingly stringent environmental regulations. In the domestic market, we have upgraded our EK cross and EK cross space to equip safety features and have launched the special edition model of G Plus Edition. And we have also launched a full model change of compact minivan Delica D2 at the end of December. On February 17, Japan time, we are planning to hold an online presentation meeting for the crossover SUV Outlander, which has undergone a full model change. We plan to follow up and announce the streaming link later to you so that you can see the presentation. We plan to launch the new Outlander globally, starting with the United States and Canada and Puerto Rico. We continue to develop technologies and expand our lineup of environmentally friendly models in accordance with our plan. So last page, page 15. The global automobile demand is gradually recovering. Particularly in developed countries, the second and third wave infections of the COVID-19 seem to have resulted in stricter restrictions on activities in each country again. Currently, the impact of the shortage in the supply chain for semiconductors is beginning to affect on the automobile production, and the environment surrounding us remains challenging and uncertain. Even in this environment, we have made it our highest priority to steadily implement these structural reforms, and centered on selection and concentration, and to firmly establish a foundation for recovery in business performance. We have been implementing these measures thus far. As a result, the reforms have progressed faster and deeper than expected, and in the current third quarter, we are able to revive upward our full year forecast as we saw a clear earnings improvement. In particular, we felt that greater than expected progress in structural reforms led to a major improvement in profitability despite the significant decline in its sales in the third quarter. We will continue to promote structural reforms without relaxing our policies and further solidify our profitability in FY 2021. Thank you. Thank you.

Part of the presentation, the Japanese presentation was inaudible. I apologize for that. And let's start the Q&A. English Channel is listened only. So if you have a question, press star followed by 1. And when your name is called, please start your question. And if you want to cancel your request for question, please press star and 2. We will take up to two questions from each speaker. Thank you for waiting. from Goldman Sachs. from Goldman Sachs. Do you hear me? Thank you. My first question, I understand that there is uncertainty, but the net generate too much profit. The shipment is about 300,000 units and then about 500 units. First quarter numbers. Is there any, like, improvement in the efficiency or something for the fourth quarter? And the second question, this is a kind of broad question, but your business in the U.S., so the new Biden administration, so I think there is a chance that some electric vehicle policies may change. And You've been working for the past nine years on inventory adjustment to survive in the market. But it's hard for us to see any improvements toward returning to profitability. So your US business, what's your plan or what's your outlook about your US business? About the roadmap toward profitability, Ikea is going to answer your question, your first question. So our result up to third quarter, considering that, the fourth quarter forecast seemed a bit conservative. I think that's the key point of your question. Let me talk about that. If you just calculate simply, take a subtract one portion from the total, in terms of volume, so we are in the 13.3 billion yen in the red. So why it is lower than the third quarter? I think that's your question. And for us, it is basically the basic fourth quarter PL. The level, the PL, profit and loss level for the fourth quarter is basically the same level as the one for third quarter, but we incorporated some risks. So first quarter first. So we will have an increase we will see we see the increased volume due to the recovery of the market but we need to yeah move up the posting of the losses and also we have some deterioration in the situation in terms of the materials raw materials like rhodium and so on so we need to reinforce the sales and then the increase in the cost of raw materials, including precious metals or rhodium, and also we foresee improvement, sorry, increase in the cost compensation for the suppliers. So the base number is similar, but we need to incorporate some risk factors for the fourth quarter. The first point, first risk is the spread of COVID-19 in ASEAN again, and also the impact of the Philippines government safeguard policies and some impact on our procurement due to shortage in semiconductor supply. So the profit level should be almost the same as third quarter, but in addition to that, we have incorporated some risk factors for the fourth quarter. Okay, then next is the outlook of our U.S. business. Yatabe is going to answer that. For the U.S., first, we need to secure profitability through building lean operation of business. We need to make steady efforts. So in the area of network and how we sell cars and our policies concerning fleet sales, So selling expenses, like we took measures in those areas. So on the cost side, we are seeing some effects of our initiatives. And as Ikea said earlier, shortly we'll have the new Outlander coming to the market. So while securing profit with this model, then how to solidify our business base in the United States. So we are in discussion with various parties related to the US business. This is Hirakata. I would like to add something. Mr. Izawa, if you look at, I think you were talking while looking at the appendix. So you said like we have in the red in terms of 19.6. But you see the sales is half. So on the one hand, revenue is half, but the profit is just like the reduction. The profit is lower only by 5 billion yen. I wanted to ask you to ask a question like this. So we have taken measures, and then our brand does not have very strong presence, but the market is low. we are affected even more than the strong like a brand prayer. But when the market recovers, we should be able to see the better results according to the market recovery, right? Yeah, I should have asked my question that way. Sales. I'm looking forward to seeing your sales picking up. And Outlander can be a catalyst or like, of your growth in sales. Thank you very much. Thank you. Next, Morgan Stanley Securities, . from Morgan Stanley Securities. I have two questions. The first one, again, the third quarter financial results, the summary of the results. It was, you are in the red ink. but not that much in terms of the level of the loss. So against your initial plan, yeah, I think you have seen good results of the structural reform. I would like to know specifically about what part of the structural reform have worked well. And in the appendix, you see profit level by region. From second to third quarter, basically, Japan The sales remain almost the same, but the fixed cost, I mean, the level of loss has come down. And I would like to know the reason, the causes, why. And then for the fourth quarter in the next fiscal year, I would like to see how you, will steer your business into the next fiscal year for the Japanese business. Okay, then first the summary of the third quarter financial results. Ikea-san, please. Summary of the third quarter financial results. In a nutshell, we have started this year this structural reform, and this is not just fixed costs, but this includes the drastic change in our sales strategies. And then I think both areas, we are making good progress in both areas. For one thing, the fixed costs. So we explained about this at the first half announcement. Our original aim is to reduce 20 percent of fixed costs over two years, but now we are at already 18 percent. We will see more effect in the next fiscal year. But the area related to the marginal profit, if you compare second quarter and third quarter, there are two major points. The first point is the improvement in the mix, like a model and destination mix. We have focused on this. And then according to Small and Beautiful, which is our midterm plan, so low-profit fleet, we want to reduce that part of the business. And then we have proceeded with the strategy to focus on the high-profit areas, Thailand, Philippines. These are high-profit markets. And then the sales volume increased by 20,000 from 37,000 to 57,000 in those areas. So I think this is one result. And another area is manufacturing. So cost efficiency improvement according to the increase in the sales volume. So we have seen some positive points. I think the improvement of marginal profit, not just the fixed cost reduction, but the improvement of marginal profit, I think this is working pretty well so far. Then about domestic sales.