FY08 Third-quarter Financial Report
Feb. 9, 2009
Carlos Ghosn, President & CEO, Nissan Motor Co., Ltd.
Toshiyuki Shiga, Chief Operating Officer, Nissan Motor Co., Ltd.
Today, I will report Nissan's performance for the third quarter and our revised forecast for the remainder of this fiscal year. Mr. Ghosn will then describe specific actions we have taken to date in response to this global crisis, specific actions that will be taken next and our vision for the company's future direction.
The global financial and economic crisis, which began to accelerate last September, continues to evolve negatively, as our third-quarter results will reflect. Nissan has been taking decisive actions to adapt to the downward trends in financial markets and the deteriorating conditions in global markets.
Allow me to begin with some indicators that show the effect of this crisis on our industry. At the start of fiscal year 2008, we estimated the global total industry volume to be 69 million; now we estimate it to be 62 million, a 10% decline. In the third quarter, mature auto markets continued to be in a period of significant recession, with demand down 35% in the U.S., 14% in Japan and 20% in Europe, and demand also declined in emerging markets.
Another serious challenge has come from the yen strengthening against major currencies, which is having a significant negative impact on our profitability. In December 2007, the exchange rate was 114 yen to the dollar. In December 2008, the rate was 91 yen to the dollar, a difference of 20%. The difference is greater among some other currencies. For example, the yen strengthened 27% against the Russian ruble by the end of December.
The speed and severity of the financial crisis has far exceeded all industry expectations. The slump in demand that began in September increased sharply in the third quarter as consumer confidence fell and access to credit tightened.
In this context, I will start by reviewing our sales results from the first nine months of fiscal year 2008.
During this period, we launched eight new global models, including the new Z, the Cube, Maxima and Qashqai+2.
Year to date, Nissan's global sales were 2.63 million units, down 3% from the prior year. Global sales for the third quarter totaled 731,000 units, down 19% from the same period in fiscal 2007.
In terms of sales performance by region, the total industry volume in Japan decreased 6.4% in the first nine months of the fiscal year, with December marking the lowest registered car demand since 1968. Nissan's sales were down 9%, to 436,000 units. Our market share decreased three-tenths of a percent, to 12.6%. We launched three new models during the third quarter - the Kix, Cube and Fairlady Z. In response to lower overall demand, domestic production decreased more than 29% in the last quarter of the calendar year.
In the United States, the market dropped by 21%, Nissan's U.S. market share improved seven-tenths of a percent, to 7.1%. We also achieved market share gains in Canada and Mexico. Nissan's U.S. sales for the first nine months were down 13.6%, to 682,000 units. Fuel-efficient models such as the Versa and Rogue continue to be among the top sellers. Again, in response to lower demand, we reduced production volumes by 37% at our plants in the U.S. and Mexico in the last quarter of the calendar year.
In Europe, the overall market was down 8%, but the decline was especially significant in Spain and the United Kingdom, with drops of 34% and 16%, respectively. Nissan's European sales totaled 417,000 units, a decrease of 7.7%, while our market share remained stable. In October, we launched Infiniti sales in Western Europe. In Russia, our sales increased 13% in the first nine months of fiscal year 2008. As in the other regions, we took production volumes in our European plants down 45%.
In General Overseas Markets, sales across the region increased 13%, to 877,000 units. In the Middle East, sales were up nearly 31%, to almost 185,000 units. In China, thanks to strong sales of the new Teana, sales were up 19%. Sales in these two markets more than offset weak sales in other countries, such as Taiwan, Thailand and South Africa.
Now I will review our financial results from the first nine months of fiscal year 2008.
Consolidated net revenues decreased 14.7%, to 6.7 trillion yen. Volume and mix had a negative impact of 6%, foreign exchange had a negative impact of 8% and accounting changes had a negative impact of 1%.
Operating profit totaled 92.5 billion yen, an 84% decrease, due mainly to yen appreciation, the deterioration in all our major markets and raw material cost increases.
Operating profit margin came to 1.4%.
Net income was 43.2 billion yen, an 87.5% decrease.
Explaining the operating profit variance analysis for the first nine months:
Volume and mix, including sales price increases, was a negative 188.6 billion yen as a result of decreasing volumes in the United States, Europe and Japan. Price increases were partially offset by the negative mix in the U.S. and Europe.
The 176.2 billion yen negative impact from foreign exchange came mainly from the U.S dollar. Compared to last year, the appreciation of the yen against most currencies had a negative effect. The ruble had the second-largest negative impact in this period, due to higher volumes in Russia and yen appreciation.
The negative impact from the increase in provision for residual risk on leased vehicles in North America was 85.2 billion yen. Compared to our initial projections, used car prices for our lease portfolio are still down. As a result, we had to increase the provision by 22.5 billion yen in the third quarter.
The remaining variance was a negative 36.6 billion yen. This includes the combination of the positive in purchasing cost reduction efforts and the increase in raw materials and energy costs - which was mostly flat in this period - higher selling expenses and other expenses.
Let's move to our FY08 outlook.
Despite starting the fiscal year with a conservative outlook for the full year, our forecast has since been revised downward in function of the deterioration in market conditions and the extreme volatility in the current environment.
Given these conditions, it is difficult to make a forecast for the remainder of fiscal year 2008. However, assuming that global sales will be down 10%, to 3.38 million units, and production volume will be down 16%, to 3.07 million units, our revised financial forecast is as follows:
Net revenues are expected to be 8.3 trillion yen
Operating loss is expected to reach 180 billion yen; this figure implies an operating margin loss in the fourth quarter of roughly minus 17% of revenue - a level similar to what other major domestic car manufacturers announced last week.
Net loss is expected to be 265 billion yen.
The decline in operating profit, compared to the revised forecast made at the first-half financial announcement in October, is mainly linked to three key factors, namely:
The impact of foreign exchange, which is expected to be a negative 60.9 billion yen;
The impact of the provision for residual risk on leased vehicles, a negative 22.5 billion yen; and
The impact of the strong deterioration in volume, price and mix, which will have a negative impact of 345 billion yen.
For more information about our future outlook as well as the actions we have taken to date, I will invite our CEO, Carlos Ghosn, to deliver his remarks.
Nissan is operating in an environment in which we are hit with three challenges at one time: the credit crisis, the economic recession and the strengthening yen. Foreign exchange rates are unforgiving and very volatile, and market visibility is very low and unreliable. The global automotive industry is in turmoil, and Nissan is not an exception. When revenue falls quickly and significantly, it creates a situation that is both unsustainable and potentially dangerous.
Let me share with you the actions we have taken so far in this fiscal year and the steps we will take next to work toward recovery. The aim of all these measures is to return to a positive free cash flow in fiscal year 2009 with a total industry volume forecast at 55 million units and a foreign exchange rate at 90 yen to the dollar.
To begin, in order to keep our company focused on the necessary recovery of our results, we have decided to suspend our NISSAN GT 2012 business plan, retaining only our commitments on quality and electric vehicles as key business objectives.
The rest of our efforts are focused around three main themes - namely, recovering profit, preserving cash and pursuing deeper synergies with our Alliance partner, Renault.
Recovery of profit
Recovery of profit touches every member of the Nissan organization, in every region. In times of rapidly declining revenue, profit recovery depends mainly on achieving swift and significant cost reductions, including labor and purchasing costs.
Our labor costs will decrease in line with the decrease in revenues. In high-cost countries - such as Japan, the United States and Europe - our labor costs will be reduced by 20%, from 875 billion yen in fiscal year 2008 to 700 billion yen in fiscal year 2009.
For example, beginning in March 2009 and until the situation clearly improves, the salaries of board members and corporate officers will be reduced by 10%. Also beginning in March, the salaries of all managers at NML and at all of Nissan's affiliates in Japan will be reduced by 5%.
There will be no bonus payment for the board of directors for fiscal year 2008.
In Japan, the working hours of salaried workers have been significantly reduced. Since the beginning of fiscal year 2008, overtime has been cut by 30%, and we are on track to reduce overtime by an additional 75% in fiscal year 2009.
In Japan, the number of production days will be reduced by 50% in February and March, from roughly 20 days per month to 10. In the United States, plants are now operating on four-day work weeks. Adjustments are being made in other regions in function of market demand.
We will be negotiating the implementation of a work sharing scheme for employees until we have better visibility on the duration of this crisis. If the situation continues to deteriorate, we will have no choice but to amplify this option. We will make an announcement by the end of this fiscal year.
In response to this crisis, which is not of our making, we have to re-evaluate our global headcount in light of our decreasing sales and production volumes. In March 2008, Nissan's global headcount was 240,000. Today, headcount is 235,000. At the end of fiscal year 2009, in March 2010, we will streamline our headcount to be no more than 215,000, which is a reduction of 20,000. We will continue to take additional measures in function of the duration and depth of the current situation.
Across the company, hiring in high-cost countries is being kept to a minimum.
Travel has been cut by 75%.
We are focusing all our resources and activities on our core business. As a consequence, Nissan will suspend its sponsorship of corporate sports teams. Employee athletes will be reassigned to other positions within the company.
If the strong yen continues to be a factor in fiscal year 2009, we may, unfortunately, be forced to make changes to our global operational footprint in order to protect the company.
In addition to profit recovery, we are taking numerous actions to preserve cash.
Tight inventory control is vital. We are monitoring sales region by region and on a weekly basis. In March 2008, our global new vehicle inventory, including both company and dealer inventory, was 630,000 units. The inventory level peaked in November, at 720,000 units. We took decisive actions to adjust production and are now on track to reduce inventory to 480,000 units by March 2009 - a level 24% lower than the previous year. For fiscal year 2009, Nissan inventory will be kept well below the fiscal year 2008 level, both on a monthly basis and on a year-end basis.
In order to maintain this level, we are right-sizing operations. We have adjusted production volumes by eliminating work shifts, scheduling non-production days or shorter work hours at all our vehicle and powertrain plants worldwide. These actions have reduced our global production volume for fiscal year 2008 by 787,000 units from our planned volume - a 21% decrease.
To free up cash to finance our operations at a time when revenues are declining, we are making capital expenditure reductions. Capital expenditures have declined from 489 billion yen in fiscal year 2007 to 384 billion yen in fiscal 2008, a 21% contribution to saving cash. In fiscal year 2009, we will be taking a further 14% reduction, to 330 billion yen, and we will take more if necessary.
We have decided to postpone, reduce or cancel specific capital investments until there is better visibility regarding the duration of the economic crisis.
In India, we are slowing the ramp-up of our passenger vehicle plant in Chennai by starting with one production line instead of two to better balance the short- and mid-term capacity needs. However, there will be no delay with the plant's start of production of the next-generation March/Micra in 2010.
In Morocco, we have decided to suspend our participation in the industrial project near Tangiers.
New-model product introductions are being reduced from 60 to 48 up to fiscal year 2012. With this change, the number of launches will average 10 per year from fiscal year 2009 through fiscal year 2012.
We will increase body types for affordable and entry segments, EV and luxury, while decreasing for the middle segments. We will also rationalize and optimize our SUV/Crossover/Pickup portfolio.
We will consolidate our powertrain strategy around EVs for the FF platform, HEV for FR and diesel for trucks.
By improving working capital - mainly accounts payable and receivable - we will be able to generate 130 billion yen of cash during fiscal year 2009.
We will be proceeding also to the sale of identified non-core assets and activities.
Given our declining profitability, we will propose to our shareholders to make no dividend payment in June for the second half of fiscal year 2008 even though the payment of an attractive dividend remains a central part of our shareholder policy.
Deeper synergies with Renault
Taking advantage of our alliance with Renault, we have taken further steps to identify deeper synergy opportunities between Renault and Nissan. Our focus is on future investments in products, technologies, support functions and purchasing cost reduction. Each company has committed to generate a contribution of 90 billion yen at the level of free cash flow, bringing a total of 180 billion yen to the Alliance. This is a work in progress; 120 billion yen has already been identified. A list of synergies for Nissan will be unveiled when we announce our full-year financial results.
Evaluating short-term issues in the context of our long-term, strategic direction is a daily exercise. Though the current crisis forces us to act defensively on some counts, we continue to look for opportunities that are open to us.
Producing the right products in the right place at the right time is the strategy behind two important vehicle projects we continue to develop - namely, global entry cars and electric cars.
Affordable, fuel-efficient cars are the right products for a time of global economic crisis, and we are moving forward rapidly with our plans to produce them. The demand for affordable entry cars has been increasing steadily, and this trend is expected to continue. Since 2005, Nissan has been developing a new, dedicated entry-car platform with at least three different body types. They will be built in five Leading Competitive Countries, and the first cars will be produced in Thailand, India and China. At full ramp-up, we expect to sell more than 1 million entry cars in more than 150 countries.
As I stated earlier, we remain committed to our strategy of zero-emission vehicle leadership. We have already decided to invest in a battery production capacity of 50,000 units in Zama, and we have 11 zero-emission agreements signed with government entities or companies around the world. Developing technologies requires heavy investments of cash, and we are currently talking to various governments about securing grants to fund these important environmental advances. We are also negotiating with governments in the United States, Japan, Europe and China for incentives to invest in production plants for both vehicles and batteries. Production of Nissan's new electric cars will start in the latter part of 2010, and we will begin mass-marketing them globally in fiscal year 2012.
Our technology pipeline is filled with advances that will be good for the environment, enhance safety, improve dynamic performance or provide greater life-on-board satisfaction. In fiscal 2008, we brought 11 important technologies. In fiscal year 2009, Nissan will introduce 17 new technologies, followed by 15 more new technologies in fiscal year 2010.
Finally, I want to announce a new organizational structure that is being put in place to deal with the severity of our current operating environment.
Effective immediately, all corporate executives will report to Nissan's Chief Operating Officer, Toshiyuki Shiga. Shiga-san will be responsible for external affairs, manufacturing, research and development, purchasing, product planning, design, and marketing and sales.
In addition, Nissan is creating a new, three-region structure from our current four-region structure, under the responsibility of Shiga-san.
The newly created region encompassing Africa, the Middle East, India and Europe will be led by Senior Vice President Colin Dodge.
The new region consisting of Japan, China and the Asia-Pacific markets will be led by Executive Vice President Hiroto Saikawa, who will retain his responsibility for purchasing and add responsibility for Nissan's affiliates.
The third region, which consolidates all markets in North, Central and South America, will be led by Executive Vice President Carlos Tavares.
We are appointing Colin Dodge to a new position of Chief Recovery Officer. In this role, Colin will lead the creation and implementation of countermeasures, such as the ones I have outlined today, that will guide us through this time of crisis. Colin will also take over responsibility for the corporate planning and control functions.
I am also pleased to announce that Andrew Palmer is being promoted to Senior Vice President and will assume responsibility for product planning, the Infiniti business unit, the Light Commercial Vehicle business unit and a newly created electric vehicle business unit.
With his expanded responsibilities, Andy will join the executives I just mentioned on Nissan's Executive Committee, along with Alain Dassas, Junichi Endo, Hidetoshi Imazu and Mitsuhiko Yamashita.
All the actions and countermeasures I have just described are not merely short-term fixes. They will enable our company to recover and secure a more competitive position that will benefit Nissan long after the current crisis subsides.
Our direction for the future is clearly and firmly established, and our vision is fixed beyond this horizon. We want to sustain Nissan for the long term.
Thank you for your attention.