SPEECHES


July 25, 2019

Fiscal year 2019 Q1 financial results Ė remarks from CFO Hiroshi Karube
and
CEO Hiroto Saikawa

CFO Karube

Ladies and gentlemen, good afternoon. Thank you for joining us for the announcement of Nissanís first-quarter earnings for fiscal year 2019.

Today, I will outline our global sales performance and first-quarter financial results. Following my presentation, CEO Saikawa will provide additional details on the business transformation plan that we announced in May.

I will first start with a summary of the first-quarter results. In the first quarter, our global sales volume decreased 6.0% to 1.231 million units but outperformed the market, which declined 6.8%.

Looking across the regions, in China, despite the significant decline in market demand, Nissanís sales increased 2.3%. In other key regions including the U.S., Europe, and Japan, the companyís sales underperformed in those markets.

Global total industry volume Ė or TIV- excluding China declined 4.8%, whereas Nissanís sales decreased 8.8%. The companyís wholesale volume, excluding China, fell 13.5%, which declined more than retail sales. This was one of the factors that negatively affected earnings. However, Nissanís dealer inventory levels, excluding China, decreased 68,000 units during the quarter and we are working on further optimization. Dealer inventory levels in China also continue to decline.

In the first quarter, operating profit decreased from 109.1 billion yen in the prior year to 1.6 billion yen.

Changes in the external environment including foreign exchange fluctuations, regulatory compliance and product enrichment costs, and raw material price hike resulted in a negative impact of 42.3 billion yen.

Given the decline in the companyís wholesale volume, excluding China, sales performance had a negative impact of 60.5 billion yen. 72.4 billion yen of this impact came from volume and mix, which was partially offset by lower selling expenses.

Purchasing cost reduction efforts did not offset completely the negative impacts from higher R&D expenses, manufacturing costs and other items. As a result, monozukuri and others had a net negative impact of 4.7 billion yen.

We expected our sales and earnings to improve in the second half of the fiscal year, while assuming lower profitability in the first quarter. However, the results were slightly below expectations. Foreign exchange movements, regulatory compliance expenses, product enrichment costs, commodity prices, monozukuri and others were approximately in line with our estimates but sales activities were below internal projections.

We continue to concentrate on our business recovery by improving sales and controlling costs in order to achieve the full-year operating profit guidance of 230 billion yen.

For the first quarter of fiscal year 2019:

  • Consolidated net revenues were 2.37 trillion yen.
  • Operating profit totaled 1.6 billion yen.
  • Net income was 6.4 billion yen.
  • Free cash flow for the automotive business was a negative 385.5 billion yen. We ended the period with an automotive net cash position of 1 trillion yen. This includes the impact from changes in accounting standards which was a negative 82.5 billion yen.

On a management pro forma basis, which includes the proportionate consolidation of our Chinese joint venture, the key indicators are on the bottom half of the slide.

This slide describes our global sales performance for the first three months of the fiscal year.

TIV decreased in all markets except Japan. As a result, global TIV fell 6.8% to 22.5 million units. Nissanís sales decreased 6% to 1.231 million units and our global market share increased 0.1 percentage point to 5.5%.

These are the sales results in the four key markets during the three-month period.

In Japan, Nissanís sales decreased 2.6% to 126,000 units. Sales of registered vehicles declined due to an aged lineup and other factors. In contrast, kei car sales grew significantly due to strong demand for the all-new Nissan DAYZ, which went on sale in March.

In China, sales of current Nissan models including Sylphy, Qashqai and X-Trail, as well as the Venucia T60, which was introduced last November, contributed to incremental sales. Nissanís sales increased 2.3% to 344,000 units. Given the increase in sales in a declining market, our market share increased 0.7 percentage point to 5.7%.

In the U.S., Nissan sales decreased 3.7% to 351,000 units due to an aged portfolio and the companyís continued efforts to normalize sales. However, the average transaction price, improved year-on-year. This was a result of lower incentives per unit compared to last year after May, as well as pricing improvements. We also reduced and optimized dealer inventory levels. Through our continued normalization efforts, we expect to recover gradually our profitability from the second half, as we introduce new models.

In Europe, we continue to see the impact from requirements for powertrains to comply with environmental regulations. Nissanís sales decreased 16.3% to 135,000 units.

Moving to our financial results:

  • Consolidated net revenues for the three-month period totaled 2.37 trillion yen.
  • Operating profit was 1.6 billion yen, which equates to an operating margin of 0.1%.
  • Ordinary profit was 35.3 billion yen. The figure includes 33.1 billion yen in investment income from companies accounted for under the equity method, including our joint venture in China.
  • Net income was 6.4 billion yen, which equates to a net profit margin of 0.3%.

This slide illustrates the operating profit variance analysis in detail. I will move to the next slide, as I discussed this earlier.

Our projection for a full-year dividend of 40 yen per share remains unchanged.

CEO Saikawa-san will now present the business transformation program.

CEO Saikawa

I would like to present the actions to be taken from next year onwards. An overview was presented when we announced full-year Fiscal Year 18 results in May. We have just finished the first quarter of the fiscal year and midterm initiatives are being specified. I said previously that I would like to make an update in July once we have the details. That is why, in addition to the financial results, I would like to give you an update.

As explained in May, in the latter half of the ongoing midterm plan, in pursuit of future growth, we were planning to make investments in CASE. We plan to maintain investments in these future technologies while making selections and concentrations on unprofitable operations. Rather than short-term sales bursts with short-term benefits, we are making steady efforts to recover our sales in two years if possible and restore profitability.

Also outlined in May, the three main pillars of the business transformation are as follows: Recovery of our U.S. business, enhancement of the efficiency of our operations and investments through selection and concentration and the third is steady growth of new products and new technologies under Nissan Intelligent Mobility. As I said last time, within the ongoing midterm plan, we had a guide for revenue, 16.5 trillion yen, for 2022. However, we have revised this to 14.5 trillion yen. Today we stand at 13 trillion yen.

As announced in May, the goal we are pursuing for operating margin is 6%.This means there is a big change in the direction we are taking compared to the expansion strategy. Previously we aimed for more than 7 million units. However, 14.5 trillion yen of revenue equates approximately to a volume of 6 million units of production and sales. With 6 million units, we will produce a 6% operating margin.

In doing so, we are working on reduction of fixed costs and pursuing steady growth. We are making improvements in different areas of 300 billion yen 180 billion yen.

The 300 billion yen are fixed costs based on the original plans. The investments that we have made in the past will be clarified and we will make selection and concentration of investments to be made in the future, with the enhancement of the efficiency we will produce 300 billion yen of improvement.

And in addition to this, we will produce steady growth. From 13 trillion yen, we will increase the revenue to 14.5 trillion yen. Within this growth, we will produce 180 billion yen of profit increase. These are the two big pillars of what we are doing today. The operations that will be largely improved are in the U.S. The U.S. will account for about 40% of this positive impact.

Later I will provide further details of the 300 billion yen. There are things that I can disclose and things that I cannot disclose, but 90% is already visible. In the process of growth, we will increase the profit. We will do this 180 billion yen step-by-step. As our CFO said earlier, in the first quarter of this year, our sales volume was slightly below our initial expectation, so gradually, slowly but surely, we would like to increase the revenue in the next three years, or this fiscal year and the next three years. This is the content of the 180 billion yen.

Currently we have a global production capacity of approximately 7.2 million units. By FY2022, we aim to reduce that capacity to the level of 6.6 million units.

The current production capacity of course includes our Chinese plants. Our Chinese plants are fully utilized today and we expect that to continue. If we exclude the Chinese plants, we are intending to produce more than 10% of rationalization. As you can see, this utilization ratio is at 69% today, and if we do as we planned, this utilization ratio will increase to 86%. Five thousand hours a year, this is the assumption that we are taking, which is somehow stretched. Based on five thousand hours, 86% ratio is healthy.

In FY18 and now in the middle of FY19, we have stopped or reduced capacity on certain production lines. In eight locations we have already implemented these actions. From next fiscal year, from 2020-2021, at six locations, at six plants, we may stop the line or stop the plant and reduce capacity. Some actions are done and some are ongoing, and they are split into groups of 1 to 8 and from 9 to 14. The first section headcount is 6,400 and the entire plan calls for a reduction of 12,500. What we are talking about here is mainly direct (manufacturing) workers. For the second section we are going to discuss and make decisions one by one. These are corrections to the investments that we made in the past. This accounts for a big portion of the 300 billion yen.

Simply put, this is about selection and concentration of investments for the future. Less profitable items or items from which do not anticipate a profit increase will be stopped. These are under discussion. In terms of lineup, the number of models will be reduced by about 10%. I will not provide names, but compact cars and Datsun lineup will be the main ones we have identified to be addressed.

In the ongoing midterm plan, slowdown in the U.S. and issues in Europe are affecting performance, and although we grew our business elsewhere, 13 trillion yen of revenue is stagnant. In terms of sales volume, it is hovering at around 5.5 million units, between FY17, FY18 andFY19. In order to ensure steady growth of 3% per annum and reach 14.5 trillion yen of revenue, eventually, in terms of sales volume, we aim to sell 6 million units, which is equivalent to a 6% operating margin.

In the next three years, and beyond that, we will continue investing for future growth. Naturally, we will make investments and this will increase fixed costs, especially for R&D expenses. Based on the level of R&D expenses in FY18 and FY19, we are going to increase the amount by 10%. By doing so, and being prepared for the future, 300 billion yen, which is already invested, we will reduce the fixed costs at the same time. As a consequence, against the latest fixed cost level, R&D expenses will be increased by 10%, but in terms of absolute level, there will be a slight decrease in fixed costs.

Another big pillar of 14.5 trillion yen of revenue is the 3% steady growth rate. We donít have specifics today, but we will make investments, deliver new products and new technologies, and as I announced last time, we will promote Nissan Intelligent Mobility, from the upstream and to the downstream. With this consistent strategy we will gradually enhance the brand value of Nissan and increase the profitability in sales.

During this time, 20 new models will be introduced in the markets, and we are in line with the plan. Among these is the Skyline. As we have announced, the Skyline is equipped with ProPILOT 2.0, the latest version of ProPILOT. These new models will be coming to the market, bringing the average portfolio age down from over 5 years to 3 years. This is one of the big factors translating to the steady growth. Also, we have been pursuing Zero Emissions, and we have said that we are leading electrification. Within Nissan Intelligent Mobility at the moment we have EVs and e-POWER. Each one has two models, and we have a 4WD high-power high-performance product, will be launched during this time.

In addition to the current Nissan LEAF, NOTE and SERENA e-POWER, we will deliver wide variations. In EV, we plan a kei-car EV and a big C crossover and D-segment cars. For e-POWER, we are going to offer high power with four models, and bigger cars. Another technological item is autonomous driving. User-friendly autonomous driving technology is what we are delivering. We started with ProPILOT and we plan to increase it to 1 million units. We will continue to update the technology, and ProPILOT 2.0, which is on the new Skyline, enables hands-off single-lane driving. During this time we are going to introduce next-generation AD technology, which enables eyes-off on freeway, which is called Level 3.

Technological development and commercialization of technologies will help us increase revenue from 13 trillion to 14.5 trillion yen. Another one of our areas of activity is in the field of new mobility services. We have agreed on a partnership with Waymo, and a driverless vehicle service will be developed between us. As early as possible, we would like to offer this driverless car service in Japan, and that is what we are working hard towards.

Today, our profit is poor, but in the latter half of this year, and two years down the road, in FY2022, we aim to continue to recover, and reach 14.5 trillion yen of revenue, and a 6% operating margin. In the introduction of CASE we would like to advance in the industry, and based on the strategy of Nissan Intelligent Mobility we will promote a wider application of EVs and electrified vehicles and new mobility services. In these areas, we would like to lead.

In addition, our Executive Committee, of which half has been revitalized, is our new generation of leaders will be prepared for whatís coming beyond 2022 and work on what needs to be done. Brand reinforcement, or brand rebuilding, is what we have to do. We need to identify the next challenge for Nissan, the technology company. In the area of new mobility services, in a wider definition, we need to evolve our business from B2B to B2C. This should be the minimal requirement that we need to satisfy, mainly led by the new generation of leaders, and identify what to do in the next three years. We need to make sure that the next three years will be enriched. That concludes my presentation.

 

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