Nissan Motor Co., Ltd. (PNK:NSANY) Q1 2023 Earnings Call Transcript

Nissan Motor Co., Ltd. (PNK:NSANY) Q1 2023 Earnings Call Transcript July 26, 2023

Operator: Begin the presentation, our fiscal year 2023 First Quarter Financial Results of Nissan Motor Co., we deeply appreciate the heavy attendance. The company is represented by our President and CEO, Mr. Uchida Makoto; and CFO, Mr. Stephen Ma. First of all, CEO, Mr. Uchida will give the highlights. Please go ahead.

Makoto Uchida: Ladies and gentlemen, welcome to the announcement of Nissan’s first quarter results for the three month period ending June 30, 2023. Let me say a few words before presenting the results of the first quarter. As you have seen in the press release, Nissan’s financial performance for the first quarter improved significantly from the prior year. Net revenue increased 37%, which is highest ever in Nissan for the first quarter. Operating profit increased by 98% and net income was up 124%. Despite multiple challenges including the pandemic and global chip shortages, we have seen continuous progress toward the goals of Nissan NEXT transformation plan. This has enabled us to steadily transform our business to a level that enables us to deliver the expected performance in many areas.

However, it does not mean that everything is on track. Our Chinese operation that has been contributing to the company’s growth is currently facing significant challenges and saw a big decline in sales for the quarter. We believe that it will take some time for our performance to recover in the market. Given the circumstances, we will revise downward the full year forecast of our sales in China as well as globally. However, in view of positive factors such as foreign exchange, we are making an upward revision on the revenue and profit for the year. Now I would like to ask our CFO, Mr. Stephen Ma, to present the results for the first quarter and the full year guidance for fiscal year 2023. Later, I will give you an update on our China business.

Stephen-san, the floor is yours. Stephen Ma Thank you, [Jess-san] (ph). Hello everyone. Before I begin, let me take a moment to express my gratitude to all Nissan stakeholders for your support enabling us to deliver strong performance while keeping our focus on quality of sales. Looking at the volume in the first quarter, global retail sales decreased by 3.7% year-over-year to 789,000 units. However, excluding China, we achieved growth of over 20%, which was driven by all regions with Japan and North America leading with double-digit growth. The rapidly changing automotive market in China remains challenging, especially in the January to March period. And in addition to the regular seasonality, retail sales decreased significantly by 45.8%.

Global production increased by 4.4%, as we continue refilling the pipeline to serve customers worldwide. However, inventory levels remain lean, excluding China, production increased 30.5%. This slide shows our key financial performance indicator for both equity basis and China joint venture proportionate basis for the first quarter. On an equity basis, net revenues increased by 37% to 2.92 trillion yen. Operating profit for the period increased to 128.6 billion yen, with an operating profit margin of 4.4%, as we progress solidly with the good initiatives established as part of our transformation plan Nissan NEXT. In this regard, I’m very pleased to share with you that again, the automotive segment continues profitable path and contributed 34.4 billion yen in the operating profit for the quarter.

Net income totaled 105.5 billion yen. Free cash flow for the automotive business was a positive 109.4 billion yen. Net cash for the automotive business came in at a healthy level of 1.35 trillion yen. On a proportionate basis, which includes our China operation, net revenue rose to 3.11 trillion yen from 2.48 trillion yen last year. Operating profit was 130.5 billion yen, representing an operating margin of 4.2%. With free cash flow for the automotive business reaching a positive 103.7 billion yen and a net cash for the automotive business of 1.68 trillion yen, we continue to produce result and are on track — on the right track. Now I will cover the performance of our key markets. In Japan, retail sales increased 19.1% to 106,000 units. Thanks to the launch of a new Serena e-POWER in April, total sales for the Serena increased 130% for the quarter.

Furthermore, the total electrification ratio improved 12 points to 54%. Net revenue per unit increased by 20% from the prior year Q1. Production volume increased 69.6% for period due to the improved supply of semiconductors as well as the recovery from the lockdown in Shanghai in the prior year. In North America, retail sales and production volume increased by 33.1% and 35.6%, respectively, for the quarter. This growth was primarily driven by our top selling models, the Rogue and the Sentra. Our quality of sales initiative continue with net revenue per unit increasing by 6% year-over-year. To pursue our path to sustainable growth in the U.S., we continue to focus on the quality of our overall business. In Europe, despite the constraint in logistics, retail sales grew by 7.2% and production volume increased by 14% for the quarter.

Net revenue per unit increased by 24% year-over-year. Our electrification ratio increased [27 points] (ph) to 35% due to the strong acceptance of our e-POWER models. In China, in the first quarter, sales and production volumes were significantly down impacted by the pandemic, seasonality, and severe pricing action within the market. We elected to prioritize our quality of sales with which led to retail sales of 162,000 vehicles for the January to March period and 196,000 from April to June, which is I will go into more detail later regarding the status of our China business. Let’s have a look at the income statement for the three months ending June 30, 2023 on an equity basis. Net revenue increased by 780.4 billion yen to 2.92 trillion yen.

And operating profit increased by 63.7 billion yen to 128.6 billion yen, representing operating margin of 4.4%. Non-operating income, which includes equity method company, totaled 38 billion yen. Extra ordinary losses totaled 37.4 billion yen, including a non-recurring loss related to litigation. Net income increased to 105.5 billion yen, as a result of the improvement in operating profit and updated tax assumptions. This slide shows the adherence factors from the first quarter of last year to this year. Foreign exchange had a positive impact of 2.2 billion yen, primarily due to the strong U.S. dollar, which was partially offset by emerging market currencies. In general, raw material prices decreased with exception of battery related materials such as lithium.

Sales performance had a positive impact of 160.7 billion yen driven by the strong increase in volume and continued benefit from the strong execution of Nissan NEXT with a clear focus on quality of sales. Monozukuri costs had a negative impact of 19.2 billion yen and other items had a total negative impact 82.9 billion yen, including negative impact from sales finance as used car pricing and net credit losses begin to normalize, as well as other timing related items. As a result, operating profit for the quarter improved to 128.6 billion yen. The automotive industry continues to face challenges in a rapidly changing market environment in China, as evidenced in our year-to-date retail sales performance. To account for this recent development, we decided to lower our sales volume forecast for China to 800,000 units.

Despite the challenges in China, we anticipate continued improved performance in our core markets of Japan, North America and Europe, which mitigates a shortfall in global volumes to a total of 3.7 million units versus the previous outlook of 4.0 million units. Looking at the financials, reflecting the depreciation of the Yen versus U.S. dollar for the first quarter, we updated our foreign exchange assumption and increased our financial outlook as follows: Net revenue from 12.4 trillion yen to 12.6 trillion yen. Operating profit of 550 billion yen, which represent an operating profit margin of 4.4%. Net income of 340 billion yen. To summarize, we started into the fiscal year 2023 with a solid results and we are confident for the coming quarters.

We remain committed to the Nissan NEXT transformation plan in order to continue this recovery and deliver sustainable growth. I will now hand to our CEO, Uchida-san.

Makoto Uchida: Ma-san, thank you very much. Let me elaborate on our approach to the Chinese market. Since Chinese operation is managed on the calendar year basis, we have the results for the first six months. As I said in the beginning, Nissan’s unit sales dropped significantly in the first quarter. One of the reasons is the emergence of rapidly growing new energy vehicles offered by the local brands. According to our own research, as shown in the table on the right, the share of the new energy vehicles offered by local brands has been growing significantly in the past few years and accounts for 25% of the total market in the first half of the fiscal year. The ones that are losing ground are mainly non-new energy vehicles of international joint venture brands including Nissan.

The share of non-new energy vehicles of joint ventures declined from 61% in 2020 to 40% today. Addition to these market changes, the first quarter was also impacted by the decline in overall demand as well as a severe price wars in anticipation of the introduction of new emission regulation applied to internal combustion engine. Our sales in China continued to fall year-on-year in the second quarter. However, the rate of decline became smaller with slight easing of these trends. Moreover, our sales volume rose quarter-on-quarter and our showroom traffic is increasing. We intend to keep the momentum and makeup for the loss in the latter half of the year as much as possible. In this context, the new models that are launched this fiscal year will be playing a critical role.

We aim to capture the demand with new energy vehicles and strong product in the C segment, which is the main battlefield. These new energy vehicles include the entry model Aria and the first plug-in hybrid of our local brand Venucia, both introduced this month C segment cars are the all new X-Trail, e-POWER that was introduced in May, and the all new Qashqai, which will be launched next month. As I said back in May, our strategy is to maximize the use of existing local assets and carry out necessary reforms with speed. Our focus is particularly on the customers who have been Nissan users for long years. We have sold more than 15 million units over the past 20 years. There are many Nissan owners in the market. It is very important to offer a wide selection of internal combustion engines that is still in demand, as well as new energy vehicles so that our valued customers continue to choose our brand.

Timely introduction of high value products that are as competitive as those of fast growing local brands at attractive prices is what we need. The key is our business that encompasses the entire value chain including parts sourcing, designing, development, production, sales and after sales. This is our strength. The photo on the right is Dongfeng Nissan Technical Center, one of the Nissan’s global development bases established in 2006, where all the vehicles under Venucia brand are developed. Chinese customers’ needs are diverse. There are many first time buyers among new energy vehicle intenders. In order to capture these customers, it is strategically important to develop more competitive products by using know-how and competitive assets that we have been building locally for Nissan brand.

Along with my relevant executive team, I have held intense discussions with our joint venture partner during my recent visit to China. We agreed to accelerate the introductions of new energy vehicles by utilizing local assets for Nissan brand. I will present the concrete plan when we unveiled the next midterm plan that we aim to announce around this fall. We have already decided to launch several new energy vehicles from the next fiscal year onward. We will further strengthen our line-up and increase our competitiveness. Today, we are producing vehicles in China. Unfortunately, the current sales outlook falls largely below the production capacity. Utilization rate of some plants remained low. On the other hand, we are facing production constraints in other regions.

There are models of which supplies are falling short of demands. Therefore, we will explore opportunities to optimize the global business by considering vehicle production for the Chinese market as well as possibility of using the plants in China for other destinations to complement the global production. This is our approach to the Chinese market. Changes in the market are not limited to China. Markets are changing around the world. This month, Nissan decided to include the leaders of the key regions and the product planning as the executive committee members. The intention is to ensure speedy decision making and increase our competitive edge in each market. I would demonstrate strong leadership while delegating authority to the rest of the executive committee members.

This is how I am going to build the united agile and vibrant team. The leadership team is also leading the ongoing initiative of cultural transformation to enable our people who are the company’s greatest assets to show their full potential. Nissan is recognized as a great place to work in Canada, the United States, Argentina, Brazil, Chile and Peru. This demonstrates that our efforts to transform the corporate culture are bearing fruits. The world is changing dramatically with the new leadership team, Nissan will continue providing values that only Nissan can offer to the customers around the world. Today, Nissan signed the definitive agreements regarding new initiatives that are intended to elevate this partnership with Renault Group to a higher level.

Though it took time to conclude, we were able to reach an agreement that is beneficial for both partners as a result of thorough discussions. We intend to further improve our corporate value and ensure sustainable growth by maximizing the use of the partnership that reached the new stage. Thank you for your attention.

Operator: Now, we’d like to proceed to the Q&A. [Operator Instructions]. [Yemenisan of NHK] (ph).

Unidentified Analyst: Are you connected? Do you hear me? This is from NHK. Yes. First, the first quarter numbers, revenue is record high for the first quarter. Operating profit and other numbers are very strong. And the results of Q1, how do you assess it? And what are the reasons behind this result? And also, the sales of each region Japan, North America, and Europe are fine, but China is pretty tough, right? So, how do you perceive the sales performance in these regions? This is my question.

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Q&A Session

Makoto Uchida: Thank you for your question. Q1 result, how do I assess it? In Nissan NEXT, we have been enhancing quality of sales, and this is delivering results. As you may be aware, business climate is extremely challenging and despite these circumstances, financial results of Q1 were pretty strong. Thanks to the result of the enhancement of the quality of sales driven by our employees and ahead of each regions and operations. Regional sales, Stephen was talking about this earlier, compared to prior year, 19.1% growth in Japan, 33.1% up in U.S. and 7.1% up in Europe, and the biggest challenge lies in China. This is what we described. Again, such backdrop, new models are appreciated by the customers today. That is why the net revenue per unit is increasing.

And our earning abilities with the automobiles is increasing or enhancing. But, like, [proactively] (ph), in Nissan NEXT, in 2023, 5.4 million units was what we are shooting for, and 6% market share was what we were initially expecting to deliver. Including China, the operating profit 5% was a milestone, and compared to these milestones are basic volume, fundamental volume requires further efforts so that we can boost the number. And because of this, business circumstances are largely changing while regions, Central and regions are working together. And that is why we included the head of the regions and the head of the product planning and EC, exit committee and discussing how to grow in the changing market and what kind of strength should be increased and what kind of weaknesses we need to address.

That’s what we have been discussing intensively since July. So, in that sense, this fiscal year 2023 will be a very important year for us. First, we need to boost the volume that we have today and ensure healthy, free cash flow, or even enhance it. That’s a challenge. And for earning abilities of automotive segment is what we need to develop as well. And in the changing business circumstances, we need to ensure sustainable growth in the future, including the fundamental volume. This is the biggest topic. With regards to China, as I described, according to our expectation, the Chinese market the intensifying competition has largely affected, especially the new energy vehicle is a segment where we need and we believe that proposing the new way of working will be very important to ensure sustainable growth.

For 20 years, we have been working together with the partner. But if we just do what we have been doing in the past, I’m not sure whether we can do effectively in China, we need to largely change ourselves. Based on this decision in the beginning of this month, we agreed with the joint venture partner on this directionality. And in the internal meeting, we approved some of the new energy vehicle plan. This is how we would like to change Nissan to adapt to the business circumstances with speed. This is the most important thing for Nissan. Thank you.

Operator: Okay. Moving on to the next question. [Asahi Shimbun, Kondo San] (ph).

Unidentified Analyst: Yes. This is [Kondo from Asahi Shimbun] (ph). Do you hear me?

Makoto Uchida: Yes. Go ahead.

Unidentified Analyst: Yes. Thank you. I would like to know about China and U.S. One question per each location. Chinese market, local partner, you said that you are accelerating the introduction of new energy vehicles, but including the local brands, the new energy vehicles segment is under intensified competition and the value of the vehicles including the software is totally different from what you have seen in the past. Competitive landscape is likely changing after next fiscal term, while this year there is a big downturn in the sales? And as a result of the reforms that you are planning for, can you recover your performance in China. It depends on the product plan. So what’s a projection in China going forward? That’s my question.