Nissan Motor Co., Ltd. (PNK:NSANY) Q3 2023 Earnings Call Transcript

Nissan Motor Co., Ltd. (PNK:NSANY) Q3 2023 Earnings Call Transcript February 8, 2024

Nissan Motor Co., Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Julian Krell : Welcome to the Nissan Financial results for the Third Quarter of Fiscal Year ’23 Investor and Analysts session. This is Julian Krell speaking, Head of Investor Relations. Thank you very much for joining. The presentation material can be found on the Nissan IR website. Please be informed of the disclaimer included on the last page of the document and read it carefully. Thank you. For today’s quarterly financial results presentation I’m joined by Mr. Ma, CFO. Mr. Ma will start with the highlights of the third quarter and then he will continue with the financial results followed by the outlook. We will conclude this call with a Q&A session. I’m now handing over to Mr. Ma. Thank you very much for your time.

Stephen Ma : Thank you, good evening and good afternoon to everybody. So welcome to the third quarter result for the nine months ending December 31st 2023. So before addressing our results I want to express my condolences for everyone impacted by the Noto earthquake. And obviously our thoughts are with the families, friends and communities affected. I also want to thank the entire Nissan team and partners for delivering steady results in the phase of challenges. So let me begin with our third quarter highlights. Nissan delivered significant improvement on several measures. Net revenue up 22%; operating profit rose 65%, net income more than double versus last year and we have been very encouraged by a rising consumer demand for our products.

A modern car on a highway, its wheels reflecting the setting sun.

And we have enhanced shareholder return by restoring interim dividend and buying back shares. For the nine month period, global retail sales rose by 1.2% year-over-year to 2.44 million units. Excluding China, we achieve growth of 20% as demand improved in key regions including Japan, North America, and Europe. Unit sales in Japan rose by 8.4%, in North America by 30%, and in Europe by17%. This all helped offset the challenging market condition in China where retail sales declined by 35%. In terms of production, global output remain flat, however excluding China, production rose by 21% to meet the rising consumer demand. During the latest quarter, global retail sales decreased by 2.7% to 819,000 units while excluding China unit sales increase by 15% and production rose by 13 % amid demand for new models.

Globally, quarterly production volume were 843,000 units. Though the third quarter volume was lower, our counter measures to improve logistics capacity and start of new model deliveries to dealership have already shown a positive impact on our sales performance in January. Therefore we are confident to increase our sales performance in Q4. This slide shows our key financial performance indicators on both an equity basis and on a proportional basis. On an equity basis, net revenue increased by 22% to ¥9.17 trillion for the nine month period. On the same basis, operating profit for the period increased to ¥478 billion with a solid operate margin of 5.2% and an improved Automotive segment profit of ¥241 billion. Net income total to ¥325 billion and free cash flow for the Auto business rose to ¥182 billion.

Net cash was at a healthy ¥1.33 even after the restoration of interim dividend and the share buyback. On a proportionate basis, including contribution from our China operation, net revenue rose to ¥9.8 trillion. Operating profit was ¥487 billion representing operate margin of 5%. Given the fast changing market condition, this is a solid performance. Turing to the home market of Japan, retail sales increased by 8.4% to 336,000 units. The main driver was a demand for the Serena, X-Trail, Sakura and DAYZ, especially the e-POWER versions of these models. The proportion of electrified models sold in Japan is more than half our sales at 53% and net revenue per unit increased by 133%. Production volume increased by 28.4% to 551,000 units and Nissan has continued to win awards for innovations including Japan’s Technology Car of the Year award for Serena.

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Q&A Session

In North America, overall sales increased by solid 30% to 917,000 units. In the US, total sales increased by 25% to 663,000 units, this reflects a stronger demand for the Rogue, Kicks, Sentra and Versa. North American production increased by 33% to 913,000 units. Net revenue per unit in the US declined by 6%, this was mainly due to model mix as the market move to more affordable segments and an increase in sales expense aimed at keeping our relative competiveness in the phase of escalating incentives by our competitors. We are confident that Q4 will experience increase in sales led by the new model year 24 Rogue and Sentra as well as improved availability of models like Versa and Kicks as we improve logistics capacity. In Mexico, the company’s fourth largest market, Nissan remains the leader for the 15th consecutive year.

Turning to Europe, retail sales increased by 17% to 244,000 units, this improvement was driven by demand for our Qashqai, X-Trail and Juke, especially for the electrified versions of these cars. As a result, the share of electrified models were nearly half our total sales in Europe at 48%, net revenue per unit increased by 8%, and production volume increased by 18% to 244,000 units. Turning to China, the competition continues to be intense. It’s a 26% fall in nine month retail sales at 547,000 units. We have responded with focused actions to help mitigate some of the industry challenges and enhanced Nissan’s competitiveness including adjusting our incentives. In the fourth quarter of the calendar year, unit sales rose 19% year-over year to 247,000 units.

Production also rose by 33%. The stronger fourth quarter performance meant that the calendar year retail sales reached 794,000 units which is in line with our previous forecast. Nissan Sylphy has continued to be a top selling ICE model in the segment for four consecutive years with cumulative sales of more than 5 million units, net revenue per unit for the period decreased by 8%. Well we are encouraged by the good sales in January and we will continue to execute plans to strengthen our China performance. Turning to our nine-month financial performance. Net revenue increased by ¥1.67 trillion to ¥9.17 trillion. Operating profit increased by ¥188 billion to ¥478 billion representing an operating margin of 5.2%. Non-operating income which includes equity method company, total ¥62 billion.

Our results were impacted by extraordinary losses of ¥98 billion which included impairment cost associated with restructuring in India. Despite that, net income increased by ¥210 billion to ¥325 billion. This slide shows the variance factors in the third quarter year-to-date versus last year. Foreign exchange had a negative impact of ¥6.4 billion. Although the US dollar remains strong, this was offset by emerging market currency and the effects of a hyperinflation in Argentina. Raw material costs decreased mainly due to steel and aluminum over the nine-month period our sales performance had a positive impact of ¥312 billion. This reflects the strong volume and pricing actions partly offset by normalizing selling expenses across the industry.

Monozukuri cost had a negative impact of ¥80 billion which reflect the retroactive payment to suppliers, inflationary pressures, logistics cost and regulatory expenses. Other items had total negative impact of ¥82 billion. This include effects of normalizing used car prices and net credit losses in sales finance as well as other items. In this environment our operating profit improved to ¥478 billion due to our steady focus on Nissan NEXT strategic plan for long-term sustainable growth. Now we’ll turn to the outlook for the current fiscal year. Based on our retail sales performance in the first nine months of the year, we have adjusted our outlook. We are managing the business by executing a strategy with discipline and have therefore adjusted downwards our forecast for retail sales volume to 3.55 million units.

This reflects challenges including intensifying competition and logistics issue in most of our key markets. In China, sales reach 794,000 units which is in line with our previous expectation. Nissan continues to focus on meeting customer demand with new our models to improve sales efficiency while addressing logistics challenges and intensifying competition. In the fourth quarter of the fiscal year, we expect to see good improvements versus previous quarter. Although the markets remain competitive, we are taking appropriate action to navigate the challenging conditions and we are on the right track. We are keeping our guidance unchanged for net revenue, operating profit, and net income. This reflects the underlying strengths of our business achieved during Nissan NEXT plan.

However we also recognize the uncertain environment in which we are operating and we are taking necessary actions. We are currently evaluating the full impact of the Noto earthquake and geopolitical issues around the Red Sea. While we continue to assess these issues, we are keeping our guidance unchanged. In summary, these results have been achieved against a background of market volatility and fast changing industry conditions. The strategic actions during our Nissan NEXT plan have made our company more agile and resilient. With these strong fundamentals we are better positioned to navigate challenges and aim for long-term sustainable growth. We are also pleased by the strong reception of our new product as we continue our transition to electrification.

To maintain that progress we are finalizing a new mid-term plan which we will announce before the end of March. Thank you for your attention. I will now be open to any questions. Thank you.

Operator: Thank you very much. We’re now starting the Q&A session. [Operator Instructions] Okay, Bank of America’s Nihonyanagi-san, go ahead.

Kei Nihonyanagi: Yes, hello, thank you for the presentation. I am Nihonyanagi, do you hear me?

Stephen Ma : Good evening.

Kei Nihonyanagi: Okay, hello. Thank you for the opportunity. I have two questions. North American sales performance in the fourth quarter, are you sure you’re hitting the sales target or not? That’s what I want you to confirm on? Because for the logistics issues, in the second quarter, I heard that the risk of the logistics will be reduced. I think you commented that the risk of logistics will be smaller. In the third quarter, what were the specific challenges that you faced? From outside incentives seems to be largely increasing. If supplies are short, you wouldn’t have seen the necessity to increase the incentives. So could you elaborate on US market in particular, what is happening in US market? Whether it’s a logistics or a competitive landscape?

Could you elaborate on US market mainly and then make sure that you are confident about the fourth quarter. And the second question, Automotive free cash flow, could you elaborate on this as well? Inventories are rising. So in third quarter, it’s turning negative. But in the fourth quarter, or in the full year, how will the free cash flow become? Will this be better? Am I right? Is there any concerns or things that I have to pay attention to, in particular? These are the two questions.

Stephen Ma : Thank you, Nihonyanagi-san. So a very good question indeed. So, first of all, we are very confident of our Q4 sales in the US. What happened in Q3 was several factors. As mentioned in the media session as well, the main issue was the lack of logistics capacity from Mexico to the US market. We were originally planning to have even more but it was not enough and therefore but we have secured more capacity for Q4. In addition to trucks and train, the real rate, we have now also secured ocean freight from Mexico to go in Atlantic to the US and Canada, so that we can have even more delivery. So that is first, it’s fairly much resolved for Q4, much, much improved. I won’t say it’s perfect. Everything is done but it is much more improved versus Q3.

That’s the first thing. Then as you clearly identified, we also have rising inventories at the end of Q3. The inventory has peaked out in January and it’s already on the way down. And as mentioned before, it’s partially because of logistics, we couldn’t get the cars out or they got to the dealers too late to be retail. So therefore we had a little bit more in the pipeline than we expected at the end of Q3. So the question also that you have was about the incentives in the Q3, so what happened was that we had faced in Q3 much more aggressive action by our competitors. And I think you know which one I am referring to, but they had gone very quickly and we had to adjust within the quarter several times our incentive strategy, just to make sure we remained competitive.

On top of that, we had a little bit more model year 23 vehicles than we intended. Originally, we didn’t think that the market would change so much, as you guys saw in the US market, more were shifted to hybrids or other markets. And also, they were moving more into affordable segments. So we had already ordered and produced and shipped to the US many more model year 23 Rogues. And the market has shifted, especially in the segment where Rogue is, you saw there was a big increase in hybrid sales. So we ended up with a little bit more model year 23 Rogues than intended. And we said before always that we’re going to be focused on quality of sales. And obviously, quality of sales is not just about raising price and keeping incentive low, but it’s also doing the right thing at the right time.

We did not want to wait to take care of this issue until later months. So we quickly adjusted our incentives on the model year 23 Rogue and also some of the Ariyas to make sure that we do not have an aged inventory problem going into Q4. So that strategy or that enhancement of some of our offers, and those offers are mainly in APRs. So we tried to funnel these customers into our sales finance company. So we did more support on the interest rates for both retail and leases. So that seemed to have worked. And that’s why we had a big incentive increase temporarily in Q3. So I believe you can see also in the details that for the single quarter of Q3 versus Q2, North America incentive increased by maybe ¥50 billion or ¥60 billion. I believe half of that was this kind of one-off where we had to provision more to take care of the model year 23 inventory.