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

Nissan Motor Co., Ltd. (PNK:NSANY) Q3 2024 Earnings Call Transcript February 13, 2025

Julian Krell: Good evening, and welcome, everyone, to the Nissan Financial Results for the Third Quarter of Fiscal Year 2024 Investor and Analyst 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 financial results presentation, I am joined by Mr. Uchida, President and CEO; and Mr. Papin, CFO. Mr. Uchida will begin the presentation with a brief introduction. Following that, Mr. Papin will present the financial results for the first 9 months of 2024 and full year outlook. Afterwards, Mr. Uchida will provide an update on the company’s turnaround actions. The session will conclude with a Q&A session for which additional EC members and executives are joining today. So, Mr. Uchida, thank you very much for your time.

Makoto Uchida: Thank you all for joining today. Well, this conference is for our financial results announcement. I would like to start by making some comments regarding the business integration discussions with Honda, which was announced earlier. Following that, our CFO, Jérémie Papin-san, will explain the fiscal year 2024 third quarter results. After this, at the end, I will take you through the update on our turnaround actions and our progress. As announced earlier, our company held a Board meeting today and decided to terminate the MOU for discussions toward the business integration with Honda, which was announced on December 23rd of last year. This has been agreed between the two companies. We also decided to cancel the three-party MOU, which involves Mitsubishi Motors Company.

Post the signing of the MOU, Nissan and Honda began discussions in the integration preparation committee, and we confirmed that significant synergies could be expected as part of the initial stage of considerations. However, during this process, Honda proposed to change the integration structure, which was different from the framework, a graded MOU to a complete acquisition with Nissan through a stock exchange. This revised structure was suggested by Honda with an intention to realize synergies quicker, hence the integration needed to be carried out quickly. Subsequently, we carefully and sincerely considered it at our Board meeting, but ultimately reached the conclusion that we could not accept the new proposal. There were several reasons for this, but I will discuss the most significant ones.

Let me reiterate that the purpose of implementing the business integration was for both companies to join forces and become a stronger entity to compete in the global market. However, with the proposal suggesting the Nissan could become a wholly-owned subsidiary of Honda, we were not confident that our autonomy would be preserved or that Nissan’s potential could truly be maximized. This led us to ultimately reject the new proposal. With this decision, discussions regarding the business integration between the two companies have been terminated. However, we will continue to focus on exploring strategic partnerships that aim to create new value and achieve synergies through efficient methods. That concludes my presentation. For now, I would like to hand it over to Jérémie Papin-san.

Go ahead.

Q&A Session

Jérémie Papin: Thank you, Uchida-san. Good evening, everyone. My name is Jérémie Papin, and I am honored to introduce myself as the new Chief Financial Officer from January 1st. I will now take you through our 9 month-to-date results for fiscal year 2024. First, allow me to summarize with three main figures. Our net revenue was JPY 9.1 trillion, our profit was JPY 64 billion, and net income was JPY 5.1 billion. On this slide, we see retail sales year-to-date and Q3 standalone. Year-to-date, global retail sales decreased by less than 2% to 2.4 million units. If we exclude China, our unit sales increased slightly. This reflects growth in North America of 2.4%, which offsets declines in both Japan and Europe. In China, the market remains challenging with our retail sales down as a result.

Looking at retail sales for Q3 alone, excluding China, we see an increase of nearly 2%, in particular, an increase of close to 10% in North America, where new models are ramping up. Now, let’s look at our key financial performance indicators. On a consolidated basis, net revenue was flat at JPY 9 trillion. On the same basis, operating profit decreased to JPY 64 billion and net income decreased to JPY 5 billion. Our auto free cash flow year to date is a negative JPY 506 billion. And our upcoming product offensives maintains CapEx and R&D at higher levels than last year. In the automotive business, our net revenue remains around JPY 8 trillion. We had a negative operating margin of 1.8%. We finished the 9-month period with JPY 1.2 trillion in net cash in the auto segment, with gross cash at over JPY 2 trillion and unused committed credit lines over JPY 1.7 trillion.

This slide shows the variance factors year-to-date. Foreign exchange had a positive impact of JPY 31 billion and better raw materials cost added JPY 23 billion. However, our sales performance declined by JPY 214 billion due to lower volumes, increased selling expenses and continued investments in marketing to support our new model launches. Monozukuri cost had a negative impact of JPY 59 billion, while inflation also had a negative impact of JPY 106 billion. We saw a total negative impact of JPY 89 billion in others, which includes the effects of net credit losses in sales finance and higher remarketing expenses. Overall, these results are due to a mixture of Nissan specific challenges in a competitive industry. However, we also see some signs of progress with our actions.

We have said that our new vehicles will be a major driver of a better second half of the year and we are seeing positive contributions, while those sales are ramping up. Some highlights include the new Patrol in the Middle East, the new Kicks, INFINITI QX80 and Armada in the U.S. Now, I’d like to move to our outlook for 2024. In terms of sales and production volume, we are maintaining our outlook as announced at our Q2 financial announcement. This includes retail sales of 3.4 million units and global production of 3.2 million. Despite maintaining our sales and production volume outlook, we have trimmed our net revenue outlook by JPY 200 billion to JPY 12.5 trillion in consideration of slightly lower wholesales and higher variable marketing expenses.

We have reduced operating profit by JPY 30 billion to JPY 120 billion, and operating profit margin from 1.2% to 1%. The net income forecast for FY 2024 includes the current financial initial estimate of approximately JPY 100 billion for restructuring cost, which is expected to be finalized in Q4. For Q4, our FOREX assumptions are JPY 100 to the U.S. dollar and JPY 161 to the euro. Here, we see the variance factors behind our revised outlook to JPY 120 billion operating profit, which is JPY 30 billion reduction from our previous update. Based on our revised assumptions, we expect FOREX and raw materials to each contribute JPY 5 billion positive. However, we anticipate JPY 20 billion higher sales expense, JPY 5 billion higher Monozukuri cost and a negative JPY 15 billion from other factors.

I would like to point out that, as shown on this slide, we have managed to implement first improvements, such as fixed cost savings in manufacturing, marketing, and G&A versus our previous outlook. I will now turn the presentation back to Uchida-san for an update on our turnaround actions.

Makoto Uchida: Let me now move to the next topic, which is an update on the progress of our turnaround actions. Through the turnaround actions, by 2026, at the sales volume of 3.5 million units, we would like to ensure sustainable profit and cash generation. To this end, we transform ourselves, and through the promotion of strategic partnerships, we increase the investment efficiency and deliver stronger products. To drive the initiatives with speed, we are revising the organization and top management while making processes more efficient. Before giving you the details, let me remind you of the assumptions of our turnaround actions. The Arc midterm plan initially called for 4.5 million units of global sales in fiscal year 2026.

However, after defining The Arc, the markets have continued to be increasingly challenging. Since we expect to continue facing a difficult environment, we have revised the sales assumption to 3.5 million units. This is the basis of the sales volume I refer to. We will be introducing competitive new products and creating new revenue opportunities, and expand the destinations and introduce the markets in the new segments. At the same time, there are many risks that may impact our revenue and profit, including FOREX volatility, investments for future growth and increases in CO2 emissions regulatory costs and fixed costs. Therefore, if we continue doing our business as usual, our operating profit is expected to remain or slightly increase compared to the 2024 level, despite of boosting our sales volume.

It is imperative to align the cost structure with the present sales plan to maintain a healthy level of cash flow and increase profitability. In fiscal year 2026, in order to hit the 4% operating margin, we need to reduce the variable expenses by JPY 100 billion or more and JPY 300 billion or more of fixed cost reduction. Today, this is the breakeven volume. This number excludes China. We have to change our structure to the one that enables us to make profit in the auto business, which is our core business to ensure sustainable growth for the company. Without the turnaround actions, our breakeven point would be 3.1 million units in fiscal year 2026. By cutting fixed costs and variable expenses, we will reduce it to 2.5 million units. As a result, even if our annual sales excluding China remain at 3 million units in 2026, we will be able to generate enough profit.

Let me start with actions we are taking to stabilize and right-size. Let’s look at details and progress in our actions in fixed cost and variable expenses. Several concrete actions are finalized and many of them are currently being implemented. As I said in the previous slide, if we do not have fixed costs in fiscal year 2026 are expected to remain stable against the fiscal year 2024 level. To hit an operating margin of 4%, we need to reduce fixed costs by JPY 300 million or more. Next one is about SG&A reduction. We expect to reduce SG&A expenses by JPY 200 billion. We are streamlining the organization by cutting the number of positions, while reducing new recruitment and expanding the scope of voluntary separation programs to reduce the indirect end count by 2,500 globally.

We are also transferring 1,000 full-time equivalent worth of jobs to shared service centers to cut unit labor costs. At the same time, we are cutting spending across the board. We are reprioritizing all marketing initiatives and sponsorships to maximize the return on investment. We are also transforming our planning and buying strategy for media and changing our advertising approach to streamline foundational fixed costs. We expect to reduce approximately JPY 100 billion in manufacturing. We are planning to reduce headcount by 5,300 in fiscal year 2025 and 1,200 in fiscal year 2026 in vehicle and powertrain production plans to right-size and reorganize our manufacturing footprint. Specifically, we are planning to close three plants. The first plant, the number one plant in Thailand is scheduled to close in Q1 of fiscal year 2025 and will be converged with the number two plant followed by the closure of other two plants in Q3 of 2025 as well as fiscal year 2026.

Additionally, we will implement shift changes at the Smyrna and Canton plants starting in fiscal year 2025. As a result, we aim to achieve fixed cost reductions of JPY 47 billion annually through plants and line optimization as well as shift changes and we anticipate further variable cost reductions of JPY 40 billion. At the same time, we are optimizing the cost required for preparing new model production and reducing depreciation cost mainly in capital investment. Our global production capacity will be reduced by 20% from 5 million units today to 4 million units by fiscal year 2026. Actions are already underway. In fiscal year 2025, we used to have 1.5 million units of capacity in China. As a result of closing Changzhou plant and adjusting operations, including change in shifts, our capacity has been reduced to 1 million units today.

Given the upcoming launches of new energy vehicles, we will explore further opportunities for reduction by discussing with our partner. Our global capacity excluding China is expected to decrease from 3.5 million units to 3 million units by optimizing production lines and adjusting operations. The utilization rate will improve from the current 70% to 85%. Let me explain how improving development efficiency will help reduce costs by JPY 30 billion or more. By making a drastic revision to our planning and development processes, we will shorten the lead time by 15 months for the lead model and by 20 months for subsequent models. Adoption of the family development scheme is expected to reduce costs by JPY 20 billion. I will explain in the following slides.

Further, we will achieve the plan by making the better use of outsourcing services and cost competitive engineering teams around the world. Under a new process, closer collaboration between the planning and the engineering teams will help reduce digital development lead time and the number of physical prototypes required. The first model to undergo this new process will come to the market in fiscal year 2026. Additionally, by applying it to some ongoing projects as well, we expect to start seeing its benefits from 2025 onwards. We are taking two main actions to cut variable expenses by JPY 100 billion. One is a JPY 60 billion reduction by reviewing product design and optimizing costs to align with market standards and needs, starting with the six key global models to provide value to customers at competitive prices.

At the same time, we are improving the efficiency of our supply chain and warehousing by reducing parts complexity by 70% improving production plants and reducing storage costs both in production and after sales. I will now outline what we are doing to build stronger products and share our growth in the future. To increase our competitiveness, we launched many new models in the markets this fiscal year. For example, in Japan, the updated Note Aura became leader in the compact car segment and is driving electrification. In the United States, sales of all new Kicks remain strong, thanks to its practicality and styling. The INFINITI QX80, our flagship SUV that is recognized for its luxurious comfort and advanced technology is gaining traction around the world.

The Armada full-size SUV and Murano crossover SUV have also been well received. In the Middle East, demand for our Patrol, renowned for its outstanding off-road performance remains strong. Nissan Shatai Kyushu, which produces the popular Patrol, Armada and INFINITI QX80 models, is preparing to increase the production of these vehicles. We will continue updating our product offerings to maintain the momentum. As part of these efforts, we will launch a plug-in hybrid version of Rogue and e-POWER version in the U.S. And in Japan, we will launch Kei Car and Large Minivan to enhance our offerings. We will also launch an all-new LEAF globally and a compact EV in Europe. Moreover, in China, the long-awaited new energy vehicle, the N7, will arrive in the market this year.

We will fully leverage our partnerships with Renault, Mitsubishi Motors, and Dongfeng to implement these actions efficiently. e-POWER is one of the pillars of our electrification strategy. The third generation of the e-POWER system will be available on the cash guide this year, followed by Rogue and the Large Minivan. The third generation e-POWER enjoys significantly better performance fuel economy and costs through the evolution-dedicated engines and the integration of electric powertrains than the first generation. Particularly in overseas markets where long-distance travel is common, we expect to achieve a 15% improvement in high-speed fuel efficiency compared to the second generation reaching class-leading levels. We continue to focus on the development of intelligent technologies that are unique.

In 2026, we will concentrate on the evolution of intelligent cockpits and driving-assistant technology along with many other differentiated innovations. In the mid- to long-term, we will revolutionize autonomous driving experiences with door-to-door autonomous driving technology, next-generation collision avoidance features using LiDAR with a goal of widespread adoption. Beyond that, we will work towards the practical implementation to driverless mobility services contributing to creating a safe and comfortable mobility society. Please, let me talk about how to drive top-line growth. This year, we expect to reach 2.7 million of sales. With new model launches entry into new markets, we plan to sell 3 million units globally, excluding China in fiscal year 2026.

Meanwhile, we are holding strategic discussions on topics including further partnership opportunities, introducing competitive products and maximizing sales opportunities of exports from China. I will not talk about streamlining and organization and processes. On the left, we will significantly reduce the number of executives starting in April this year, limiting it to the CEO and the heads of each function and region. We will discontinue the current corporate officer system with the current officer’s transition to newly established corporate executives. We will reduce the number of executive positions by 20%. This will expand the areas of responsibility and scope for each individual. By eliminating layers, this will enhance the speed of decision making and execution.

Additionally, by promoting the selection of longer talent, we aim to foster the next generation of leaders and energize the organization. As you can see in the middle, by reducing the layers in the organization, we increase the span of control to increase the speed of decision making. As you can see on the right, we are also clarifying the roles and responsibilities between global regions. We will centralize the upstream functions in the head office, while decentralized downstream functions. This will streamline the headquarters functions and improve overall operational efficiency. This is the status of our turnaround actions. We are accelerating its implementation to deliver the results as soon as possible. Given the latest performance of our company, which we have presented earlier, it is essential to explore all the options without any trouble [ph] and carry out the deeper structural reform.

To this end, we will further define which market we will continue operating and how to run the operations to optimize our business and portfolio. We will also reprioritize products, platforms, and part range to identify what to stop and what to retain. We will expedite the ongoing projects with existing partners, including the Alliance Partners and Honda. We are identifying all the opportunities for asset optimization that contributes to cost reduction and better efficiency. In order to increase our operational efficiency, we are studying possibilities or carving out of businesses asset integration and leaseback. These efforts are already underway. We will give you the details in the next 1 month or so. Considering the current business situation, I believe these actions alone will not be adequate.

Therefore, we will maximize the effects of the current partnerships and going forward, carry out a strategic review to find opportunities for of new partners in a variety of domains to maximize our corporate value. Thank you for your kind attention.

A – Julian Krell: Mr. Uchida, thank you very much. We are now starting the Q&A session. [Operator Instructions]

Operator: Goldman Sachs, Yuzawa-san, please go ahead with your question.

Kota Yuzawa: This is Yuzawa. Thank you for the great opportunity. Do you hear me?

Makoto Uchida: Yes, we do. Thank you very much.

Kota Yuzawa: The first question is about this business integration. I thought that there will be a very strong automaker in Japan, Honda, which is financially strong, and it wasn’t successful. What was the reason behind it? Earlier, you talk about autonomy and Nissan’s opportunities, but specifically, what made you reach this conclusion? By becoming a wholly-owned subsidiary of Honda, what was the concern? Could you reiterate this? Second question, the turnaround actions. Thank you for giving us all the details. JPY 100 billion is the expense that you are booking for this fiscal year. In total, if you try to implement what you presented today, how much expenses, whether it’s an impairment loss or cash out, will be required? Could you give us a number? Thank you.

Makoto Uchida: Thank you very much for your question, Yuzawa-san. The first question, on the 23rd of December, we signed an MOU. At that time, we said that given the performance of the company and in order to develop ourselves in the future, we thought that we will do the business integration with Honda so that we can be stronger. That was our intention. This remains unchanged. But initially, we expected to create a holding company. And below the holding company, we expected to have Nissan and Honda underneath. And in this holding company, we wanted to incorporate the strong functions of each company so that we can generate synergies. That was the assumption. These two big companies, under a common ambition, in order to capitalize the strength of each company, we thought that the original scheme of business integration within the holding company, we believe that this was a very effective scheme.

But as media reported, given the present performance of Nissan and market cap, Honda, at the time of creating a holding company, Honda will send to you and nominate majority of the board. Since then that was our expectation. While Nissan demonstrates its strength in the holding company, this will be served contributing as a leverage. So that’s what we stressed or attached the importance on. But the new proposal to make Nissan a wholly-owned subsidiary and the reason behind, there were many reasons behind this new proposal. I’m aware of this. The scale combining the two companies will be a strength. That’s what I was aware of. So in executive committee and board we had a lot of debates and discussions. And if we standalone with plus of our partnerships and face the challenging environment can we compete effectively.

That’s what we examined. Being a wholly-owned subsidiary, well, we have experience of Alliance with Renault. Can we become a strong company under the scheme of being a wholly-owned company? We thought that this will be very difficult. That was the reason for the conclusion. Can we leverage our strength? That was the question. We had a doubt. But on the other hand, we have similar markets. We have lineup. In order to join forces rationalization will be necessary. We assume or we were ready to do rationalization. But, we thought that we wanted to make the strength even stronger. And to this end, holding company was very important to be respected. We thought that this original structure will lead to a success and I still believe that if you look at the history of auto industry we should start with the business integration.

That’s what we believed in. Excuse me for the lengthy explanation. Second one is the contents of turnaround here; I would like to ask CFO to give additional information. But before that JPY 100 billion is what we estimated for now, but partially going forward there will be additional amount going forward. The details will be given by CFO to the extent that can be disclosed.

Jérémie Papin: Yes, thanks for the question, Yuzawa-san. So, at the moment with what we presented to you today and what we could be deciding in the fourth quarter we see about JPY 100 billion in restructuring costs and impairments. Obviously, as this number gets updated, we would absolutely update you in a timely manner.

Makoto Uchida: Okay. Thank you, Yuzawa-san.

Kota Yuzawa: The second question, within one month or so, you are going to give updates on the turnaround actions. What kind of things do you want to update on in the next one month or so?

Makoto Uchida: Yes, given the situation of the company like performance, financials, JPY 150 billion of full year guidance has been revised downward. After 2026, because the turnaround is up to 2026, in the challenging business climate, and unfortunately, we have to cancel the MOU with Honda. Given these circumstances, there are two perspectives to look at. One is that Nissan requires more structural reform so that we can remain strong in the future. So, what are the specifics? So, we would like to do something deeper, for example, in which market shall we remain, the way to remain. In fact, from this year, we already started such discussion. That’s one. And in 2026 and beyond, the number of platforms requires optimization.

What should we retain as a core product? Which one we would like to gain support from Alliance partners as well as Honda? Well, we focus on our core. Such approach is what we would like to define. At the end of the day, this will translate to the business case in the future. After 2026, in the challenging business climate of auto industry, standalone plus alpha partnership will be enough. For this, we need to explore a variety of opportunities. So that is why we declare strategic review. Not only with OEMs, but for example, mobility domain where we are strong in, there are many opportunities of partnerships maybe. That’s what we would like to explore. And we would like to make our business case stronger for the future. But this strategic review, we need a partner to make it a reality.

So, we would like to spend time to evaluate the business case in the future. That’s the approach.

Kota Yuzawa: Thank you. That was very clear. Thank you very much.

Operator: Thank you very much. [Nadisa-san] [ph] of Okasan Securities. Please go ahead.

Unidentified Analyst: Thank you very much. Now to say of Okasan Securities, can you hear my voice?

Makoto Uchida: Yes, we hear your voice clearly.

Unidentified Analyst: I have two questions. First, Page 30, growth of revenue. Going back to 3 million, you gave us the details. But if I speak of harsh words, even if you came up with new models, due to aging and other factors, the volume didn’t recover. But under that backdrop, what’s going to be different? And how are you going to be achieving this target? And also, as mentioned by Uchida-san, will you be also withdrawing from some markets? And is that factored in this chart? Could you add some flavor to this chart? Secondly, Trump tariff will be kicking in. And it’s something you can’t avoid. And it’s not – you’re not the only one that would be suffering from impact, but your impact would be quite significant.

You are in the phase of turnaround without much profit. And we don’t know if it’s going to be happening, but if it kicks in, then there would be huge losses to be incurred. So do you have a backup plan, Plan B? And how do you intend to respond to Trump tariff? Thank you.

Makoto Uchida: Then let me take the second question first. And the first question, since CPO, Guillaume Cartier is joining us, we will ask Guillaume to respond to the first question. Mexico tariff increase, it’s been postponed. But if this kicks in, as you have pointed out, Nissan exports in 2024 from Mexico, 300,000 units from Mexico under the Nissan brand and INFINITI brand put together. So in this context, these models could be produced in Japan. Some of these models could be produced in Japan. So that’s one backup plan to respond to the possible 25% tariff. But that is going to be a huge impact to a profit and it’s going to be a huge impact. So, currently, we are contemplating the production basis that could be used as an alternative production base.

And we’re thinking of an optimized plan in order to back up to the possible implementation of high tariff against Mexico. And regarding revenue growth at the top-line, later I will ask him to add some information, but within the lineup of products, I talked about increasing exports out of China in 2025, we will begin, and competitive models in China will be exported to existing markets like the Middle East, where there is demand, and those units are factored in, and we are currently working with Renault in India, and the number of units there. Now, under Arc, we showed you a diagram where the number of units out of India is going to be increasing quite significantly, and those policies are underway.

Unidentified Analyst: A little bit more detail, we appreciate it.

Guillaume Cartier: Thank you, Uchida-san. Guillaume Cartier, CPO speaking. So, to answer your question, I think that the chart here is describing how we are calculating the volume increase. This is excluding China. And if I go, I will say that what we have paid attention maybe more than we did is the gray bar, because here you have de-aging, so it’s to acknowledge that the current lineup will have a volume decrease linked to de-aging, and ensuring that all the end of production and end of sales are, I would say, contemplated and registered. Then you have the full model change. So, that’s the model that has been said, like Kicks, Murano in the U.S., we have the new LEAF, we have Patrol, Armada, that’s in 2025, and after that, in 2026, you have other models that are coming, also kicking Japan, but Versa [ph].

So this one is the enhancement of the new models that are replacing models that are existing, but obviously when you launch a new car you can expect to have volume increase. The new nameplate, I would say, you can nearly bank it fully, because it means it’s a car which is not existing today in the lineup. And that’s what has been described by Uchida-san. This is some cars that will come from India that has been announced with the investment that we are doing in India with two SUVs. That’s also Micra EV and that’s also INFINITI, one model which is not existing today. And then the last category is to look at the model expansion, so it’s some cars and I will take the example of Magnite, which is currently produced in India and it’s sold in some market.

As we have invested with the left hand drive, we are opening some destination like Mexico that’s an example. Other example that you can take is some powertrain, so you may have heard that we will have Rogue with PHEV and that’s something that will of course enhance the coverage of the market in U.S. and that’s where we will have also some volume. And, finally, some volume of some car produced in China that will be sold. So this is also a business that today we are not counting on that will be really new. So that’s how we made the waterfall from 2024 to 2026. If I can split in two. First step, which is a bit less than 100k from 2024 to 2025 and more than 200k in between 2025 to 2026.

Makoto Uchida: Guillaume, thank you very much. You mentioned our business portfolio and review of business portfolio, our assumption is the core models here. But on the other hand, when we look at the markets, how do we change our business operation in each market that would be a separate issue to be discussed. So, for example, we have these distributors and we may change the format of business operations and that could be factored in.

Unidentified Analyst: Thank you very much.

Operator: Thank you. Moving on to Mizuho Securities, Ishiyama-san, please.

Yoshitaka Ishiyama: Yes, this is Ishiyama. Do you hear me?

Makoto Uchida: Yes, we do, Ishiyama-san.

Yoshitaka Ishiyama: Yes, thank you. The first question is about strategic review that you referred to. Maybe it’s not decided yet to the extent that it’s possible. What is the timeline and the area or domain? According to your presentation, I understand it will be long. But on the other hand, things it’s very difficult to be optimistic. So what is the timeline? What will be discussed? And you have an Alliance already, Renault, Mitsubishi Motors, and you have a partnership with Honda. So what is the area where you need a new partner? What do you see today? That’s the first question. And the second question is about the financials. Today, in the full year guidance, the downward revision, I was looking at the slide, Page 11.

Compared to the initial guidance, how did it change? What’s the reason behind this change or revision, especially Monozukuri costs and other items? Others of other items seems to be significant. So what is happening? Are they one-off? These are my questions.

Makoto Uchida: Thank you. Second questions will be explained by CFO later. After this, I will come back to first question.

Jérémie Papin: So on the walk, the JPY 30 billion adjustment from JPY 150 to JPY 120, as you can see, the two main items are the need for slightly higher VME [ph] in incentives in Q4, both in Europe and in the U.S. And in others of others, we have legal matters that are a one-off.

Makoto Uchida: Did that answer your question? The second question…

Yoshitaka Ishiyama: Excuse me, if so, Monozukuri costs, others of Monozukuri costs, $20 billion? What’s this?

Jérémie Papin: On slightly lower production, we have some adverse variable manufacturing and purchasing costs. So that’s in the others of Monozukuri costs.

Makoto Uchida: Thank you. So strategic review, maybe you are aware of this. When we discussed the MOU, there was an exclusive negotiation right. That is why we are unable to discuss beyond this. But having said that, internally, within our company, we are exploring opportunities in the variety of domains. So, unfortunately, we couldn’t agree with Honda. So in which domain? What can we do? Internally, we are discussing, we have some assumptions internally. And we are receiving suggestions from the advisors. So, we will proactively take action on this domain. And Alliance, in the relationship with Renault, we are able to have many discussions with Renault. As I said earlier, if you look at the future, what will be the best way to work with Renault more effectively?

That’s what we need to explore. In terms of business operations, we excel in mobility in these areas. Maybe there’s a potential opportunity to partner with non-automotive industry player. For example, we can invite these non-auto industry as a function within the organization. That may be a possibility. That’s just one example that we are thinking about. These are the things that we would like to look at to make ourselves stronger for the future. That’s the intention. Need us to say many companies may approach us or make propositions of collaboration. So if it benefits our business, we are ready to prioritize and discuss and examine.

Yoshitaka Ishiyama: Understood. Thank you.

Operator: Takahashi of UBS Securities. Please go ahead.

Kohei Takahashi: Takahashi of UBS Securities. Thank you for this opportunity. First point, Slide #19, cost reduction. Sales cost will be reduced most significantly. Can you elaborate on this? Simply put, SG&A 2,500, and that’s going to reduce JPY 35 billion. And it says JPY 200 billion, and it only goes down by JPY 35 billion. So JPY 100 billion in other areas, cost reduction, that far can be done. It depends on the sales level. So will the fixed expenses be reduced as planned? It’s going to be rather challenging, don’t you think? In order to increase the visibility, can you give us more details?

Makoto Uchida: Sorry, this SG&A is the general G&A. So workforce reduction and labor unit cost reduction are unrelated. So JPY 200 billion as a total is a big number, but JPY 4.5 million towards that target. SG&A preparation had been underway. So in that sense, since this fiscal year 2024, some of these policies have begun. And has our size become fit to the turnaround? In order to optimize our administrative functions, these are some big numbers. On the other hand, efficiency of FMI. This was also based on 4.5 million units as we calculated. So there was a major review on that point. And we are expecting quite significant impact out of this measure. So in terms of methodology, there’s two persons, Ihara-san of HR and then Guillaume. Can the two of you point out the salient points? First Ihara-san and then Guillaume.

Toru Ihara: Thank you. Ihara, in charge of HR. Takahashi-san, thank you for the question. As Uchida-san said, of the JPY 200 billion, what’s the breakdown? The top half is labor costs and expenses. And the second half is efficiency in advertisement. And labor costs, two upper bullets are related to labor costs, 2,500 people. This is for the global. The G&A function in all regions and in all offices review will be conducted. And, therefore, this includes places where the unit labor cost is high. And as indicated here, 1,500 people, back office people have been hired. We will reduce that number. And already the early separation, voluntary separation program has begun in the United States, and we are thinking of those policies.

And it’s not just about reducing the number of people. We will streamline the organization and also improve the efficiency of operations through digitalization. So related to labor cost, we are also planning to reduce other expenditures. And the second point on unit labor cost. At the global level, there are countries where unit labor cost is high, and there are partners where unit labor cost is still lower in some countries. So in countries where unit labor cost is high, by outsourcing offshore, some of the labor we would like to reduce the expenditure already in U.S. and Europe. Offshore service centers are being utilized. And on top of that, there are partners to whom we are outsourcing digitalization, so we will be using these partners in order to reduce unit labor cost and labor cost.

And regarding SG&A, the G&A expenses of each function, these cost items will be prioritized for reduction. That’s it from me.

Makoto Uchida: Thank you. On FMI, Guill?

Guillaume Cartier: To the point, I think simply it’s better. Thank you very much. So FMI means a fixed marketing incentive, and on this one, it’s not only a wish, it’s something that we are already articulated. And the aim is, of course, as Uchida-san said, to take into account the volume, but not only the other one that we will do is how we can be more efficient, and we are targeting minus 20%. How to do that? One, in terms of science for media buying, and here, we’ll have a totally different innovative methodology using intelligent artificial, but also in terms of production that we will rationalize, and also the fees of the agency as we are working with Nissan United. So this plan is ready and will be deployed by 2025.

Makoto Uchida: Does that answer your question?

Kohei Takahashi: Thank you. There’s another question. May I?

Makoto Uchida: Yes, go ahead.

Kohei Takahashi: Okay. You are looking for a new partner, and developing the products, aren’t they linked to each other, especially when it comes to EV and software-defined vehicles? In the case of collaborating with Honda, you will just share the project with Honda. But once again, if this collaboration, if now that this partnership has deferred from what we initially expected, your product development, are you going to look for a new partner or do it internally? Isn’t there any possibility to make a huge revision on this approach?

Makoto Uchida: As I said earlier, business integration talks with Honda have been terminated. However, we are still discussing about the strategic partnerships, like which involves SDV, EV, EXL, SDV with regards to these domains by exploring wider strategic partnerships, we believe that we can get the good scale merits, such as in North America and Japan. In these markets, we have a similar lineup. So, we believe that there are more opportunities in these domains. When we see a potential win-win relationship, we will pursue these possibilities. So, we have no intention to do something differently. But in other business domains, there are many possibilities in other business domains, which we are going to review through the strategic review process.

In the relationship with Renault, we have unpaired involved. How to make European operations strategically strong for Nissan is another question. In India, we have a collaboration with Renault. So, these are the things that we need to think how we can evolve ourselves and identify which area we should focus our resources on and enhance the efficiency of the investment and maximize the return on investment. This is how we need to develop the overall plan.

Kohei Takahashi: Understood. Thank you.

Makoto Uchida: Thank you so much. Okay, we are running out of time, so this will be the final one. Julian?

Julian Krell: If there are no more questions, then we would like to conclude the session. Thank you very much for your attention today. And if you have any follow-up questions, as always, please feel free to reach out to the Nissan IR team. Thank you for your participation and talk soon. Bye-bye.