Nissan Motor Co Ltd (OTCPK:NSANY) Q1 2014 Earnings Conference Call July 28, 2014 3:45 AM ET
Joji Tagawa – Corporate VP
Ladies and gentlemen it's 4:35 so we would like to begin the fiscal year ’14 first quarter earnings announcement presented by Mr. Joji Tagawa, the Corporate Vice President.
Yes. Good afternoon ladies and gentlemen. Thank you for joining us today for the announcement of Nissan’s first quarter earnings for fiscal 2014. Today I’m going to outline the operational and financial highlights for the quarter. After this I will be happy to take any questions you may have.
In the first quarter demand in North America continued to rise and we began to see signs of recovery in Western Europe. This helped offset the impact of the consumption tax increase in Japan which led to some softening in the market there. Emerging markets also continued to be volatile during the period. In this environment we’re continuing to execute our Nissan Power 88 mid-term plan and profitably grow our business.
As explained last fiscal year Nissan is required to report earnings under the equity accounting method for our joint venture in China. Based on that method for the three months ending June 30, 2014, consolidated net revenues increased 10.4% to ¥2.466 trillion. Operating profit totaled ¥122.6 billion which equates to an operating margin of 5%.
Net income increased to ¥112.1 billion which represents a 4.5% net margin. Free cash flow for the automotive business was ¥3.3 billion and we ended the period with an automotive net cash position of ¥916.3 billion.
The true measure of our corporate performance includes the proportionate consolidation of our China joint venture operation and is the basis for our Power 88 mid-term plan objectives. Therefore when I discuss the financial results I will show both the equity accounting and management form of methods. Before going through the financial results in more detail I will briefly outline some of the business highlights and our sales performance for the period.
Nissan continued to make solid progress in the quarter, for example, in the key markets of the U.S., Japan and Europe the combined sales of the new Rouge X-TRAIL and Qashqai are up 20% compared to last year.
These are the first models to use that common module family development approach which was co-developed by Nissan and Renault and demonstrate the benefits coming from the alliance together these models have won almost 20 awards since the start of the year. Just as we’re realizing the success of our new products Nissan is now benefiting from the significant plant investments made during the first half of the Power 88 plant. New production volume is coming on stream in the fourth largest automotive market in the world. In April we officially open the new plant in Resende, Brazil.
In May we also opened our second plant in Indonesia and earlier this month we opened a second plant in Thailand to create a production and export hub for the NP300 Navara, Nissan’s next generation pick-up truck. We also continue to make progress with our remission strategy. The Nissan Leaf is the world’s bestselling EV with more than 124,000 units sold as introduction.
In June we availed our second electric vehicle, the e-NV200 zero emission commercial vehicle. The e-NV200 further reinforces Nissan’s commitment to zero emission and our global leadership in this growing area.
We remain committed to developing the charging infrastructure which we believe is the key to improving EV penetration. You may recall in November last year Nissan and three other Japanese auto makers announced plants to financially assess installers of charging stations.
In May we created new company Nippon Charge Service to promote the installation of EV chargers across Japan. In the United States recently drivers are now enjoying free charging at the eligible public stations thanks to Nissan’s no charge to drive program which is now live in 11 markets.
Nissan also plans to support the installation of an additional 500 quick chargers in key Leaf markets.
Our remission strategy has been recognized globally and contributed to our ranking in the prestigious Interbrand's Best Global Green Brands report. Nissan improved its ranking one position to fourth in 2014.
We also took steps to increase our brand awareness globally. Just two weeks ago, Nissan announced a global partnership positioning the company as the official automotive partner of City Football Group. This partnership gives Nissan exposure to number of key markets and worldwide fan base. During the quarter we will be the first Datsun for South Africa and we’re now taking orders.
This month we also began production of Datsun on-Do, a new family sedan designed and engineered specifically for Russia. With these moves Datsun is now fully launched in its four key markets of India, Indonesia, Russia and South Africa. I mentioned earlier that we have continued to benefit from the Renault-Nissan alliance with the common module families.
We’re also pursuing further synergies from the alliance which totaled €2.9 billion in 2013. Last fiscal year we announced that new conversion plan with Renault in purchasing research and development, manufacturing logistics and human resources which we expect to generate synergies of at least €4.3 billion in 2016.
Meanwhile our strategic operation with (indiscernible) has continued to evolve. This was demonstrated by the recent inauguration of the Infiniti Decherd Powertrain Plant which will produce engines into the European versions of the Infiniti Q50 Sports Sedan and the Mercedes Benz C Class.
Last month the company’s announced that they will jointly produce premium compact vehicles in Mexico for both Infiniti and Mercedes Benz. Production for Infiniti will start in 2017 and Mercedes Benz will start in 2018.
I will now turn to our sales and financial performance for the financial period. Well overall global industry volumes increased 2.7% to $21.69 million, Nissan’s total retail volume was up 6% at 1.240 million units in the first quarter with strong sales in North America, China and Europe.
This offset some sluggishness in Japan and continued volatility in emerging markets. Looking across the regions, in Japan our volume was slightly down by 0.5% to 134,000 units. The increase in Japan’s consumption tax earlier this year pulled forward some new car orders however we have been encouraged by healthy demand for the X-TRAIL and (indiscernible) which improved our market share by 0.1 percentage points to 11.5%.
In China where our sales performance is measured on the calendar year basis, Nissan sales increased by 21.1% to 283,000 units in the first three month of March 31. Our overall market share in China during the period was 5% which was an improvement of 0.5 percentage points from last year.
Turning to North America, in the U.S. our sales grew 14.1% to 350,000 units outperforming the overall market and lifting our market share from 7.4% to 7.9%. This strong performance was due mainly to higher demand for the Rouge and Altima. In Canada sales increased 28.2% to 32,000 units. Sales in Mexico were slightly down to 64,000 units however Nissan continues to be the market leader with the market share of 25.6%.
In Europe trading conditions show signs of stabilizing despite intense price competition. Nissan sales increased 13.3% to 471,000 units. Nissan held its position in the important UK market and as a result increased its market share from 3.2% to 3.4% in Europe excluding Russia. In Russia sales increased 31.2% to 39,000 units resulting in a market share of 6.1% and improvement of two percentage points from last year. In other markets including Asia [ph], Africa and South America sales volume increased slightly by 0.8% to 206,000 units.
Asia and Oceania saw a 6.2% sales increase to 90,200 units. Sales in the Middle-East were up 10.9% to 52,700 units. The increase in the above markets was partially offset by the 12.6% decline in sales in Latin America.
I will now go through our overall financial performance for the period under the China JV equity accounting basis consolidated net revenues increased ¥232.7 billion to ¥2.466 trillion primarily driven by the increase in volume and FOREX impact.
Operating profit totaled ¥122.6 billion, net income was ¥112.1 billion. Looking at the operating profit movement in detail, purchasing cost reduction efforts and higher raw material cost resulted in net savings of ¥41.5 billion. Volume and mix produced a positive impact of ¥28.9 billion. The increase in selling expenses resulted in ¥25.9 billion negative improvement, R&D and manufacturing expenses increased by ¥9 billion.
Recall and warranty expenses increased ¥1.6 billion. Other items have a negative impact of ¥19.4 billion. Nissan’s automotive liabilities were ¥293 billion above the net cash position of ¥622.9 billion as we reported at the same point in fiscal 2013. Nissan continued to enjoy a solid automotive net cash position of ¥916.3 billion.
Although this represents a seasonal decline from the ¥1 trillion at the end of fiscal year 2013 it is a ¥293 billion above the net cash position at ¥22.9 billion that we reported at the same point in fiscal 2013.
I would now like to outline the key financial metrics on the management pro forma basis which includes a proportionate consolidation of our China JV results. For the first quarter net revenues increased ¥179.7 billion to ¥2.692 trillion. Operating profit increased ¥38 billion to ¥155.8 billion resulting in a 5.8% operating profit margin, an increase of 1.1 percentage points from the prior year.
Net income increased ¥30.1 billion to ¥112.1 billion. Based on our first quarter performance and outlook for the remainder of the year, we’re maintaining our previously announced full year guidance and we continue to project a full year dividend of ¥33 per share.
In conclusion I would like to reaffirm that Nissan remains committed to develop the Power 88 objectives. Thank you for your attention.
First off this first quarter how do you assess the first quarter earnings that you announced today? The sales in Japan due to the impact of the rise in consumption tax. The impact is bigger than you expected or do you think the impact was smaller than assumed? All in all how do you see the performance operating profit of 13.4% up, how do you assess this? This is my first question.
And another question is about the outlook. In Q2 and Q3 this operating profit is expected to grow? If the performance recovery which time will we see the improvement of recovery? These are the two questions.
Starting with the overall assessment of our performance in Q1, usually due to the seasonality’s Q1 result usually tend to be smaller in numbers. In the progress rate over the year it tends to be lower usually but this time if we apply the equity method the operating profit progress is 23%, it's about 23% of achievement rate compared to the full year guidance. And in terms of net income a 28% of achievement rate therefore compared to our internal plan in Q1 our progress was better.
And compared to the past year’s our Q1 result in 2014 is good. Having said that for example if you look at the absolute amount, if you look at the absolute operating profit or absolute operating margin based on equity method 5% operating margin in consolidated basis it's 5.8% of operating margin compared to our real potential offerability we believe that there is still a big room for improvement that’s how we see it.
So going forward we expect to increase our ability to generate profit and delivery results. That’s what our intent is.
How about the Japanese market?
Last minute demand before the consumption tax hike and this was ahead of sales. In May when we announced at fiscal year ’13 earnings, we said that TIV is expected to decline by 14% at fiscal year 2014. Therefore looking at Q1, 1.9% decline of the TIV in Q1 was better than what we expected but if you go get the latest performance in order intake for example or seasonality’s we still believe that it's too early to say that the negative impact is small, it's longer than expected.
In the first quarter there was a big growth in specific manufacturers of specific segments like mini-cars or Kei cars. This is the area where we saw a significant growth and the sales front line is objected to intensifying petition therefore going forward we should be careful in making projection. But compared to our initial assumption of 14% decline was conservative compared to the reality as of today. So if the TIV is to grow we’re trying to catch up with it to boast our sales volume that’s our plan.
Can you tell us a little bit about your North American operations. The sales are growing very smoothly and very fast paced.
Now some of you probably did not understand the question because some of you did not have earphones. So I will repeat the question, the question was in regard to our North America market, did we do anything different and also what about the risk selling going forward and also when will we catch up with Honda? Because Honda is number two, when will Nissan overtake Honda and become number two in the U.S. market. I think those were just the question.
So let me talk about North America, yes we enjoyed growth in sales last year however we did had some selling expenses. So overall we thought that this was improvement and of course there are some temporary factors such as recall in the North American market but of course improvement was required so therefore since November last year we have taken various changes in that point onwards. One example about the changes we introduced, for example starting from April this year our dealings with the dealers most of the end up -- the programs in terms (indiscernible) to dealers for change so we will set a full year target at the beginning of the year and we will follow-up the progress of the target as we go along. Now this new program was well received the dealers and the dealers are really well incentivized to do better and also Rouge and new products also had positive impact in terms of volume.
Yes we see some strong sales and also in terms of profitability we see signs of improvement as well. At the same time profitability in the North America is much higher for the perspective potential. So improvements have just begun that is our assessment.
Now in regard to beginning number two in the Japanese market, we’re not actually setting any particular manufacturer as a target in any given market, we don’t rise up [ph] price. It's important that we with our own business be profitable and increase sales. Of course at this moment, January through June of this year, yes our gap with Honda has become much smaller in the North America market that is good news but at the end of the day it is important our sales and profitability improve. I think that should be the priority for us.
Next question please? Yes go ahead.
Earlier, this is related to the first question’s answer. You said that progress report is higher than the past year, you said the achievement rate is higher. Is this better than your internal goal? Is it due to the assumptions, the reality is better than assumption why is that achievement rate higher than the past years and the full year guidance seems to be conservative in the first place. How do you answer this question?
Thank you for your question. The full year guidance is conservative or not, this is my answer. So far traditionally compared to the past several years, past several years means a past couple of years. We gave profit warnings for two years in a row. In fiscal year 2014 we intend to hit the full year guidance so that’s why this guidance is for fiscal year 2014. So it's not that our full year guidance is conservative. For this fiscal year we make sure that we generate the profit that we intended for and from the first quarter we tried to double the solid results and this is what is appearing on -- what we see today.
Achievement rate for example the net income, it was the (indiscernible) net income was good and the effective tax rate was better. So it will not necessarily continue for the remaining quarters if things are uncertain but at least if they look at the operating profit, 23% of achievement rate is secured. Since last November we learned a lot of lessons and we took many measures and we’re seeing the results now.
Of course we have to admit that there is still room for improvement but the counter measures that we implemented since last November is delivering results that’s how I see it.
Thank you next question. Yes the person at the front row.
Business in Japan, I would like your elaboration here. The sales volume decline compared to sales volume decline, operating profit is declining by 25% why? Is this due to the over spending of incentives after the rise of consumption tax or because there is a higher proportion of Kei cars [ph] what’s behind this?
Probably segment profit, you’re asking about the profit by segment in Japan and compared to the volume decline you see the profit decline is higher or bigger. One reason is that last summer Rouge for United States was transferred -- we transferred the production to U.S. so compared to last year Rouge profit, we used to export Rouge to U.S. and it was ¥100 to the U.S. and we generate profit out of this but this was eliminated because we transferred the product, because this year Rogue is already produced in U.S. So this is one factor behind it. Another factor is that as you say sales volume declined in Japan and so Nissan Motor company operation as well as others like some of the dealers are consolidated, there are some subsidiary dealers that are consolidated so the profit generated by these dealers are impacted by the sales decline, that’s another factor. I think these are the major negative contributors.
Yes we see many hands. Let’s go to the person in the middle.
Yes as far as North America is concerned TIV itself very strong to begin with for example in the month of June it's close to 70 million TIV, now in our case at the beginning of the year we take a look at we actually set 15.9 million as the U.S. TIV is our assumption.
Now we have not made any provisions at this time. So we’re going to be actually giving in advance our assumptions but it seems that maybe going forward U.S. TIV could reach maybe 16.2 million. So therefore the auto TIV North America is very strong. Our track record to-date is such that the short fall in-line with our potential has now translated into strong results. So (indiscernible) against the plan in North America is indeed higher than our initial expectation. As far for the other market (Foreign Language).
Latin America and also Thailand and Russia in these markets. But the progress of the plan is as initially expected, but of course our concentration in one region is one reason and also the auto market is probably weaker than we initially anticipated. It is not enjoying this higher growth as we had anticipated. In the case of Latin America for example, in April in Brazil we launched a new plant at Resende in Brazil and also the production volume is up at those units at this point in time.
However going forward as the operation becomes more full in-line I think we believe that we can expect recovery in these markets and as it is apparent as you’re aware the situation is very, very challenging, overall TIV has probably dropped by as much as 30% year-on-year. And this was probably unexpected to many of us in this room but then are also Nissan sales on a year-on-year basis has actually dropped only as much as 3%.
So we will continue to make efforts to improve our market share. Also as we mentioned earlier, the number two plant in Thailand will begin its operations and overall pick up this production and also sales can be expected going forward so therefore we can expect contribution from the second plant going forward.
Turning to Russia, as you’re aware they are inclusive and political risks, there are some uncertainties and instabilities in the Russian market. As far as we’re concerned last year Avtovaz [ph] our partner. We’re going to actually begin production on a new model and Avtovaz production which was very small last year is actually going to increase by fivefold and also sales volume will increase four fold, it has already increased to seven. We talked about 2% increase in market share in the Russia market. So all the TIV is of course challenging as far as Nissan is concerned. I guess this backdrop in terms of volume and our target thereof, we certainly will make effort so they will be able to catch up with initial expectation. But overall the negative impact in TIV is quite significant in this particular market. So yes the situation is challenging that is indeed the case, that is the recognition.
Thank you. Okay, next question? Which one? Yes the person at the front row.
First off talking about the sales in China, last year, last fiscal year due to the island issue there was a decline. This is an impact or due to other factors we’re growing, what’s the rest going forward in China? This is your question I believe.
So in the first quarter of fiscal year 2013 due to the island it has been less than six months since the island issue occurred. So in terms of the absolute term it was weak, that’s one. But between January and March our sales grew by 21.1% year-on-year. So far we’re in-line with their internal plan. In Q2 just what you referenced we already have the number which is on the document. In the Q2 market share is stable but the sales volume increased by about 10% so this is -- we’re in good shape. Having said that if you talk about risks today looking at the latest performance and looking at June or July we discover that there is intensifying competition so inventory it's same for Nissan. Also dealer inventories are a little bit excessive therefore for example if you look at the month of July sales after next week this will be announced officially.
After July our wholesale is reduced to adjust the inventories to optimize the inventory that’s what we’re intending to do.
And we don’t want to be involved in the overly intensifying competition to undermine the profit. Therefore what are the risks, volume decline may happen but our intent is to hit the profit objective which we have set forth in the initiation of the fiscal year, that’s our plan.
Thank you very much. Next question?
Two questions if I may ask, first question, you talked incentives to profitable dealers in North America market. I want to know what was the level of incentives, how did you give incentives? What is the difference between the new program in the case of North America although there was a decline in the level of the incentive, competitiveness to your competition -- Japanese competition is still higher. It's a higher risk market. This is my second question, recall of your airbag, various companies in June carried out their recall and I think Nissan also carried a recall for 72,000 units. What about the expenses related to this? How are you going to reflect this cost in your balance sheet? That’s my question. Thank you very much.
Let me talk about our program, the United States. Of course this reflects our competitive situation. Can I give you the details? Actually you will understand but give you very rough idea what’s the difference between the old program and the new program. The full year target, full year goal has been set for each region and also for each dealer and that’s also broken down on a monthly basis and on annual or quarter basis so as far as dealers are concerned they know that depending on the volume that they are able to project then the level for incentives that they will be able receive and they will have a more long term understanding of the potential incentives that they can benefit from.
Now stair-step incentive, you may have heard about this incentive program. For example if you sell a certain level of model at a certain level then you will be able to receive additional benefits. Ordinarily those are short term programs that are limited to just single month and maximum is on quarterly basis. So most of the incentives are on a short term basis so compared against that we’re offering a long term commitment to a understanding vis-à-vis incentives.
As far as the absolute level of incentives concerned, yes we do believe that ours is higher at the absolute level but then you’ve to be concern of the competition. Of course we cannot excessively and dynamically reduce the incentives compared against our competition. However I believe that we see a very positive downward trend in terms of incentive level. So we would like to leverage this opportunity and I think within the industry I think we should set to optimum the incentives that we want to actively pursue at.
In regard the recall of airbag, I think you want to know the impact on our accounting. Expenses for the recall to the extent that we’re able to identify at this juncture, all the expenses we’re going to setup a reserve -- we’re going to provide a provision for that but then the reason for the recall is actually with the company with whom we actually deal with. So therefore this cost could be 100% absorbed by the party with whom we carried this transaction, so that is assumption that all this cost will be absorbed and this is reflected in our full year guidance and also in our balance sheet.
So therefore on a net basis the impact of this recall will be totally neutral. It is not going to have any financial, positive or negative impact on our balance sheet that is under signing.
Again it's neutral, so if you net out the positive and the negative it comes out to a neutral.
Thank you. Yes, please.
Thank you for your question. Your question was about Datsun sales. What’s the absolute actual performance of sales of Datsun and do we have a plan to go beyond the four regions that we launched at? Do we have a plan to go beyond these four regions? I think this was your question.
Starting with the sales performance so far. In the first quarter we reckoned Indonesia where we sold 2063 units. This was launched in May in Indonesia, so we sold 2063 units in retail already and how about -- excuse this is wholesale, no this is retail, yes, I’m right retail and for Datsun GO. Datsun GO is in India, we sold 5800 units approximately, this is wholesale or retail I’ve to check later. So could you wait? In retail we sold 5250 units, in wholesale it was 5800 units.
And Datsun, besides four regions that we already announced there are a lot of positivity’s that it just mean that four regions and that’s it. Today it's under discussion when and where we’re going with Datsun will be decided and announced accordingly.
Thank you very much. We’re running out of time so we will entertain two more people. The first one at the front and another one at the back.
Operating profit variance was shown earlier, FOREX impact is not indicated. Compared to Q1 of 2013 Yen has appreciated. What was the FOREX impact for Q1 this year?
FOREX impact, if we net it the impact was very small so we didn’t indicate it separately. In that the FOREX it was several billions of Yen on the positive side because in Yen Dollar basis thanks to impact and deprecation we benefit from this and Euro Ruble generated a negative unit, Euro was the cause and Ruble is on the revenue side. So Ruble appreciated so it's on the negatives and this trend is continuing. In net-net where we have the FOREX impact was several billion yen it's less than ¥5 billion or so in net. There are other movements in currencies like Canadian Dollars, Chinese Renminbi but all-in-all there was a positive side from dollar and Ruble negative. So it net-net it was positive ¥5 billion, less than ¥5 billion.
I have one question, operating profit variance and now sales volume mix was ¥28.9 billion and so volume mix are combined in one. If you separate the impact of volume and mix how does it look like? In the latest performance Kei cars that was absent last year but now you’ve a full impact of Kei cars and Datsun is increasing the proportion so the mix is deteriorating. Could you elaborate on the separation of volume and mix?
I cannot give you all the details but volume is bigger part of the continuation and mix is on the negative side. Mix negative contributor, this is mainly due to U.S. and Europe. U.S. and Europe are on the negative side. U.S. for example, Sentra sales are rising and Nissan Leaf are rising that’s what we’re happy about but unfortunately profitability wise these are smaller. So these are the negative factors and for Europe as you’ve indicated Avtovaz, Almera, these smaller cars are increasing in volume so that’s another negative contributor.
Thank you very much. We’re running out of time. So with this we would like to close the press conference. Thank you for joining the session out of your tight schedule. Thank you very much.
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