Nissan Motor Co Ltd
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Nissan Motor Co Ltd
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Is everyone ready? We would now like to start fiscal 2017 Third Quarter Financial Results Announcement Session. Thank you very much for coming to join us for this session out of your busy schedules. First, Mr. Tagawa, the CVP, will give a presentation. Mr. Tagawa, please.
Good afternoon, and thank you very much for joining us for the announcement of Nissan's fiscal year 2017 9 months' results. Today, I will outline our headline figures, our global sales performance and financial results for the 9 months ending December 31, 2017. I will also provide an update on our full year guidance. Following the presentation, my colleagues and I will be happy to take any questions.
For the 9-month period through December 31, we achieved year-over-year growth in unit sales and market share. Today's reported operating profit is down from the previous year due primarily to the adverse impact of special items related to the final vehicle inspection issue in Japan and the settlement of the Takata-related class action suit in U.S. as well as the lower-than-expected industry volumes in the U.S. that prompted us to take actions to reduce dealer inventories during the third quarter.
For the 9-month period, consolidated net revenues were JPY 8.53 trillion; operating profit totaled JPY 364.2 billion, which equates to an operating margin of 4.3%; net income totaled JPY 578.1 billion, which represents a 6.8% net margin. Here, I would like to point out that net income includes the favorable impact on tax expense of JPY 207.7 billion related to the benefits from the recent U.S. tax reform. Free cash flow for the automotive business was a negative JPY 100.3 billion. And we ended the period with an automotive net position -- net cash position of JPY 1.31 trillion. Please note that the year-on-year comparisons shown here are distorted by the previously mentioned previous special items that were recognized in the fiscal '17 9-month period related to the final vehicle inspection issue in Japan and the Takata class action settlement in U.S. as well as the impact of our divestiture of Calsonic Kansei at the end of fiscal year 2016. I will come back to these points later when I review the financial performance in more detail. Prior to that, I will briefly highlight our sales performance.
During the 9 months ending December 31, global total industry volumes or TIV reached 68.52 million units, an increase of 2%. Nissan's total unit sales were 4.109 million units, an increase of 2.9% over the same period of fiscal year 2016. Global market share increased by 0.1 points to reach 6%.
Moving to our sales performance in the key regions. In Japan, TIV rose by 4.5% to 3.66 million units. Nissan saw its overall retail volume increased by 9.7% to 378,000 units although we saw a 3.4% decrease in registered car sales to 252,000 units due to the final vehicle inspection issue. This was offset by a 50.6% increase in mini car sales to 126,000 units following the sales' resumption of days and days missed last year. As a result, our market share increased by 0.5 percentage points to 10.3%.
In China, where our sales performance is measured on a calendar year basis, TIV for the 9-month period was up 2.6% to 19.08 million units. Nissan's sales increased 9.8% to 1.02 million units, representing a market share of 5.3% for the period. This is up 0.3 percentage points versus the comparable year -- prior year period. For the 12-month period through the end of December, our sales outpaced the market and increased 12.2% to 1.52 million units as we saw increasing sales of X-Trail and Sylphy. Our full year market share reached 5.6%, which is up 0.6 percentage point versus the prior year.
In North America, TIV decreased 1.8% to 15.97 million units. Nissan's sales decreased 1.4% to 1.561 million units. In U.S., TIV was down 1.9% to 13.2 million units. Nissan's sales increased by 1.1% to 1.177 million units, resulting in a market share of 8.9%, reflecting continued demand for the Rogue and Rogue Sport. In Canada, TIV increased by 4.6%. Nissan's sales rose by 8.6% to 113,000 units, resulting in a market share of 7%. In Mexico, TIV was down 8.3% and Nissan's sales fell 13.7% to 270,000 units, equivalent to a market share of 23.4%.
In Europe, including Russia, our sales rose 0.3% to 544,000 units. Market share decreased slightly to 3.7%. Excluding Russia, sales decreased by 2.2% to 464,000 units, which resulted in a market share of 3.5%. In Russia, the market continued to show signs of recovery. Our sales rose 17.8% to 80,000 units and our market share was 6.3%.
In other markets, our sales increased by 2% to 607,000 units due mainly to increased sales in Latin America and Africa and other market models such as the Datsun redi-GO and the Nissan Kicks contributed to this improvement. Unit sales in Asia and Oceania decreased 2% to 248,000 vehicles. Latin American sales rose 14.5% to 151,000 units. Sales in the Middle East decreased 6.6% to 138,000 units. Sales in Africa and others totaled 70,000, an increase of 11.7%.
Moving to our financial results. As with previous quarters, Nissan is presenting its financial performance under the equity accounting method for our joint venture in China. For the 9-month period, consolidated net revenues totaled JPY 8.53 trillion. Operating profit was JPY 364.2 billion, which equates to an operating margin of 4.3%. Net income improved to JPY 578.1 billion, which represents a 6.8% net margin. This improvement is driven primarily by the positive benefits from the recent U.S. tax reform from our U.S. business.
Looking specifically at our third quarter 3 months' results, our operating profit was JPY 82.4 billion and was affected primarily by 2 factors. Operating profit was negatively impacted by JPY 41.8 billion due to the revenue deterioration in our U.S. business reflecting prevailing market conditions, specifically our U.S. performance was impacted by higher selling expenses as we transitioned from model year 2017 vehicles and adjusted our U.S. dealer inventory levels downward in order to better position our business, given the reduction at U.S. TIV. In Japan, the final vehicle inspection issues resulted in a negative impact of JPY 39.6 billion. This was due to the combination of low domestic and export sales volume, increased Monozkuri cost resulting from the required manufacturing process changes and the longer-than-anticipated recovery times in line speed at our plants and higher selling costs incurred for vehicles sold in the domestic market. Other items had a net positive impact of JPY 9.2 billion.
For the 9-month period, our operating profit was JPY 444.6 billion before accounting for special items. Looking at operating profit movement in detail. The adjustment for the divestiture of our equity stake in Calsonic Kansei was JPY 23.8 billion. FoRex had a positive impact of JPY 32.3 billion. Raw materials had a negative impact of JPY 80.1 billion. Volume and mix and marketing and selling expenses had a net negative impact of JPY 138.6 billion. Cost items, including purchasing cost reduction efforts and product enrichment, resulted in net savings of JPY 139.7 billion. We continue to invest in R&D. As a result, R&D and manufacturing expenses increased by JPY 21.4 billion. And other items had a positive impact of JPY 33.3 billion.
Including special items, specifically the final vehicle inspection issue in Japan and the settlement of U.S. class action lawsuits related to Takata airbags, our operating profit was JPY 364.2 billion for the period. On a management pro forma basis, which includes the proportional consolidation of our Chinese joint venture, net revenues increased to JPY 9.42 trillion. Due to the strong performance of our Chinese joint venture, the decline in operating profit was a bit less pronounced. For the period, operating profit was JPY 474.8 billion, which equates to an operating margin of 5.0%. Net income improved to JPY 578.1 billion. Automotive free cash flow was a positive JPY 9.1 billion and we ended the period with automotive net cash of JPY 1.58 trillion.
Relative to our outlook for the full fiscal year, we are revising our sales and earnings forecast for the 12 months ending March 31, 2018. Our fiscal year global retail sales outlook is being revised down by 50,000 units to 5.78 million units to reflect the declining conditions in Japan, Mexico and Europe, which is only partially offset by the strong performance in China and other markets. Reflecting our revised volume and business outlook, Nissan has also revised its full year earnings outlook and has filed the following full year forecast with the Tokyo Stock Exchange using foreign exchange rate assumption of JPY 111 to the dollar for the -- it is based on the equity accounting method for our Chinese joint venture. Net revenue is expected to be JPY 11.8 trillion. Operating profit is revised downward by JPY 80 billion to JPY 565 billion to reflect the additional impact related to the final vehicle inspection issue in Japan as well as the measures we took to adjust the U.S. market conditions. Net income has been revised upward to JPY 701 -- JPY 705 billion to reflect both solid earnings of our affiliate companies, including our China joint venture, and the positive benefits from the recent U.S. tax reform on our U.S. business.
Looking at the change in operating profit from our previous outlook, we anticipate an additional negative impact of JPY 30 billion from the vehicle inspection issue of JPY 40 billion negative impact from the adjustment in dealer inventory levels, an increase of JPY 20 billion in raw materials cost and a positive impact of JPY 10 billion from other items. Based on the actions taken during the third quarter, we expect to see improved performance in the final 3 months of the fiscal year. Specific improvements expected in the fourth quarter include: global retail volume forecast to grow by 296,000 units from the third quarter to 1.671 million units. Net revenue, that is expected to increase to JPY 3.27 trillion. We expect operating profit to improve to JPY 200.8 billion, equivalent to a higher operating margin of 6.1% as the 2 negative factors in the third quarter, the vehicle inspection issue and the adjustment we took for U.S. market conditions, ease and as operations normalize. And net income is forecast to reach JPY 126.9 billion, equivalent to a 3.9% net margin.
Despite the recent challenges for the 2017 fiscal year, we are still committed to a full year dividend of JPY 53 per share at 10.5 -- 10.4% increase versus the previous year level.
In summary, the company faced a number of challenges during this 9-month period and in the third quarter specifically. These challenges included the impact from the final vehicle inspection issue in Japan, the lower than previously expected market TIV in the U.S., rising industry incentives levels and the raw material price increases. We remain focused on improving steadily the underlying business performance and our financial results despite the market headwinds and the disruption caused by the final vehicle inspection issue. We are implementing measures such as the reduction in U.S. inventory to align our U.S. business with market trends and are also on track to full recovery from the vehicle inspection issue in Japan by the end of the fiscal year. As a result, we expect to normalize operations by the end of the fiscal year. We are committed to growing our business in a sustainable way to deliver solid earnings and automotive free cash flow as well as attractive shareholder returns.
Thank you very much for your kind attention.
Okay. Thank you very much. We would like to move on to the Q&A session. [Operator Instructions] Yes.
I am from Nikkei Shim. My name is [ Hoshi ]. I have a couple of questions. Both of them is about the sales in United States. So far, with regards to the sales in U.S., more than your own capability, you spend incentives that has been indicated last year. But you said that you're having a good control in the sales in U.S. But now you are saying that you are going to constrain it. Well, there's a contradiction to what you have said. Why is there such a contradiction? And why did you just abandon the performance in the U.S. to deteriorate so much? Could you give us the background in more details? Second one is about the restoration of the sales in U.S. I need your elaboration. Tagawa-san, you said that by the end of the fiscal year, you expected to normalize the operation, but inventory adjustment underway. Could you be more elaborate because how many were in the inventories? And how far did it deteriorate? And how far did you reduce the inventories? In the auto industry, 1-month or a 2-month inventory is an average, right? Compared to this industrial average, are you going to restore the inventory to that level? And are you going to revise your policy on the incentives? So the recovery plan in the U.S., is this fundamental? Is it only anti-phenomenal type of -- anti-symptomatic measure? If it's a fundamental one, please be elaborate.
Thank you for your question. Starting with the U.S. operation, why did we change our policy for the U.S. operation? On the -- retrospectively, during Nissan Power 88, U.S. -- our sales in U.S. outperformed the market for many years. The TIV in the U.S., for example, in 2009, it was less than 10 million units but it grew to 17 million units after crisis of Lehman. And we have outperformed the market during these years. And this growth is becoming an asset for us for the future development. With this growth, this provided a strong foundation for the future. And so far, we have been growing our sales in U.S. So for this fiscal year, when we came up with the forecast, 17.5 million units was the TIV forecast that we set for us, which looks optimistic retrospectively. Well, last November, I talked about this and I said -- we said that -- Saikawa-san said we intend to put more focus on the quality of sales. But if I look into the details of the TIV last year in U.S. between April and August, the TIV largely declined. This was when we had to reduce the inventory of model year '17. In September and October, TIV was very strong. So looking back, we should have adjusted the production or adjusted the wholesale. But we did -- it was a bit late, so we piled up the inventory of model year '17. Between November and December, the TIV was falling and the selling expenses increased against its backdrop. Nissan, compared to other carmakers, added selling expenses and sell off the model year '17 through [indiscernible] deals partially. These were the actions that we had to take. This year, Saikawa-san has been saying this at various occasions. Striking a balance of growth and profit is important. In U.S., operation was very successful in growing. While we recognize this fact, the U.S. market is picking up from the level of 17 million units. That's what people are saying. So compared to the constant growth, sustainable profit -- quality of sales, sustainable growth is what we are focusing on. So from the last -- from last November, we have started addressing this. As of today, we still have -- we had an excess of inventory of model year '17. So the incentives in Q3 was high and the mix of fleet was high. Unfortunately, we revised the full year forecast. In fourth quarter, even today, we are narrowing down the wholesale and we are keeping a certain level for the fleet sales. That's where we are today in the United States. Specifically, when we talk about -- I think you are asking about the specific volume. In United States, in the third quarter, retail and wholesale gap is -- wholesale is 30,000 to 40,000 units less than the retail volume today. And we talked about the overall adjustment of the inventories. And this -- in the end of Q -- compared to the Q3 end inventories, in the end of Q4, our expectation is that the inventory will be narrowed down by 100,000 units or even more than 100,000 units by the end of Q4 compared to Q3 end. So among the negative factors of the inventory adjustment, more than half are accounted for by U.S. JPY 40 billion is the impact that I indicated and more than half of this JPY 40 billion is due to the U.S -- adjustments in U.S.
And lastly, is this a fundamental measure or anti-symptomatic actions here?
First, we need to normalize operation in Q4. And the leader of the North America is a new one now. A new leader is in place. So we will continue striking the balance between profit and growth. And in the end of March, the dealer inventories and the OEM inventories should be normalized so that we should be ready for the sustainable growth in the future. That's our intention. Thank you.
Other questions, please? Other questions. Yes, please. First person -- third row from the front, the person sitting in that row.
[ Yoshitake ] from NHK. Throughout the year, the whole year outlook, final profit net income, I think it is going to be record high for your company. But because of the Trump administration's tax reform in the United States, you have some beneficial effect. So with this, it is pushing up your profit but the fiscal year has not ended. So record-high profits, how do you evaluate that? How do you assess this record high level of profit?
To be honest with you, the net income, JPY 170 billion upward revision, so the number is record high. But out of it, JPY 200 billion would come from the tax reform. This is onetime affair. I say temporary, but in the future, the tax would be payable tax is reduced. So it is true that there is a positive impact. But net income for this year is pushed up by JPY 200 billion. So is there anything fantastic about it? I have no intention of saying that it is wonderful or fantastic. Rather, in our company, the operating profit was revised downward in November last year. And despite, again, we have to downward revise again. And in terms of the number of units, we committed certain number in the past and now we have revised it downward by 50,000 units. So we take it very seriously. So we are putting in various measures to cope with this situation.
Okay, thank you. Anyone else with a question? Yes, the person in the front row.
Asahi Shim, my name is [ Kimura ]. Talking about U.S. again, incentives, you said that, originally, the incentives were high and this led to deterioration of profit and you are narrowing down the spending of incentives. This is my first part of the question. And for next fiscal term, what will be your incentive policy? How will you change this incentive policy? And what kind of positive impact do you expect on the bottom line?
Thank you for your question. Incentives in the first half of the year, the TIV was starting to fall. So when we made an announcement in November, CEO or the MC Chairman of North America said that we intended to narrow down the incentives. For example, $400 was the reduction that we talked about, I believe. In the third quarter compared to the second quarter, $400 -- it wouldn't -- it didn't reach $400 per unit, but there was a reduction at a certain level. However, we didn't fall as much as we expected, as I said, because we still had the inventories of the model year '17 in third quarter and some will remain in fourth quarter. So throughout the year, we wanted -- we couldn't reach the $400 per unit level when it comes to reduction of incentives. And how will it look like in the next fiscal term? If your question is whether you will change the incentive program or measures, we don't have an intention to totally change it. Rather, we will revisit or review the priorities, striking a balance between profit and growth. And obviously, in U.S., we are putting more focus on -- too much focus on growth. So profit, brand, quality of sales are what we need to put more focus on. Not only the people involved in sales in U.S., CEO and the top management, everyone is trying to shift the focus to these other aspects. When the incentives are rising in the industry as a whole, the -- we have an excess of production capacity and they have to produce. That's one reason behind it or the inventories build up so they want to reduce. That is why they spend incentives and they pursue market share and that is why they spend more incentives. But today, obviously, in the case of Nissan, in terms of the utilization ratio, both Mexico and U.S., we are at 100% in Mexico. It's 120%, 130% utilization ratio. So it's not -- there's no pressure on incentives from the production utilization because we were trying to grow market share and the sales volume target was set for us. But now we are changing the direction as a company. So we need to change this direction effectively, translate it to real actions. And as a result, we expect -- we believe that we have to reduce the incentive as a result of these actions.
Okay. Thank you. Next question, please?
Jiji Press, [ Miyashita ] is my name. Final inspection related cost, I want to sort out some issues and I want to ask a question. Throughout the whole year, recall cost including the compensation, inspection-related costs, overall, how much would it be? And how would it impact on the operating profit? Can you talk about it?
Thank you very much. Regarding the inspection-related issues, last year in November when we made the financial results, first, recall cost at JPY 30 billion and then reduce the sales or capacity utilization rate of plants will come down and the actual shipment was suspended. So outside the recall, JPY 30 billion. So altogether, JPY 60 billion would be the cost. That's what we anticipated. Against that, as I showed you in the graphs, in this presentation, further additionally JPY 30 billion had to be added on. The reason why additional JPY 30 billion, and let me explain to you the JPY 30 billion versus the JPY 60 billion, regarding the recall expense, JPY 30 billion is as expected so unchanged. Reduced units or the capacity utilization, that aspect increased additional JPY 30 billion. JPY 30 billion -- 30,000 and JPY 40 billion would be a risky unit numbers, we saw it last year. But in terms of the unit numbers, that was the variance. So it's as expected. But actually, regarding the domestic sales, the retail review has not been done and the 20,000 unit is the number shown. If you concentrate on the domestic sales, it's just a little reduction. But you see, the cars that we export, the final line, the inspection line is shared with the domestic cars and export cars. Because of that, if you include export cars, number of units was not changed but the more profitable exported cars was -- cars were impacted. That's why we have the different number. Talking about what is happening now, the line speed at plant has come back, but we don't want to make any haste. So since November, we want to be very careful and we respect it. We attach importance to the processes. We went through training and education. We changed lines and we covered the inspection line only and so forth. So we've done many things. So 20,000 would be the reduction for the domestic sales. But to be honest with you, the orders are coming back. We are appreciative of the customers, and at the same time, additional marketing efforts and sales expense would have to be incurred and it's a fact. So putting all of those factors together, export cars, the profitable cars are impacted, the production cost or sales cost, all those would add up to JPY 30 billion. Partly, it is happening in the third quarter and part of it that will be generated during the fourth quarter. That's why we have this outlook number.
Anyone else with a question. Yes, person at the back.
NHK, [ Hatanaka ] speaking. Talking about the final inspection issue. Earlier, Tagawa-san, you said that by the end of the fiscal year, you are going to normalize the business operation. But as of today, looking at the sales in Japan, how much recovery have you made? Could you be more specific? What's the recovery progress?
Well, let me talk about the plans first and then I would like to hand it over to Hoshino-san, who is an SVP in charge of Japan operations, to talk about the order placements and others. With regards to the plants, it's there that -- with regards to line speed, they are practically at the level of 29th of September. However, flexible production system -- compared to flexible production system, we still need more time. By the end of March, we believe that we can completely normalize the operations. So we are working out the details for the final stage to do that. Okay, I would like to ask Hoshino-san to talk about the latest order intake and the dealer circumstances. Ms. Hoshino, please.
Yes, I'm in charge of the Japan market. My name is Hoshino, nice to meet you. With regards to the order intake, as we have been mentioning between October and December, depending on the month, 10% or 20% are the decline of the order placement that we saw. But in January, we are exceeding the prior year level when it comes to order intake. As you may know, NOTE gained -- the first part about the registered cars and the calendar year in '17, NOTE became the #1 seller in the compact cars. So we have Nissan LEAF, which was launched. That's another -- so strong models are supporting this strong order intake. So we are practically back at the level of last year. Last year, for your information, in January, Serena and NOTE came in to the top 2 after more than 3 decades. So we are back to that level. So order -- with regards to order intake, it's coming back strongly.
Thank you. Next person? Yes?
Nikkei, Shiraishi. Amateurish question, I'm sorry. Inventory adjustment, with that, how come cost and expense are incurred? Can you talk about the mechanism? Why does it relate to cost increase?
Well, when we revised the JPY 40 billion, the graph showing that, I think that's what it is talking about. Usually, when we have a business plan, we have retail unit number and wholesale number and production numbers. I think they are more or less the same level. But this time around does this happen. On retail side, as I said, partially, sales cost is happening and the fleet cost is happening. So not much change. But TIV has declined. So we are trying not to have excessive inventory. So only the wholesale side has reduced, especially this term the wholesale side shrank. So wholesale is reduced. So on appearance, retail is 5.7 million units, but actually the revenue will decrease and per unit, how much would be the profit? That will be wiped away. So because of the inventory adjustment, manufacturer side, our side, profitability worsens. But conversely put, dealers will not have to have an excessive level of inventory. So at least, the sales will normalize into the -- going forward. At least it is a measure to do that. So inventory adjustment goes and wholesale side becomes very healthy. And then, spring market in the United States on March and April, the sales will pick up in terms of the absolute numbers. So at a time like that, model year '17 inventory, if possible, we want to get rid of it. And then the incentives, that would not be required, and the fleet sales, that would be better impacted. So it will be normalized. But once the wholesale is reduced, the cost-wise, so much so, the opportunity loss is created. The profit that can be taken would be lost. That's why we have this number.
Thank you. Yes?
Sean McClain for the Wall Street Journal. Just wondering if you could us a bit more details on your excess inventory situation, looking in the fourth quarter here? Are there any particular problem areas? I know you had an excess of Altima that created a big problem for you. Have you solved that yet? Are you closer? I mean, how many days inventory are you looking at, sort of, for Altima?
Thank you for your question. I would like to translate the question into Japanese. The excess inventory in U.S., is there any issue specific to models or segment? For example, Altima. That was your question, if I understood correctly. This issue is not specific to a specific model. Overall, we would like to make adjustments on the inventories. Why? Because the OEM -- the dealer inventories, for example, automotive in use indicates dealer inventories. But if we look at only dealer inventories, it's not that only Nissan has rising inventories. By -- in the end of January, our inventory in U.S. is 600 -- 65 days of supply, and Altima, for example, is 55 days. In the end of December, it was 59 days in U.S. and Altima was 64 days. So the numbers don't seem excessive. But looking at the latest numbers, you discover that both in December and January, [indiscernible] market has been largely declining. And we have Rogue and Titan in truck segments as well as Armada, so we shifted our resources to these vehicles. In January, 57% was the mix of the truck. But industrial average was much more advanced, 65% or even higher with the mix of the trucks. So going forward, the -- it's not that we have too much inventories now that we will get into trouble. In the future, if the TIV is not as high as we expected, we have to make adjustments. In other words, our original business plan, our initial assumption that we had in the beginning of the fiscal year for both November, December, January, February, March, we wanted to produce more and wholesale more. And based on this assumption, we made a profit plan. So rather than having an excess inventories now, we need to -- we have to make a revision of the original plan. With regards to incentives, lately, it's a down segment. We are putting more incentives and fleet mix in the sedan segment is at high level. So the immediate performance and the plan was too optimistic. So these are the 2 issues that we are faced with.
Thank you. Yes, please?
Freelancer, [ Inoya ] is my name. I have a question regarding North America. The moment of truth is coming, I guess. Renault Eurasia in charge is going to be MC, and why is it he is going to be the top personnel management committee? How come this appointment?
Well, the reason is not for me to explain. This is a matter for financial result. This is a place for financial results. But to the extent I know, North American business, up until now various attempts were made as other questions are expressed. There were good times, but there were times that we were not doing very well. So it is the decision of good and bad. So in the past, we were doing something internally. For example, Nissan North America 20, 30 years one person is working and then on the extension of what they did, they want to cause change. Well, rather than that, we want to introduce something drastically different in looking at the business. We saw that could be a good idea. As you know, Nissan, in terms of functions, in terms of regions, we have a lot of human resources having different backgrounds. Mr. Carlos Ghosn was sort of in the same group. But anyway, bringing in new ideas and rebuilding the company. So I myself, the new board, regarding that person, because he is this and that, he is appropriate or not, I don't have any knowledge about that. But my personal expectation, my hope is that we shouldn't stick to the old ways of doing things. We want to introduce something new so that we can infuse a new blood into the North American business. That's how I feel about it.
Thank you. Yes, anyone else? Okay. We are bit in advance but since no one else has additional questions, we would like to close this press conference. Thank you for joining us today.