Isuzu Motors Ltd
TSE:7202
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Isuzu Motors Ltd
Earnings Call Analysis
Q2-2024 Analysis
Isuzu Motors Ltd
Isuzu Motors has embarked on a collaborative journey with SPARX Group Co. Ltd. and the Japan Monozukuri Mirai Fund through its subsidiary IJTT Co. Ltd. This strategic move is aimed at enhancing IJTT's value and branching out into untapped business domains. While retaining its key supplier status to Isuzu and securing a steady parts supply, IJTT is expected to witness mutual growth with Isuzu's financial backing. Investors should note that this reorganization will see IJTT shifting from a consolidated subsidiary to an affiliate based on the equity method. Consequently, this will incur an extraordinary loss of JPY 6.0 billion by March 2024 – a critical point for investors to consider.
Despite witnessing shrinking unit sales in Commercial Vehicles (CVs) and Light Commercial Vehicles (LCVs), particularly in overseas and Thai markets, Isuzu has still managed a silver lining with upward revisions in overall earnings. The financial review reveals this resilience, attributing improved earnings to superior sales, income updates, and positive currency impacts. Any potential investor should approach this as a strong signal of the company's ability to navigate through headwinds in unit sales.
Isuzu's experience in the first half of the fiscal year paints a varied picture: enhanced sales in Japan and North America owing to parts shortage improvement, but a decline in emerging markets due to economic pressures like rising interest rates and inflation. Adjustments in the fiscal outlook mirror these trends, with forecasts for Japan and emerging markets being downgraded due to prolonged sales lead times and softened market demand. Understandably, this level of specificity in regional sales performance is indispensable for investors gauging geographic strengths and vulnerabilities within Isuzu's portfolio.
LCV industry sales plummeted significantly under pressure from tough market conditions, yet Isuzu maintained a robust market share. Despite a drop in production for the Thai market affecting overall numbers, mitigating factors in export markets help stabilize expectations with no major forecast alterations. For investors, the company's resilience in maintaining market share amidst a production downturn is a testament to its competitive position.
Isuzu has set sights on fortifying its after-sales service, a segment that has seen a positive forecast revision reflecting strong demand, primarily in Japan. Counterbalancing this is the stagnation in industrial engine shipments, equating to the previous fiscal year due to the Chinese market's slump. This information is vital for investors seeking insight into cross-segment performance and potential revenue streams.
Even against the backdrop of decreased unit sales, Isuzu reports a significant increase in operating income, buoyed by improvements in the product mix, robust after-sales, effective pricing strategies, and cost-reduction efforts. The financial review acknowledges the role of a weaker Japanese yen contributing positively, despite negative influences from euro-based transactions. The revision in foreign exchange assumptions provides a nuanced view of currency effects. An investor assessing Isuzu's fiscal health would find these details on operational efficiency and currency impact essential for predicting future performance.
Focusing on shareholder returns, Isuzu is implementing a strategy to enhance value through a repurchase of up to JPY 50.0 billion in shares, with plans to cancel all acquired shares. Dividends are also set to increase from JPY 80 to JPY 86 per share, aligning with a 40% average payout ratio from the midterm business plan and culminating in a total shareholder return rate of 51.8%. Investors will likely view these actions as a robust commitment to returning value and maintaining financial integrity.
Isuzu's midterm strategy reflects adaptability in a volatile business environment marked by significant currency depreciation, soaring material costs, and dampened demand in emerging markets. With ambitions to reach the midterm business plan's targets, Isuzu is pushing towards profit optimization. Although the Return on Equity (ROE) goal of 12.5% remains unmet, the company's persistent focus on profit margin enhancement is a clear message to investors regarding fiscal objectives.
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Thank you very much for attending today's presentation of Isuzu Motors Limited's financial results for the second quarter of the fiscal year ending March 31, 2024.
Allow me to introduce the Isuzu members. This is Naohiro Yamaguchi, Director of the Board and Senior Executive Officer, Group CFO, and Executive Vice President of the Corporate Strategy Division and Corporate Planning and Finance Division.
I'm Yamaguchi.
My name is Fumiya Yamakita, Vice President of the Corporate Planning and Finance Division. First, Mr. Yamaguchi will discuss the general overview of the business. While I, Yamakita, will present the financial results for the first half and financial outlook for the fiscal year ending March 31, 2024 in addition to the progress of the midterm business plan.
I am Yamaguchi. I will briefly explain the overview of our business. First are the results of the first half. Profit increased year-on-year due to growing aftersales and successful measures such as price realization, et cetera, and a favorable weak yen trend despite a decline in profit due to deterioration in market conditions, especially in emerging countries, and negative impacts from fluctuations in material costs. As a result, net sales and all profit levels for the first half marked an all-time high.
Turning to the volume of CVs. Unit sales to emerging countries declined significantly, while unit sales to developed countries increased due to improvements in part shortages. As for LCVs, unit sales for Thailand decreased sharply due to severe market conditions, while the number of export shipments increased, mainly due to back order pile up resulting from shortages of parts in the previous fiscal year.
Next is the outlook for the fiscal year ending March 31, 2024. We expect deteriorating market conditions for both CVs and LCVs and consequently revised unit sales downward from the previously announced forecast. On the other hand, we are making an upward revision to the sales amount and profit, thanks to the steady progress in price realization, cost reduction activities, et cetera, in addition to the favorable external environment, such as the fact that prices of materials and other costs have not risen as expected and the yen has weakened. Operating income is adjusted upward by JPY 20.0 billion from the previous forecast to JPY 280.0 billion.
I now turn to shareholder returns. As reported on our company website today, comprehensively taking into consideration the financial conditions, cash flow, expected future revenues, et cetera, we will repurchase up to JPY 50.0 billion of our shares during the current fiscal year, aiming to enhance shareholder returns and improve capital efficiency. We also plan to cancel all of the repurchased shares. Dividend for the fiscal year is expected to be JPY 86 per share, an increase of JPY 6 from the previous forecast, which is in line with the target of the current midterm business plan that states a 3-year average payout ratio of 40%. As a result, the total shareholder return ratio of the 3-year midterm plan is expected to reach 51.8%.
Finally, I would like to report on our business restructuring. As also announced on our website today, IJTT Co. Ltd., a consolidated subsidiary, will commence a new collaboration with SPARX Group Co. Ltd. and Japan Monozukuri Mirai Fund, aiming to not only deepen existing business, but to also expand into new business areas. While IJTT continues to be our business partner, he will also aim to enhance its corporate value. Not only will IJTT keep on being our important supplier and continue to provide parts to Isuzu, but by providing financial support, both Isuzu and IJTT will strive to grow into the future.
As a result of the restructuring, IJTT will be transferred from a consolidated subsidiary to an equity method affiliate during the current fiscal year. Further, we expect to report an extraordinary loss of JPY 6.0 billion around March 2024.
I will discuss the business performance of the first half of the fiscal year ending March 31, 2024. As I mentioned at the beginning, unit sales of both CVs and LCVs decreased from the previous fiscal year. Earnings are as described.
I now turn to the full year forecast of unit sales and earnings for the fiscal year ending March 31, 2024. The forecast for unit sales has been revised downwardly from the previous forecast, mainly due to the declined unit sales in CVs for overseas markets and in LCVs for the Thai market. On the other hand, regarding the earnings, the sales and all the incomes will be revised upwardly as I mentioned at the beginning. That's all from me.
Next, I, Yamakita, will explain the financial results of the first half of the fiscal year ending March 31, 2024, and the full year outlook. I will explain the global CV unit sales. In the first half of this fiscal year, unit sales in Japan and North America increased year-on-year due to improvements in part shortages, while unit sales in emerging markets mainly in Asia and mid and South America decreased due to severe market conditions caused by rising interest rates and inflation.
Next, I will talk about a comparison of the full year outlook for global CV unit sales between the previous and revised full year outlook. The unit sales in Japan have been revised downwardly due to a prolonged lead time to sales. The overseas unit sales have also been revised downwardly to reflect a decline in demand due to rising interest rates and inflation in emerging markets, particularly in Asia, such as Indonesia and Vietnam.
Now I will talk about the results of the industry sales in Japan and our market share in the first half of the fiscal year ending March 31, 2024. Industry sales of both heavy and medium-duty and light-duty truck segments recovered as constraints in production eased for both Isuzu and other OEMs. The Isuzu market share of both heavy and medium-duty and light-duty truck segments also increased, thanks to the eased constraints in production.
Next, let us now look at global LCV unit sales. While unit sales saw a decrease in the Thai domestic market due to severe market conditions, unit sales for export markets increased mainly in markets where backlogs had accumulated because of part shortages in the previous fiscal year.
Now I will turn to a comparison of the full year outlook for global LCV unit sales between the previous and revised full year outlook. The unit sales outlook for the Thai domestic market has been downgraded further from the previous outlook because recovery in the market conditions cannot be anticipated. The unit sales for export markets remains the same as we see no drastic changes in the demand.
I will explain LCV industry sales, our market share and production units in Thailand in the first half of the fiscal year ending March 31, 2024. Industry sales dropped significantly compared to that of the previous fiscal year due to worsened market conditions. However, we maintained a high market share continuing from the previous fiscal year. Production units fell from the previous fiscal year due to a large decrease in the production volume for the Thai market.
Now I will touch on industrial engines and after sales business. Global industrial engine shipments have been revised downwardly to the same level as the previous fiscal year due to deterioration in demand for construction machines in China. On the other hand, we have raised our full year forecast for sales from the after-sales business, reflecting a strong demand mainly in Japan.
Next, I will discuss the analysis of the changes in operating income by comparing the variances between the first half of fiscal year ended March 31, 2023 and that of the fiscal year ending March 31, 2024. Although unit sales have decreased, operating income increased by JPY 31.0 billion from the previous fiscal year, which is attributable to the improvement in the destination and model mix, strong after sales business, successful price realization and effective cost reduction activities. The exchange rates are shown in the upper right table. Additionally, from this financial results briefing, we have added the euro currency in the exchange rate table. The trend of the weaker Japanese yen against the stronger euro has accelerated. Thus, we are indicating a negative impact from euro-based purchases.
I will now turn to the financial results of operating income and beyond. Ordinary income was JPY 158.0 billion, after adding and subtracting the share of profit of entities accounted for using the equity method, foreign exchange gains and others to the operating income of JPY 143.2 billion. Net income was JPY 88.1 billion after adding and subtracting items such as income taxes and profit attributed to noncontrolling interests from ordinary income of JPY 158.0 billion. Please note that we recorded in the first quarter JPY 2.2 billion of extraordinary loss regarding the transfer of our business operations in Russia, and nothing has changed since then.
Next, I will discuss the analysis of changes in operating income forecast for the fiscal year ending March 31, 2024, compared with the previous fiscal year. Although we expect unit sales to fall from the previously announced forecast, we have raised our operating income outlook by JPY 20.0 billion from the previous forecast to JPY 280.0 billion, thanks to increased price realization, materials and other costs not rising as expected and the impact of the weak Japanese yen. Foreign exchange assumptions have been revised as listed.
I will now turn to the financial results beyond operating income. Ordinary income is expected to be JPY 300.0 billion after adding and subtracting the share of profit of entities accounted for using the equity method. Foreign exchange gains and losses and other nonoperating income and expenses from the operating income of JPY 280.0 billion. Net income for this fiscal year is based on ordinary income of JPY 300.0 billion from which the following are added and deducted: income taxes, profit attributable to noncontrolling interests as well as loss on business restructuring of JPY 6.0 billion and impairment loss on production facilities of a subsidiary in China of JPY 4.0 billion.
Regarding the impairment loss of our subsidiary in China, loss related to impairment of production facilities as expected due to surplus production capacity caused by the sluggish Chinese economy. We are not considering withdrawing our business in China and we'll continue to work with our partner to expand our business.
Next, I will explain the progress of the midterm business plan. Here is an update on the progress during the current midterm business plan. The business environment has changed significantly since the announcement of the midterm business plan in May 2021. While the yen has depreciated significantly, material costs, et cetera, have soared and demand has slowed, mainly in emerging countries due to rising interest rates and inflation.
With regard to profit and loss, we aim to achieve the quantitative targets set out when we formulated the midterm business plan by promoting price realization and cost reduction activities. Although ROE has not reached the midterm business plan target of 12.5%, we will continue to strive to achieve it through earnings growth.
Next, I would like to explain shareholder returns under the midterm business plan. The basic policy in the current midterm business plan includes returning profits to shareholders based on the level of profitability for each fiscal year after comprehensively considering the balance between securing funds for growth investments and bolstering internal cash revenues for maintaining financial soundness as well as repurchasing treasury shares in a flexible manner.
In accordance with this policy, as Mr. Yamaguchi stated at the outset, we will repurchase treasury stock and increase dividends. We will repurchase our shares up to JPY 50.0 billion during the current fiscal year with the aim of enhancing shareholder returns and improving capital efficiency. We plan to cancel all the acquired shares. As to the dividends, in accordance with the average dividend payout ratio of 40% set in the current midterm business plan, the annual dividend will be increased by JPY 6 from JPY 80 to JPY 86 per share. As a result, the total shareholder return rate of this 3-year midterm plan is expected to reach 51.8%.
Last but not least, this slide shows changes of unit sales and financial indicators of the midterm business plan. This is the end of Isuzu Motors financial results briefing of the second quarter of the fiscal year ending March 31, 2024. Thank you.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]