Transcripts
Nissan Motor Co., Ltd (NSANY) Q4 2022 Earnings Call Transcript
Operator
Okay. We would like to start the Q&A session. [Operator Instructions] Shall we start with [Nikkei Shimbun].
Unidentified Analyst
This is [Indiscernible] of [Nikkei Shimbun]. I have two questions. U.S. is the first one. Production and sales forecast for this fiscal year is a question. For the production, you are trying to resolve the bottleneck, I believe. Specifically, how are you going to grow this? And the sales, as the interest rates are hiking and the recession possibility is heightening, so how do you perceive the environment for the sales?
And the second one is the sales finance business forecast for this fiscal year. Interest rate is hiking, and net credit loss — provision for net credit loss may be increasing. How does it impact the profit and bottom line? And at least — and it’s really hard for me. The purchasing environment, the procurement environment, how do you perceive this? Sorry, it was very unclear.
Makoto Uchida
Thank you for the question. There are two questions that you raised. Talking about the sales finance, I would like to ask Kochhar-san, who is the Senior Vice President, to answer about the sales finance. And the first question, excuse me, it was a connection poor. Are you asking how we are growing the sales and production in U.S.? I think that’s what you meant. If you look at the U.S. market, is there any big impact that we expect in U.S. on sales and production?
I think we see opportunities in U.S. I show you the numbers earlier. For example, in 2022 Q4 compared to the prior year, U.S. grew a lot. In the full year, because of the supply chain challenges, it was difficult. But we compared to last year, we are trying to grow the product line growth like Rogue, Sentra. We have a plan to double the number for Sentra, for example. Driven by these models, we would like to achieve 29% growth rate that we are foreseeing. And this is what the sales is expected to contribute. Relationship with the dealers are becoming better.
In 2020, we announced Nissan NEXT in order to enhance the quality of sales. These are becoming a reality. And as a result, our Nissan products are well received by the market. That is why we believe that sales volume in U.S. in 2023 can grow. This is what’s behind the numbers. And the second question, excuse me, sales finance, I would like to ask SVP Kochhar-san to answer. Go ahead.
Rakesh Kochhar
Thank you, [Ara-san], for your question. And you’re absolutely right. The interest rates are rising, not just in the U.S. but across all over the world and in the U.S. and other markets, delinquencies are also rising. However, we are managing the risk very well. We expect another solid year of sales finance profits, although we already said that it’s going to be lower than fiscal year ’22 for the reasons, higher interest rates as well as the high delinquencies. We have no refinancing risk. Our balance sheet in the sales finance business, like in the auto business is very solid. 38% of our assets are actually self-funded by equity or group loans. So lenders see that and they get a lot of comfort.
On delinquencies, even though they are rising, they are significantly lower than what we have seen in the past. So we’re very, very comfortable. The business is being managed in a very effective way, and we continue to see good performance there. Thank you, Ara-san . I hope I answered your question.
Operator
Moving on to the next question. [Yamana-san] of NHK.
Unidentified Analyst
In [Yamana-san] of NHK. I have two questions. First, last year’s performance, China business. China, due to the impact from lockdown you had suffered. My question to Uchida-san. You said that the speed is transforming very rapidly, specifically software EV. What are the factors where the speed of change is fastest? And in order to achieve victory, what are the factors necessary for Japanese manufacturers? Second, for the outlook for this year, revenue will be a record high according to your forecast. Mr. Uchida, you have been talking about transformation of management as you were appointed to the CEO. What do you think about such outlook? And the global environment is still full of uncertainties but your plan is to increase sales in all of the sectors. What is the basis of this outlook of record high revenues?
Makoto Uchida
This is Uchida speaking. Thank you for those 2 points. Dealing with the second point first. Rather than talking about the basis in Nissan NEXT, we have committed to the change and that will deliver fruit. Of course, there was the COVID chip shortage problem, but 4.1 million units. What is the outlook of securing chips? In our relationship with suppliers, we are applying ingenuity to secure enough ships. So rather than the same situation repeating this year, we think that gradual recovery will take place.
Then the quality of sales and productivity to which we have injected will bear fruit. We will be able to manufacture and that will serve as the backdrop of increased sales. And on your first point, the models that we have created are very popular amongst our customers. When we took over Nissan, the brand had been damaged and the brand value from even our perspective was at low price. Even from our perspective, we thought that it would have deserved a higher price. That’s how low the quality was.
But now we are in a virtuous cycle, and that is leading to higher sales and revenues. So this is all due to the employees’ efforts, they are given the credit and the top management who are sat here should be given the credit and the Nissan’s good points have delivered results. We have a model that makes money, but we should not be complacent. The opaqueness of the business environment we are in is very serious. There are many uncertainties. So market by market, the trend is changing, the ecosystem is changing, and I think it’s all about securing strong presence.
And this would lead to the first question, but — one good example is China. And in fact, it’s not just myself, but all — the 3 of us have visited China. And later, Ashwani-san will probably comment on the actual situation on the field in China. But even before I became CEO, I was in charge of China. Back then, local brands were already there. We witnessed the speed of development and agility to respond to market needs was already there. And during the past 3 years, there has been acceleration NEV in the EV, N-E-V is the word they use. And EV is already taken for granted, and there are many specifications that they are offering, meeting the needs of the customers in order to secure prominence in the world of NEVs.
We were really surprised and shocked. In just a matter of 3.5 years, I was very impressed about how fast the speed has become. So we were reminded and we were reminded that we are in crisis. But we’ve been doing this for 20 years and 15 million units have been sold in China. And the customers that own Nissan, they must become our repeat customers and we need the measures to make them repeat customers so that they would choose Nissan for their next car. And on the other hand, if we look at our growth trajectory, and you said EVs — C segment EVs, can the conventional model be viable? I think we need to look at various potentials and possibilities. What can we do more by taking advantage of the assets we have already locally. We are already beginning to discuss these points with our partner. We haven’t reached the point where we can disclose that with you. But when that time is right, we will comment on that.
Ashwani Gupta
Thank you, [Yamana-san]. So — last year, it’s very difficult to analyze the China performance because there are many factors which impacted the China performance. So one, the external factors, which were driven by the COVID and the lockdowns. Second, the semiconductor availability. The third is our own Nissan’s X-Trail 3-cylinder performance. And number four, that unavailability of the electric vehicles by Nissan in China. So when we saw in 2022 that the electrified market in China rapidly grew whereas we were short of the electrified vehicles. So that’s why it’s difficult to really categorize which goes where now.
Moving forward, when things are becoming normal in terms of COVID, in terms of semiconductor availability, what are the 3 big things which are changing in China. Two years before we thought that electrification is driven by numberplate restrictions, by the incentives and so on. Whereas after 2 years, what we understand that it is customer also which is pulling the electrified vehicles. For example, the 60% of the new electric cars are bought by the first-time buyers. So that’s the first big change. The second big change, 2 years before what we thought is the software or the customer service is totally changed to software first and the chassis and the tires and the instrument panel after.
And this is where the market has changed significantly. And the third most important is time to market, which in China, we see clearly between 2 to 3 years’ time to market, whereas the global automotive manufacturers have much more time to market. So I think these are the 3 things which have changed absolutely in China in the last 2 to 3 years. And that’s why we have to speed up and align or redefine the way we design, the way we manufacture, the way we sell cars in China. I hope it answers your question. Thank you.
Operator
Moving on to the next question, [Mizhuturi Shimbun].
Unidentified Analyst
My name is [Mizhuturi]. I have two questions. The first one. Earlier, you touched upon that. Nissan NEXT, how do you assess the Nissan NEXT performance so far? Earlier, you said that since 2020, your profit or earning capabilities has been rising. But if you look at operating profit guidance, it’s a little over 4% for this fiscal year, which is falling short of the Nissan NEXT milestone. Having said that, once you have the ample supply of parts, do you think that you can achieve this operating margin milestone. So the financial foundation is strong that enables you to achieve the mouse of Nissan NEXT? Semiconductor supply short will continue, right? So this — in order to boost the operating margin and conclusive to Nissan NEXT milestone, is there anything that you can do more?
And the question is about the operating profit by region for Japan. Compared to fiscal year 2022 is better, but it’s like ¥150.3 billion. So this is pretty big of amount. R&D expenses are borne by Japan, which is greater than the rest of the regions, and this may be one of the reasons. But the amount is so big, so how do you — what are you going to restore the profitability of Japan operation?
Makoto Uchida
Yes. Thank you for the question. Yes, in Nissan NEXT, as I said, in fiscal year 2020, we first focus on building a stronger financial foundation and make sure that the business was in a tough situation, as you may remember. When I became CEO, I said that Nissan can do more than what you see today. We have wonderful talent. We have a lot of talented people within the organization, and I thought this was the responsibility of management to guide them. So with Nissan NEXT, we — as a result, we have been improving the brand, which was damaged, thanks to efforts by our employees. And not only the operations, but the partners, sales — the dealers, the relationship with dealers are becoming better, and this is another big factor. .
And taking this into account, this full year guidance of 2023 was calculated. Products are better. Relationship is better. Having said that, we need to make changes in other aspects. In order to pursue growth, we need to think of a way to look for new sources of revenue or digital assets on top of what we have made in the past years. That is what is expected to do to answer the strategic questions in the next midterm plan. And in the current portfolio, the main battlefield is U.S., Japan and China. China, there was a question about China earlier. In order for Nissan to grow, and make — how to make customers understand the value of Nissan? What do we do concrete?
Unless we show this concrete plan, Nissan’s future potential from the market perception will not be convincing enough. So this year, as I said, in the new midterm plan, which we will unveil this year, we would like to make this clear so that you understand.
And the second question, there are some figures. So I would like to ask CFO to provide additional information to answer your question.
Stephen Ma
I’m sorry, I did not quite catch your question, sorry, for the translation. Could you repeat the question one more time for me? .
Unidentified Analyst
Sure, [Mizhuturi], yes, the regional breakdown of operating profit, especially Japan, how are you going to restore the profitability of Japan? Because you have a big loss in Japan. According to document, it’s ¥150.3 billion of losses made by Japan operation alone. So how are you going to restore this profitability. What are you going to do to improve this profitability?
Stephen Ma
The Japan is showing a negative number, but that negative has hugely declined versus previous year, a big improvement. So if you look at the details, it’s improved by — I think to reduce the loss by at least half and is improving further. And obviously, as mentioned earlier by our CEO and CEO, it’s volume story. We need to increase the volume, obviously. We don’t have enough scale in terms — right now to cover all the fixed costs. And as you rightly mentioned, some of the global fixed costs are in Japan. So there’s a global cost in here.
Of course, the way to go forward to get that back to positive territories, one is volume. The second is continue the good financial discipline we have in terms of fixed cost control. And three, is looking at how we optimize the mix and production and how we look at everything. Of course, given the current inflationary environment, energy cost and many things. Another thing we’re looking at also in Japan recently is how to rectify or set the right pricing in the Japan market as well to reflect the latest environment. So we’re doing everything from all the angles. And hopefully, you would get better next time you see these numbers.
Operator
Moving on to the next question. [Asahi Shimbun].
Unidentified Analyst
I have a question on China and the U.S. One question each. China market, yes, you mentioned that harshness continues. We understand that. And in the midst of such environment, plus 8.1%, 1.13 million is the outlook. NEV is emerging and ICE is struggling. How are you going to reach the number of units, and you want to be profitable. Can you reach 1.13 with profitability? ICE is difficult. So how are you going to balance the presence, the profitability and the market environment to reach such outlook? That’s my first question.
Secondly, U.S. EV strategy. This term, your outlook is for number of units to grow, volume to grow. But BEV portion will increase. Our IRA, Inflation Reduction Act, under that, Leaf was put out of the scope, but supply chain resilience, how do you intend to tackle the IRA issues? And how are you designing incentive in the U.S. market? Those are my questions.
Makoto Uchida
Then regarding IRA, I will ask Ashwani to respond. And — the rest, I will add some comments. Please go ahead.
Ashwani Gupta
Yes. Thank you. The U.S., I think the second question. First of all, the U.S. EV strategy is same as our global EV strategy. We have launched LEAF. We have launched Ariya, which is doing a big — good reception from the customers. Of course, Leaf, we started manufacturing in 2011, and Ariya, we are exporting from Japan. But as we announced in last year, $500 million of investment in Canton, to come up with a brand-new 4 cars. These all 4 cars are being targeted to be localized in the United States, starting from platform to battery to be powertrain and so on.
Now why Leaf has been excluded from IRA is — IRA is recently announced. Leaf, we started manufacturing in 2010. So when we designed, developed Leaf, we never had in our mind that what would be the IRA regulation. So that’s the reason that Leaf is not in the IRA. Having said that, what would be our next step. So next step, as I said, the 4 models battery electric models, which we are going to manufacture in the United States, we are targeting to qualify for the IRA by addressing platform, e-powertrain and the battery localization.
Makoto Uchida
So in that sense, including IRA, Nissan is trying to enjoy the benefit with these new models, and we are deepening the collaborations with the suppliers to this end. And talking about China. China, new energy vehicles are growing largely but C segment where we are strong with Sylphy, we see a strong demand in this segment as well. So we are planning for the new products. So along with these, we would like to boost the volume in China. That’s how we calculate the full year guidance. As I said, our units in operation is pretty big, which we are proud about.
So we would like to deliver the products that the customers will accept based on this volume. As you said, the latest circumstances in China is very tough, challenging. So profitability — make sure — we have to strike a balance between price and profit as we operate the Chinese business. We are having a close eye on the market trend. We will look at the next 3 months, review closely and determine the direction — we see the necessity to figure out the directionality of operation in China. We are not overly optimistic. We have capacity and sales power, but the market circumstances are extremely challenging. In the next 3 months, we have to see how it will turn out. In many aspects, we need to anticipate things.
Where we announced the first quarter results, let me share with you what we have reviewed about China.
Operator
Next one will be the last question. Toyo Keizai [Inoli-san].
Unidentified Analyst
This is [Inoli-san] from Toyo Keizai. For the full year guidance of 2023, I have a question. The first one. Operating profit will increase thanks to raw materials because as a benefit, that’s why see the variance. Raw material, will this be a bigger impact? How do you assess the raw material impact for this fiscal year? That’s my question. And the other one, in the financial documents, production volume guidance was never unveiled in the past quarters, but you are showing this time for the first time, why?
Makoto Uchida
Regarding the first question, I will ask our CFO to respond.
Stephen Ma
I think as we all saw in FY ’22, raw material prices went up hugely and reached a very high level. And as we can see from the market prices in recent months, it has plateaued and it has come down generally. So all the major raw material prices has come down. It’s still fairly high compared to 2 or 3 years ago, but it has come down since last year. So what we have done in the outlook for next year, we already incorporated partially some of that good news in our estimation.
In recent weeks, I think some of the prices come down even more. What’s still kind of expensive is EV-related kind of materials are still kind of high, but also they seem to be softening. So outlook should be okay. We’re just now looking to see how — when they will stabilize. So right now I feel comfortable with this assumption in the budget for next year.
Production volume guidance, I believe, historically, in the past, Nissan used to long time ago give production guidance. I think the last few years, we haven’t given because of COVID and many other things, we didn’t give that. But now that we have better visibility of our supply chain and hopefully, things are recovering. And we want to sort of give this indication because with the production and retail, you can also understand potentially what the wholesale, which is also driving the financials. Of course, the timing, there will always be some lag in the timing, but the production will be a sort of a leading indicator that shows you where the trend is going. So I think the production volume, as we disclosed for next year is 4.1 million, retail is 4 million, which means the volume is growing. Given that these two numbers are growing roughly 21%, you can safely assume also that our sales — wholesale volume of roughly 20%, 21% growth, which drives our financials.
Operator
Okay. Thank you so much. Now it’s 5:30, so we would like to end this session. Thank you for joining us.