NISSAN | Fiscal Year 2020 first-quarter financial results

July 28, 2020

Fiscal Year 2020 first-quarter financial results

Introduction (CEO)

Good afternoon. Thank you for joining us for the announcement of Nissan’s first-quarter earnings for fiscal year 2020.
For the first quarter, total industry volume was halved as a result of the worldwide outbreak of the novel coronavirus. Consequently, Nissan saw a significant decline in sales. In addition, we suspended production at many plants globally due to the COVID-19 pandemic. The plants that resumed operations also suffered from low utilization rates due to declining sales. As a result, the company’s performance has been impacted by this challenging business climate.

Today, COO Ashwani Gupta will outline Nissan’s global sales performance and financial results for the first three months of fiscal year 2020. Then, I will discuss the outlook for the full fiscal year, as well as our Nissan NEXT transformation plan.

FY2020 Q1 performance (COO)

Let me start today’s presentation with global total industry volume and the related Nissan sales results for the first quarter. These results also reflect a full quarter of COVID-19 disruption that we knew would undermine our performance in key markets.
When we look at global total industry volume on a financial-period basis, which includes China from January to March 2020, we see a drop of 44.5% to 12.49 million cars. Correspondingly, Nissan’s global sales totaled 643,000 vehicles, which was 47.7% less than a year earlier.
When we look at the sales period, and correspondingly China’s realistic situation from April to June 2020, Nissan kept a market share of 5.4% with 827,000 unit sales globally, excluding U.S. rentals. This was despite inconsistencies in sales mix across the world, due to lockdowns or slowdowns caused by COVID-19.
Amid the pandemic, Nissan’s top priority was to protect our employees. To put our status in perspective, let me explain the impact on three key areas:
Production status;
Operational status of sales outlets; and
The start of production of new models

<Production status>

This is the production status for the first quarter.
In Japan, slow market demand as well as a significant decline in exports have significantly affected production volume, which remained below the year-earlier level. Even in June, production volume was 61% lower than a year earlier.
In China, Nissan’s production volume for the January to March period decreased 51% from a year earlier. However, we saw a steep recovery in the April-June period, with 8% higher volume than a year earlier.
In North America, plants are gradually restarting but were still at 60% in June. Europe is at 20% compared with a year earlier.
We are taking extra precautions in restarting plants, keeping people’s safety as our top priority.

<Operational status of sales outlets>

Next, let’s look at the impact on the operation of sales outlets.
In Japan, although all outlets stayed open, there was a significant drop of up to 60% in customer traffic. Even in China, we see a similar trend: All dealerships remained open; however, there was a substantial decline in traffic.
Though the dealerships in North America and Europe are gradually ramping up, showroom visits remain very low.
However, during the COVID-19 period, we have taken additional initiatives to strengthen our online sales platforms, and 11% of our sales went through a digital journey. We launched specific digital sales initiatives, like “shop at home,” ensuring a smoother customer experience.
While we had to shut down or slow down production, we continued sales through open showrooms as well as online. This did help to reduce our inventory and will help us drive quality of sales moving forward.

<Start of production of new models>

I truly appreciate our employees in Japan, as well as overseas, who ensured timely start of production of new models even as they worked from home. Thanks to them, we were on schedule with new models and kept our sales momentum.
For example, we were able to start production of:

1) In February – the Sentra in Mexico;
2) In March – the Kicks e-POWER, for export from Thailand to Japan and other Asian countries; and,
3) In June – the new Rogue, produced in Japan and exported to the U.S.

As you can see, the pandemic had a severe impact on our operations, but despite this, Nissan ensured business continuity while taking care of people.

<Sales performance in core markets>

Let’s now look at our sales performance in three core markets.
In Japan, our market share rose steadily from less than 8% to more than 11% in the April-June period. In June, the market share grew from a year earlier due mainly to our kei car sales. Nissan increased its share of the kei car segment following the introduction of the new Nissan Roox in March. Our market share in the registered segment is also growing progressively.
In particular, the Nissan Kicks compact SUV, launched at the end of June, has been very well received. It has more than 10,000 orders in one month. We expect to increase our market share in the registered car market.
Our sales in China have steadily recovered, progressively increasing our market share. In particular, we increased sales in the April-June period by 4% from a year earlier. This momentum was driven by strong demand for the Sylphy and the Altima.
In the U.S., where we are transforming our business by focusing on profitable retail operations, we significantly increased our retail share from 4.9% to 5.4%. Nissan’s fleet sales in the first quarter decreased to one-fifth of the year-earlier level. As a consequence, net revenue per unit is up approximately $700. In addition, four Nissan models have won top segment honors in the recent J.D. Power APEAL Study – a gratifying recognition by our customers. While the impact of COVID-19 remains challenging in the U.S., we see a steady recovery and contribution from the U.S. in our quarterly financial results. This improvement was specifically led by the new Sentra, Versa and Titan.

<Financial performance>

Moving to our financial results:
Given the decline in the global market and sales volume, consolidated net revenue for the three months fell 50.5% from a year earlier to 1.17 trillion yen. The operating loss was 153.9 billion yen, and the net loss was 285.6 billion yen. The non-operating loss includes a 84.7 billion yen loss by the companies under the equity method.
The extraordinary loss of 72.3 billion yen reflects a 33.2 billion yen one-time net loss due to shutdowns and other items caused by COVID-19, and restructuring charges of 40.1 billion yen.
Free cash flow for the automotive segment for the quarter was a negative 815.7 billion yen, reflecting impacts from the profit decline due to COVID-19 and low utilization of plants.

This slide illustrates the profit variance. Foreign exchange fluctuations had a positive impact of 3.5 billion yen. Volume and mix, parts sales and profit deterioration of consolidated dealers had a negative impact of 232.2 billion yen.
Selling expenses had a positive impact of 35.9 billion yen, while monozukuri, fixed costs and others had a positive impact of 37.3 billion yen, primarily due to reductions in fixed manufacturing costs and general and administrative expenses, partially offset by deterioration in manufacturing variable costs resulting from low utilization of plants.
The key takeaway is that without fixed cost reductions and actions to reduce selling expenses, our results would have been worse. This underlines that Nissan Next has demonstrable results and is laying the foundation for sustainable growth. This remains the right plan at the right time to address our challenges.

Finally, the liquidity status for the first quarter:
Nissan ended the period with negative free cash flow, resulting in an automotive net cash position of 235.2 billion yen. Despite the decrease in net cash, Nissan maintains more than 1.2 trillion yen of auto cash.
In June and July, we secured an additional 182.4 billion yen in funds in response to COVID-19. We also issued 70 billion yen in corporate bonds. Furthermore, we have unused committed credit lines of approximately 1.9 trillion yen as of June end. The company continues to monitor the pandemic closely and is preparing accordingly.
Let me once again stress our key priorities moving forward. We will:

Continue fixed-cost reductions;
Grow profitable market share through quality of sales of new products; and,
Keep our focus on operating cash and collection of adequate funds to maintain our liquidity level.

As management, we are well aware of the scale of the challenge and that market conditions will remain volatile in fiscal 2020. We remain confident of our long-term prospects for returning to sustainable profitable growth.

FY2020 Full-year outlook (CEO)

<Sales forecast>

Given the impact of the COVID-19 pandemic, we anticipate all markets to decrease in fiscal year 2020. We are forecasting global TIV to be 72.04 million units, a decrease of 16% from the prior year. Total demand in Japan and China are expected to decrease by 7% to 8%, while demand in Europe, the U.S., and other markets is expected to drop by approximately 20%. The market outlook remains uncertain, and the demand may see further deterioration due to a possible second wave of the pandemic. We will keep a close watch on the market.
For the full fiscal year, Nissan’s global retail volume is expected to be 4.125 million units, a decline of 16.3%. We expect to outperform the markets in Japan and China, while underperforming in the rest of the markets. In the U.S., we are moving away from pursuing excessive volume to reassessing our fleet ratio and optimizing incentives in order to improve the quality of sales. Global market share is expected to be 5.73%, almost in line with the prior year.

<Financial outlook>

This is the financial outlook for fiscal year 2020.
We are forecasting net revenue of 7.8 trillion yen, down 21%, which reflects a 21.7% decrease in sales volume excluding China, and an operating loss of 470 billion yen. We also forecast a net loss of 670 billion yen for the fiscal year, as we expect losses in companies under the equity method and additional restructuring charges that we did not book last year.
Fiscal year 2020 will be a challenging year in terms of profitability and free cash flow, as we are still on the road to recovery with our new transformation plan, not to mention the significant negative impact of the COVID-19 pandemic. Therefore, we plan to suspend payment of the dividend for this fiscal year. Our entire team is committed to the implementation and execution of our transformation plan, in order to recover profitability and to return to a stable and sustainable dividend as soon as possible.

This slide provides the operating profit variance analysis for the fiscal year forecast.
Foreign exchange fluctuations, mainly from the yen-dollar rate, are expected to have a negative impact of 40 billion yen. The volume impact, including volume and mix of new vehicles resulting from lower TIV due to the COVID-19 outbreak, parts sales and deterioration in profit of consolidated dealers, is expected to have a negative impact of 425 billion yen.
The decrease in profit from the sales finance business, including provisioning for net credit losses, and costs associated with residual value losses for leased vehicles, primarily in the U.S., is forecast to have a negative impact of 85 billion yen.
The negative impacts from the inefficiency of variable manufacturing costs, due to the decline in production volume and resulting lower utilization rates, and an increase in product enrichment costs are offset by the positive contribution from fixed cost and purchasing cost reduction efforts. The net impact of manufacturing related fixed costs and others is expected to be a positive 120.5 billion yen.
As we stated in May, we are on track to reduce fixed costs by 300 billion yen versus FY18. For this fiscal year, we expect to reduce fixed costs by more than 150 billion yen year-on-year, including depreciation, marketing, and general and administrative expenses.

<Nissan NEXT>

Finally, I want to reiterate our business transformation plan, Nissan NEXT. As explained before, our aim is to bring Nissan back on a growth track in four years, and to build a business foundation by the end of fiscal year 2023 that is sustainable and robust enough to compete effectively for the next decade. To realize this, we will:
Ensure steady, profitable growth without pursuing excessive sales expansion;
Concentrate on core competencies while enhancing the quality of our business and financial discipline; and,
Restore a culture defined by “Nissan-ness” for the new era

Nissan is on track to reduce fixed costs by 300 billion yen against fiscal year 2019 by the end of this fiscal year, as we rationalize our business. We are also streamlining production capacity to 5.4 million units and developing a more efficient and competitive global product lineup. Through prioritization and focus, we are allocating resources consistently to core markets, core products and core technologies, in order to realize a solid recovery and sustainable growth. Essential to support these reforms will be an emphasis on quality and customer needs, and cooperation with our suppliers and dealers.

Nissan is also on track to launch at least 12 new models in the next 18 months as we rejuvenate our product portfolio. In the U.S., we continue to improve quality of sales and brand value with renewed product offerings, starting with the new Rogue, Nissan’s top-selling model, which will be followed by the Pathfinder, the Frontier, and two Infiniti models. In Japan, we have launched the new Kicks, dedicated to e-POWER. We are widening the application of e-POWER to increase our electrification rate to nearly 60% in Japan and to accelerate our momentum. This includes the new Nissan Ariya.

Nissan is also updating and enhancing its lineup in the C/D/EV/sports car segments, where our strength lies.

The Nissan Ariya, which we unveiled earlier this month, represents a new chapter of Nissan and brings forth a new face with our new brand logo. This new crossover EV, the pinnacle of our strength, has attracted more than 20,000 hand-raisers around the world as of today. Ariya will play a key role as a brand driver and an EV frontrunner in this new era.

Nissan faces considerable challenges this fiscal year. The company’s performance is impacted by the tough business climate and our business transformation initiatives. Even amid this difficult phase, by fully executing Nissan NEXT, I am sure that Nissan will achieve a 5% operating margin on a pro forma basis and a 6% global market share by the end of fiscal year 2023, which we set as our milestones with the plan. As I’ve repeatedly mentioned, Nissan has much more potential to deliver. I am determined to carry out this plan, without any compromise, to put the company back on a growth trajectory and revive Nissan once again.

# # #