MMTOF - Mitsubishi Motors Corporation (MMTOF) Q3 2022 Earnings Call Transcript

Mitsubishi Motors Corporation (MMTOF)

Q3 2022 Earnings Conference Call

February 2, 2023 4:30 am ET

Corporate Participants

Koji Ikeya - Representative Executive Officer, Executive Vice President (CFO)

Yoichiro Yatabe - Representative Executive Officer, Executive Vice President

Noriaki Hirakata - Executive Officer, Division General Manager, Corporate Strategy Management Division

Conference Call Participants

Shinya Naruse - Okasana Securities

Eiji Hakomori - Daiwa Securities

Kota Yuzawa - Goldman Sachs

Masataka Kunugimoto - Nomura Securities

Presentation

Operator

Thank you very much for waiting out of your busy schedule. Thank you very much for taking time to attend Mitsubishi Motors Third Quarter FY '22 result announcement. I would like to introduce today's speakers. Koji Ikeya, Representative Executive Officer, Executive Vice President and CFO. In addition, we have Hiroshi Nagaoka, Representative Executive Officer, Executive Vice President and Yoichiro Yatabe, Representative Executive Officer, Executive Vice President, and Noriaki Hirakata, Executive Officer, Individual General Manager of Corporate Strategy Management Division, joining here for Q&A session.

So today, we would like to present our results for third quarter fiscal year 2022. And then, afterwards we'd like to take your questions. The meeting is scheduled to end at 7:30 in the evening. Ikeya please.

Koji Ikeya

Please turn to Page three. So this is Ikeya speaking, the Vice President. And good evening, everybody. Thank you for taking time out of your busy schedule to participate in our Q3 FY '22 results meeting. The environment surrounding us is becoming increasingly uncertain, including the situation in Russia and Ukraine, where the exit is still unknown and the resulting disruption in logistics soaring energy prices as well as facing global inflation at a level not seen in recent decades and the sharp rising interest rate to control them and also concerns over the global recession.

In this business environment. Our business performance showed a significant year-over-year improvement mainly due to continued efforts to improve the quality of sales and to improve our profitability despite the yen's appreciation toward the end of the year.

The net sales for the Q3 FY '22 increased 27% year-on-year to ¥1805.3 billion. The operating profit improved significantly year-over-year to ¥153.7 billion, and the OP margin remained at high level 8.5%. The ordinary profit was ¥154.7 billion, due in part to the impact of foreign exchange rate and net income was ¥130.8 billion.

In the third quarter alone, net sales were ¥647.1 billion, operating profit was ¥69.1 billion, the OP margin was 10.7%. The ordinary profit was ¥53.4 billion, and the net income was ¥48.1 billion. The retail sales totaled 630,000 units on a global basis.

Please turn to Page four. This slide explains the factors behind the only changes in the operating profit for the third quarter FY '22. The volume and mix selling price improved a ¥53.4 billion mainly due to increase in its sales in ASEAN and other reasons which have been our focus and also highly profitable region, and also the progress we made to improve selling prices in each country.

With regard to sales expenses, despite an increase in advertising expenses from the normalization of economic activities in each country. Sales expenses continued to improve by ¥17.2 billion in total, due to a large decrease in incentives mainly in North America. In procurement cost, shipping costs the impact of rising raw material prices, but partially offset by procurement cost reduction activities. However, together with increases in transportation cost and factory expenses, the procurement cost, shipping costs resulted in overall deterioration of ¥54.5 billion. The R&D expenses increased as planned to prepare for the introduction of new models starting from next fiscal year onwards, with a year-on-year increase of ¥11.7 billion. In other expenses an improvement in after sales in domestic subsidiary performance resulted in a positive impact of ¥13.2 billion.

With regard to Forex rate, as you see on the slide, the impact of the U.S. dollars and Australian dollars were significant and had a positive effect of ¥80.2 billion year-over-year. So far, although there was a tailwind in the exchange rate, we have managed to absorb increase the material cost, logistics cost and R&D cost by carefully selling our products mainly in our focused regions amid vehicle supply constraint and pursuing strategy to improve our net revenue. As a result, the operating profit increased by ¥97.8 billion year-on-year even excluding the Forex impact, our profit increased by nearly ¥18 billion.

Next Page five. This slide explains the factors behind year-on-year changes in the operating profit for the third quarter of fiscal 2022. The volume and mix selling price improved by ¥15.2 billion, thanks to increased sales in ASEAN, which have been our focus and also our highly profitable region as well as effects of improved selling prices in some regions.

Sales expenses improved by a total of ¥7.3 billion, mainly due to a decrease in incentives in North America and Japan. Procurement cost and shipping costs deteriorated by ¥19 billion in total, due to efforts procurement cost reduction activities, which absorbed a raw material price hike and deterioration in factory expenses and logistic cost. R&D expenses increased as planned and as a result deteriorated by ¥3.4 billion year-on-year others improved by ¥7.7 billion mainly due to an improvement in aftersales business and domestic subsidiaries performance.

With regard to foreign exchange rate, the overall trend of yen's depreciation continued and the duration in the cost currency type was reversed in other currencies, including the U.S. dollars and Australian dollars, resulting in the positive effects of ¥30.6 billion year-on-year. In total, the operating profit increased by ¥38.4 billion year-on-year. As cumulative third quarter profits continued to increase even without the impact of exchange rate.

Please turn to Page six. Next, I would like to explain our global sales volume for the third quarter FY '22. The retail sales were 630,000 units down 8% year-over-year mainly due to the impact of a constraint and production volume caused by a shortage of semiconductors in other parts, as well as a shortage of vessel availability.

The decline was substantial, particularly in China, which maintained a zero COVID policy and in Europe due to a smaller model lineup as well as the impact of the suspended car supply due to the Russia and Ukraine issues. The sales volumes in North America were also significantly impacted by the car supply shortages.

From the next page, I would like to discuss the sales status of our core markets and North America as well as Japan.

Please turn to Page seven. First of all, I would like to explain our mainstay ASEAN region, and cumulative Q3, the retail volume increased by 17,000 units, which is a driver of improved OP margin. So first, Thailand. Thailand completely abolished immigration restrictions in October last year and has been accepting more tourists, therefore, we expected the market to recover. However, the demand did not fully recover due to factors such as flooding in some regions and the decline in purchasing power caused by inflation.

We achieved year-on-year growth in unit sales with our core models, such as XPANDER and PAJERO SPORT and secured almost the same market share as in the previous year, amid an increasingly harsh environment with competitors introducing new models. We continued to focus on improving the quality of sales introducing digital tools, strengthening our sales platform and prepare for new models that to be launched from next fiscal year onwards.

In Indonesia, the demand slowed mainly in the passenger car segments because of the intermittent interest rate hikes since last September inflation and fuel price hike resulting from the reduced fuel subsidies affecting on the consumer sentiment. On the other hand, the demand for the commercial vehicle segment remained steady at core prices and the results related to prices remain high. We did not follow the intensifying price competition. But we will carefully communicate to our customers focusing on event marketing which we accelerate. As a result our unit sales have been gradually increasing along with the new XPANDER CROSS.

Meanwhile, the commercial vehicle segment although the orders were [fine] [ph], retail sales declined due to vehicle supply constraint and also delay in getting approval for TPD in the fourth quarter. However, the import quota issue has already been resolved. And that will contribute to the retail sales in the January-March period. While closely monitoring the uncertain macroeconomic environment we will continue to implement appropriate sales measures, striking the balance between the sales volume, profit and loss and market share.

In the Philippines, despite the tightening of monetary policy by the Central Bank due to the continued rise in policy interest rate, that is an attempt to control the highest level of inflation we have looked in for the first time in 14 years. And also the consumer sentiment improved due to an increase in remittance from migrant workers and also a decline in employment rates. And those have supported people's willingness to purchase automobiles in addition to strong orders for the new XPANDER which was launched in last May, and the sales of MIRAGE and MIRAGE G4 was significantly higher than planned due to relaxation of the bank loan examination amid the robust demand, we will continue to experience nervousness because of unstable supply and availability of fresh inventory affecting the sales performance. However, we will strive to extend sales by strengthening our face-to-face sales, which are gradually coming back.

Next Vietnam, the market as a whole is slightly sluggish due to a reaction to the last-minute surge in demand from April to May last year. However, we enjoyed favorable sales of the new XPANDER which was launched in last July and both sales volume and market share extended. We will continue to have the new XPANDER as our core model. And we'll aim to achieve our full year plan by expanding sales of TRITON which is performing well with relatively stable supply and inventory and also OUTLANDER which is performing well since we introduced the annual change model.

The Malaysia market continues to be firm, and we continue to see strong sales and the order backlog has been gradually resolved.

So next Page eight. In Australia, the overall demand improved to the fiscal 2019 level when the impact of the COVID was minimal. In this environment, we were significantly affected by car supply constraints similar to peers. We made our every effort to eliminate vehicle supply constraints by negotiating with logistics companies and changing equipment specifications to avoid the restricted part supply portions. In addition, the new OUTLANDER has been extremely popular resulting sales increase year-on-year basis. The vehicle supply constraints continue, and we still have many back orders. We will work to minimize order cancellations through meticulous follow up. I'll repeat it again. So we will work to minimize order cancellation through meticulous follow up for customers who have been waiting for a long time or who have experienced significant delivery delays.

Let me continue. In New Zealand, although demand was driven by PHEV EV models boosted by the Clean Car discount initiative. On the other hand, total demand fell below the previous year due to a decline in consumer sentiment in the background of rising inflation rates and the decline in demand in the commercial vehicle segment which has a large amount of CO2 emissions due to the impact of the introduction of CCD program. Under these circumstances, we gained our market share year-on-year by strengthen sales of ECLIPSE CROSS PHEV model and OUTLANDER PHEV model, which are subsidized by the CCD program from the beginning of FY '22.

Going forward we will continue to focus on supplying PHEV series which in strong demand and conduct promotional activities related to PHEV to drive market expansion as the PHEV leader.

Please turn to Page nine. Next, I would like to talk about the current status of our North American business. In the North American market. So it has not recovered yet due to a decline in demand caused by the shortage of vehicle supplies that was caused by semiconductor supply constraints since the previous fiscal year. While cumulative Q3 sales volume have remained negative compared to the previous year. Total demand in the September-December quarter has exceeded against the previous year. And we have begun to see signs of recovery from the sales decline due to the inventory shortage.

We prioritize to deliver the limited inventories we had to dealers for retail sales in the first half of FY '22 which has resulted in a significant decrease in the fleet sales from the previous year, resulting in a decrease in total retail sales year-over-year. Sales of OUTLANDER our main core model also was sluggish due to a lack of inventory. But inventory conditions have begun to improve since Q3, we will strengthen our sales by conducting marketing activities for ICE and PHEV models together. While a negative impact on the economy from the rapid monetary tightening by SRV is becoming a concern, some manufacturers are raising incentives after seeing inventories normalizing resulting in intensifying the competitive environment.

We strive to maintain the quality of sales that was improved by the new OUTLANDER and secure sales volume appropriate for our scale or business.

Please turn to Page 10. Finally, I would like to explain the status of our domestic market. Although demand in Japan has surpassed 100% year-on-year for four consecutive months since September, showing some signs of recovery, although it did little by little. In addition to the new OUTLANDER PHEV model and the ECLIPSE CROSS PHEV model, we expand our electric model lineup by launching mini cars eK X EV and Minicab MiEV, which resumes sales in November. We also enjoyed the strong audits for all of those products.

On the other hand, due to vehicle supply constraints coming from the shortage of semiconductors, we actually making customers wait. Going forward, we did not expect material cost hike and also semiconductor shortage problem will be brought under control in the short-term. And we expect this will continue to have an impact on our production and unit sales. In this environment, we will strive to further increase sales by introducing products that embody the characteristics of Mitsubishi Motors, in addition to the long serving of PHEV and BEV and other electric vehicle series. And we will also strive to improve the quality of sales by focusing on enhancing servicing quality and customer service quality.

Please turn to Page 12. In the third quarter for fiscal 2022 we continued to maintain strong momentum through the first half achieving favorable results. Although there was a favorable impact from the foreign exchange rates, we believe this is a result of our concerted company-wide efforts to resolve issues. Nevertheless, uncertainties have been drawing to an unprecedented level due to the factors like continued unstable operating environment and the possibility of worried global economic downturn as well as volatile FX market.

Based on a careful consideration for the impact of these factors, the full year earnings forecast revised in November will remain unchanged. Only net sales have been revised from ¥2.53 trillion to ¥2.48 trillion in line with the revision of the wholesale volume.

Please turn to Page 13. We have revised analysis of the operating profit variance forecast for FY 2022 from the previous fiscal year as shown on the slide in accordance with the current situation. Despite the attainment from the exchange rates, we are expecting to counteract the impact of soaring material cost by our sales efforts. Regarding the impact of volume and mix and mix selling prices. The forecast for the wholesale has been revised to reflect the impact of the shortages of vehicle supply to-date and to the overall positive impact of ¥75.8 billion is affirmed.

With regard to service expenses. The effect of curbing the amount of incentives has been more sustained than expected and we expect an upturn of ¥15.6 billion in total. In the procurement and shipping costs, although we will pursue the procurement cost reduction activities as planned, we expect a total deterioration of ¥94.6 billion and due to the rise in both material prices, soaring material costs, including semiconductors and the deterioration in transportation and factory related costs. And on the expenses, are projected to increase as planned and we anticipate an increase of ¥11.3 billion and in others we anticipate worsening of ¥13.6 billion on the assumption that personal expenses and local procurement cost will worsen and general expenses will increase.

As you can see, the impact of exchange rates has been revised in line with the current exchange rate level and an upturn of ¥110.8 billion is expected.

Please turn to Page14. As a result of a review and the factors being changed in the operating profit forecasts for FY 22, the elements that have changed we have shown on this slide. Regarding the impact of volume and mix selling prices, we have revised forecast for wholesales to reflect the impact of the vehicle shortage to=date. As a result, we have seen a deterioration of ¥6 billion from the volume.

Sales expenses are expected to improve by ¥7 billion is reflecting the sustained effort of driving the amount of incentives amid the vehicle supply shortage. The impact from the foreign exchange rates is expected to be ¥1 billion worth considering the factors such as appreciation of yen in the expected amount announcement for the modification of the monetary easing at the Bank of Japan meeting held in last December, amid this peeking out of the prolonged appreciation of U.S. dollars. The other elements have generally in line with the previous analysis.

Please go to Page 15. Digital shortage of semiconductors and other parts, production constraints are more widely affected than initially estimated, and a worldwide shortage of vessels are also impacted. As a result, we revised our sales volume forecasts from 908,000 units to 866,000 units. Mainly we have changed our forecast in China, where the demand remains sluggish due to the government remain a zero COVID policy until the end of last year. And in ASEAN and North America, where the impact of vehicle supply shortages were relatively large due to the lockdown in Shanghai and the semiconductor shortage.

The vehicle supply shortages despite the signs of recovery in an unstable condition and we are still facing the difficulties in handling. However, we are making every effort to achieve our revised status volume forecast by carefully selling attractive EV lineups that embody Mitsubishi Motors uniqueness, such as eK X EV, OUTLANDER and OUTLANDER PHEV. which have been steadily rolling out globally and expanded.

Please turn to page 17. About the business highlights, the all-new eK X EV which has been well received since it was launched in last May has won the 2022 to 2023 Japan Car of the Year and the Kei-Car of the Year organized by the Japan Car Over the Year Committee. This award together with that Car of the Year 2022, 2023 award from the Japan Automotive the Hall of Fame, same ended RJC Car of the Year for 2022 to 2023 run by the Automotive Researchers and Journalists Conference of Japan or RJC that made us Triple Crown win in Japan which is a great honor for us. We believe that these results are the evidence that the electrification technology that we have honed over the years and our underlying strength in car manufacturing have been highly evaluated.

We will continue to deliver vehicles that embody Mitsubishi Motors and that's a combination of safety, security, comfort and environmental friendliness. While contributing to the realization of a Carbon Neutral Society.

Please turn to Page 18. Team Mitsubishi Ralliart which received technical support from us participated in the Asia Cross Country Rally or AXCR 2022 that run from November 21 to 26 in Thailand and Cambodia with a TRITON which is the drifty one for the best cross-country vehicle. One of the two finished in the first place and the another finished in the fifth place. For this year AXCR, we build on the high reliability and durability of the TRITON by tuning the engine and chassis and entered the rally with specifications relatively close to the production car. Even so, the two TRITON rally cars delivered powerful driving and brought superb performance. We'd like to see to the knowledge we gained through our participation in AXCR, back into the development of production vehicles and way to be Mitsubishi vehicles that are even tougher, more powerful and more reliable.

Please turn to Page 19. On Friday, January 13 to Sunday, January 15, we showcased our new DELICA MINI light super height wagon at the Tokyo Auto Salon 2023 one of the largest customer car event in Japan. The new DELICA MINI is a powerful styling allied Super Height Wagon, unique to SUV with a design theme of daily adventure.

With the growing popularity of outdoor leisure in recent years, the concept of DELICA series will be filled with light super height wagon and the new DELICA MINI will began to sell in coming May.

We started the reservation orders on Friday January 13, and have already received around 4000 orders, which we made a good start. The new DELICA MINI is scheduled to be exhibited at the Osaka AUTOMESSE 2023 at INTEX Osaka on February 10 to 12. Mitsubishi Motors booth will continue to propose the appeal of environmentally friendly, safe, secure and comfortable Mitsubishi vehicles with the theme of the next era adventure.

The final page. Page 20, three years have passed since the spread of COVID-19 infections, but it seems that we are finally heading towards the end in conjunction with the implement in the vaccination ratio. On the other hand, the macro environment surrounding us seems to be increasingly uncertain due to the situation in Russia and Ukraine, where there are no prospects for solution energy prices, which are rising rapidly as a result, raw material prices soaring, inflation at unprecedented levels, but it rises in interest rates to curb inflation and the concerns about the future economic downturn.

The environment surrounding the automotive industry itself is also changing on a daily basis. Why do we still cannot be optimistic, the semiconductor supply system is gradually enhancing. The global shortage of vessels is, however, not showing a sign of subsiding and it is likely to take certain amount of time to resolve that shortage in vehicle supply.

Under these circumstances, our performance has improved substantially year-over-year, due to the benefits of our efforts to improve profitability, which we have been pursuing since last year. Although the environment surrounding us is changing day-by-day and difficult to deal with, we will continue to make every effort to further improve our profitability and achieve the forecast for FY 2022, the final year of the current mid-term plan. Thank you.

Question-and-Answer Session

Operator

We apologize for the sound and also the image problems that we experienced. So now we would like to move on to the Q&A session. But we apologize but English lines only for listening. [Operator Instructions]. So from the Mr. Naruse from the Okasana Securities.

Shinya Naruse

So this is Naruse speaking from Okasan Securities. Can you hear me? So I'm sorry that I have to turn off my camera. But so since I'm the starter, so I would like to ask a question related to the summary of Q3. So first of all, thank you Ikeya San thank very much for giving us a thorough explanation. And I'm very impressed with OP rate more than 10% and I know Forex did help. But I would like to ask, is there any one time seasonal or one-off reasons why these numbers are really good? And also, we see a lot of improvement from Q2 to Q3. So in addition to the Forex, you mentioned about working on reducing the incentives in the U.S. but still, you have managed to raise the profit significantly from Q2. So can you elaborate a little bit more on how we're contributing to this good result from Q2?

And you mentioned that so, you did not revise the profitability forecast because of the uncertain environment and also the Q4 and forecast a lower number. So Q2, Q3 to Q4 the trend of the profitability. Is that because of only the forecast, or would you share with us about if your original assumptions remain the same or not?

And the second question is about your next MTP. So I know the dividend is not yet finalized. And next year onwards, you have a series of new launches. So I understand various activities that are underway. But what is the level of profitability are you aiming for next year onwards for the next MTP, you enjoy the really good profitability in Q3, so we understand what are the activities that are planned for next year onwards, but if you could give us more like a numerical reference for what you are planning to achieve through those activities next year. So those are the two questions.

Koji Ikeya

Naruse San, thank you very much. So this is Ikeya speaking. I would like to reply to your first question. So your first question is about, for the Q3 the numbers are really good. And so you want to know, what are the one-off elements that are contributing in these numbers or are they our real performance to earn. And then also about the full year, so we believe that it will slow down in Q4. But I would like to comment a little bit on that as well.

So first of all, Q3 we have managed to enjoy. So 69 billion. So that was a really good number. And it will be right as well above 10%. So for the trend in a one-off is, it meant if the Forex, the Japanese yen, change to on the appreciation side, so 143 yen for the Q3. And compared to previous year, that itself was worth 30 billion. But even excluding the Forex impact, compared to the previous year, our performance was better, the revenue was higher. So last year was 31 billion and excluding Forex, it was still 39 for this time, so we did improve. The initiatives, we rolled out mainly in ASEAN, and then also the company-wide profitability improvement activities, those are now bearing fruit, I believe, and also in ASEAN region.

COVID, so for the last two years, we struggle because of the because of the COVID situation. But for OP right now it's close to 11% for the Q3. One is the demand orders, some degree of difference, but 10% or 20%, the recovery in the economy in general, each country know them, and then also models like TRITON which is close to the end of the lifetime. We are rolling out various initiatives and also XPANDER is contributing a lot of development not only in Q2, but ASEAN recovery is really contributing to our performance in Q3. So that's what I believe.

And then also about North American market, if you look at the profitability, it's high as well. The market situation is now slowly but changing and we are continuing to control the incentives and then controlling the incentive levels to other Japanese OEM level and also various marketing measures being implemented as well.

So there is some one-off forex impact as well. But even excluding that, I think we can say that all the initiatives we have been promoting really coming into fruition in Q3. And then, also another one, for Q4, we believe they do like 165. And I'm sure I mentioned about this earlier, but between Q3 to Q4, the reasons for the decrease are that -- so there's like -- simple about a 500 drop. But as you know, the Japanese yen, well, because of the change they need policy by the Bank of Japan, the Forex assumption is now being affected or changed about say the change from ¥143 to ¥129. So, if you calculate the difference and that corroborate the difference.

And then also another point is that majority of like payment settlements are slated in Q4 mainly for the steel and also [indiscernible] and EV related raw materials, those prices are still high. So, Q3, if you remove the Forex impact, steel, the situation was good. But in Q4, the Forex impact and also the raw material cost negative impact will be booked in Q4. And then also the various other factors that we are monitoring in the market. But we will continue to rigorously control the fixed cost. So, we say 170 billion is what we are aiming for. So, that's the say, my comment for the Q3 and also the full year forecast.

And I think I would like to ask another person for the commenting on the MTP.

Noriaki Hirakata

So Ikeya, of course, we cannot give you any numerical reference for the next MTP. But like Ikeya mentioned for about Q3. So looking at the models available in Q3, it's not that we're competing with branding model, for example, TRITON has been in the market for seven, eight years. So but even for those older models, we are working together with our sales colleagues and make sure that we ensure certain profitability or sales, prices. And so it's in the U.S. as well. They manage to stay strong in Q3. And if you look at data, you can tell Japanese OEMs with like a brand-new models, actually, we incentive is like similar to those level and our customers are still purchasing from us. So it really shows our sales efforts.

And what's going to happen in next term is that we believe that we can further strengthen our sales efforts. So we haven't really clearly mentioned about we are planning to have a say, new models launch next year, so our cash cow models will be renewed, and then also the negative impact coming from these semiconductor supply. We believe that will be resolved gradually. And then, we'll be able to actually compete in the market with the brand-new model’s next term.

So of course, we need to brace for what is going to happen with Japanese yen appreciation, for that negative impact we cannot control. But for other areas, we will continue to steadily roll out our initiatives. So that's all I can say right now, although Japanese yen is getting stronger, but it doesn't mean that we don't have any cards to play. So we don't expect the Japanese yen situation is going to create a havoc in our business.

Operator

Did we answer your question, Mr. Naruse?

Shinya Naruse

Thank you. Sorry, my microphone was muted. Thank you very much. Just one, so that the dividends and also the return to shareholders, what's your plan right now? I'm sorry, my question is not very specific.

Koji Ikeya

So, for us, we have no -- whether we are going to pay dividend is not yet decided at the moment. But as we reported to you that dividend issues like in the resources because we are earning more profit. At the same time from our overseas subsidiaries, we are receiving dividends and we have positive and we're making profits. So I think we do have a sufficient in resources in order to restart paying resources for the dividend. But if we are going to restart paying the dividends then it has to be sustainable. And within the framework of growth strategy, we want to confirm that it will be sustainable. So within this fiscal year, we want to come to, if we wish to come to a decision to restart paying out dividends.

Shinya Naruse

Thank you.

Operator

Naruse San, thank you very much. So next, Mr. Hakomori from Daiwa Securities.

Eiji Hakomori

Hello, good evening. This is Hakomori speaking from Daiwa Securities. I have two questions. So first one is about the sales volume you revised downwards by 40k. And I think it is mainly because of the semiconductor part supplies and also the vessel availability. So, I would like to receive an update on those issues, although you said you have seen time recovery? And then, second question is that, so from ¥50 billion drop between 3Q to 4Q. And half of them coming from Forex difference. And then also, there's an increase in material cost in Q4, but although you try to partially offset with controlling the fixed cost.

So, the cost which you expect to see an increase, I would like to ask how conservative your assumption is, because historically, you usually generate profit in Q4. So, but now you're saying that Q4, your revenue will shrink, and it doesn't really ring a bell to me. So that is why I would like to ask for your perception on this.

Koji Ikeya

First of all, so I think for the first one, the semiconductors and also the vessel availabilities, and raw material prices, like market trends. So those comments I've already touched on, but I can elaborate a little bit more. So how we see is, for the semiconductor issue, so now, we've been saying that it will recover, but then it didn't recover as fast as we thought it would. But in the second half, finally, we are starting to see a sign of recovery. So meaning that the degree of negative impact is becoming less, but still, there's a gap between the supply and the demand. So compared to the amount that we need, of course, that will not be fully supplied. And that situation probably will continue for this year, next year as well.

So compared to last year, so there was a negative 77k. And then, 64k, so there's a difference, and second half is 13k. So in the Q4, we believe that negative impacts will be reduced gradually. But we're also struggling to secure enough vessels for transport and this is in COVID situation. And like I do know, the supplies of the vessel like -- the validated vessels been reduced overall in the global market. And I think that situation probably will continue this year next year as well.

So probably 80,000 in total is a full year impact. Though the impact that we believe to take place in Q4. So as I mentioned earlier, there are various negative factors throughout the year, but especially for Q4, the settlement for raw material purchase takes place in Q4, mainly steel. So there's a seasonality between Q1, 2, 3 and 4. So Q4 tends to get hit harder than other quarters for the raw material prices, but in the past few years under the tight raw material supply situation. I think that is highlighting more the seasonality in Q4. So like you said in the past, yes, there were times where we had a profit -- more profit made in Q4. But we worked on to equalize the profitability throughout the year instead of just concentrating the profitability generation in Q4. And then, the second question, did I answer to both the questions?

Eiji Hakomori

Yes. Thank you.

Operator

Thank you very much. Next from Goldman Sachs, Yuzawa.

KotaYuzawa

Yes. My name is Yuzawa from Goldman. I have two questions. Number one, about inventory levels, would you please give me the update? I understand there are some supply constraints. But toward the end of last year, retail, there are some regions that it was a bit weaker. So, I want to know, the updated status. And that was somewhere between 20,000 to 30,000. That was a figure I got in September, the range. So, in about the inventory and the timing of when it can be normalized, could you please give me the answers.

And the second question is, in the USA, I understand, we know the prices in the destination, but your margin is at a very high level right now. You said that they were able to like control, the profit margin, but in the coming one year or two years in the U.S., what is the outlook? End of '23, you are going to launch new models in ASEAN. But do you think you can maintain this high level of profitability in the U.S. going forward? Thank you.

Koji Ikeya

Thank you very much for the questions that Mr. Yuzawa. The first question was about the inventory. And we usually disclose our total inventory, how was the level towards the end of last year and also our outlook on the stock level. Total inventory in distribution and including other inventory. Our adequate level is about 310,000 units or three months’ worth of inventory as we announced before. It was two years ago, at the end of March 2021. We were able to reduce our excessive inventory remarkably down to 310,000 units. At the end of last year, it was down to 250,000 units. But because of the supply shortage 230,000 units at the end of June, and at the end of September, it was 255,000 units.

At the end of December last year, it was 270,000 units increase over 15,000 units. Overall, we were able to improve or recover our inventory level to that level and about 15,000 units. And because of the demand-supply balance for semiconductor improved and we were able to improve our inventory level to 270,000 units. However, it's not you know, sufficient for the supplies and so forth towards the fourth quarter. And then, I think this is still the end of the fourth quarter. This situation will continue that's our view.

Unfortunately, concerning the U.S. the profit outlook in the coming one or two years. First of all, I want to tell you something, there is like regional profit. And based on how you account, your profit, in FX impact it's not in the scope for Q3 FY 2022. So there was a question about -- there was any long-time impact that you said, yes, FX. So FX impact is, all accounted in the U.S. It looks amazing from analyst viewpoint but some of that should be counted in Japan, but it's not converged into U.S. So profitability by region, maybe our method is too simple, which is misleading. And of course, next year FX rate changes, then we have to change how we book profitability otherwise our profit looks so low in the U.S. So we have to see this from the consolidated viewpoint. But finally in the U.S., our dealers have enough inventories and customers can come into our showroom and we have in there enough stock so that they can buy in our showrooms. And we know below the line, above the line incentives and we did not properly allocate our resources.

We need to devise better ideas for marketing approach so that we can expand ourselves. Yes, we are impacted by FX. But looking at the coming year, we assuming there will be major change in the U.S., the answer is no, we don't expect a major change in the situation in the U.S. That's all. Maybe you're on mute.

Kota Yuzawa

Thank you very much. My first question, I understood your answer. Well, as a follow up question. Retail situations performance in Thailand and others, it looks weak. So I understand this is -- there's no concern on the demand side.

Yoichiro Yatabe

This is Yatabe speaking. I want to answer that question. To give you a conclusion first. We want to prioritize our profitability. We want to value our profit, not only profit, but also brand. In Thailand, as we have been explaining, so far, towards the end of life of our current model. But you have to bridge to the next model in the middle of last year, we have raised the prices, [indiscernible] in market share has been probably a little bit going down. But we want to make sure that we want to sell the client models to get ready for the next model. In XPANDER service performance is strong. Indonesia, they are mixture of reasons. In market share within ASEAN market, total demand is flattish in Indonesia, especially like a subsidy fulfills and so forth from different perspectives. The overall market is quite tough at the moment. But for us yes, we did have a supply issue in addition to that.

Like in a finished product, input from other markets, we have to get approval from the Indonesian government, but we were not able to get approval as we planned. So we expected higher status volume there. However, we were not able to achieve that level. Next is about XPANDER. Our competitors, they will launch new models, or the Korean carmaker is going to launch their new model too. So there are those effects, pricing wise. There are so many activities going on in the market, but we are not following them. We want to keep our current price and there is a big gap between their price and our price right now. Of course there are some going down, but we need to endure this situation and we have to keep fighting. That's all. Did I answer your questions?

Kota Yuzawa

Thank you very much.

Operator

Thank you very much. And next is Nomura Securities, Kunugimoto.

Masataka Kunugimoto

So about sales and cost, I have one question each for the sales and the cost. First of all about the sales, depending on the market, I guess the demand the robustness and the demand varies. For example, Australia, Oceania, I believe that the demand is quite solid, but the U.S. sales are looking at that. So some of the inventory day is 60 days over but still I see a 10% drop. So OUTLANDER is, an old data set inventory dated 70 days. So I know partially you mentioned that the goods are not really delivered to the site, the location of the dealers, so they are in transit, or they are at the port and because of that you don't count them as an inventories yet. Or the U.S. the environment is becoming more competitive. So you need to do more sales promotions in order to create a retail sales.

So if you could give more information about especially in the U.S. and Oceania, like a bigger regions, because you were explaining about the ASEAN. So if you could tell about each characteristics of the market when it comes to demand. And then also about the third quarter and also the fourth quarter raw material prices, you mentioned that there are some seasonality to what that from, but when you compare the raw material costs between this year and also last year, and what should we expect as a deterioration of the material costs for the year to come and also for the fixed cost? I believe that fixed costs will increase because of the cost of dye for the new models. But in the Forex situation is not as favorable as it was before. So I would like to know, what are the area of the fixed costs, which you think are controllable? Thank you.

Yoichiro Yatabe

This is Yatabe speaking. For the first question, I'd like to reply. It's about Australia. So the demand is quite solid, the overall demand is quite solid, and so is our sales. So from the supply perspective, because the ships do need to deliver. So because of the we actually have a quite a high back order was like several months. I mean, meaning in the higher number of the months. Actually, we have all of the backorder in Australia. So honestly speaking, if I could find a more vessels, I would like to send those vessels to Australia, to be honest. And then, about the U.S., for the second half, so compared to the last year, second half. In particular, the supply of OUTLANDER we have managed to recover. So, finally, the vehicles are arriving in the U.S. market, one after another. So we have been maintaining the current sales activities. But of course, we will monitor our competitors and do what we need to do for the sales activities, but because we're not going to go beyond our means. And for this year, we didn't -- we hardly did any fleet business. almost zero unit close to zero unit. So, but the retail, we have managed to sell the same level as the previous year. So we'd like to maintain that momentum. So that was for the first question.

And the second question especially for next term, about the fixed cost and the cost related topics, like how should we consider them, of course, we will -- we are working on that as we speak. But the overall mindset as you know, back in 2020, we have brought down our fixed cost level significantly. And then, since then, because we did a 20% reduction in fixed costs, and we applied, so the 20% reduction over one year. So that really became a momentum for activities in 2020/2021. And also in addition to that, the profitability improvement activity is now generating more as an add on. So that's how we have been doing so far. And that overall approach, we're not going to change next year. For the fixed cost controlling is the modulation is very important. So when I say modulation, for next year, we will have more newer models coming into the market. So like you mentioned new models will come in advance. So it's in Japan, the other company. So for those of course a fixed cost will increase to prepare for those new models.

And then also the indirect labor costs. Overall, it is about trends in order to counter the inflation and others like we do need to do what is necessary for our growth strategy, capital outlay, and so on. So for those in the relative term, of course, those elements will increase. But of course at the same time, we do need to look and place a cap overall for the cost and then work on other like a general expenses. But overall, because next year we'll have a series of new models because of that, we will have more burdening on the cost including depreciation, but like Hirakata San mentioned various initiatives we have been working on in mainly at the end, if not will bear fruit specially for the launches of new models next year. And of course, we do need to make sure to manage the costing.

And also we do need to take into account the interest rate and also, the market situation is always still uncertain depending on the countries in ASEAN, some countries decided to raise interest rate, and also the Forex, as the Japanese Yen is on the appreciation side now. So the negative impact coming from the market situation as well, but we would like to respond to each of them in the appropriate manner.

Masataka Kunugimoto

Thank you very much. And about the raw material, overall, next year, because this year the raw material cost did increase a lot. So for next year, do you regard that level to be the same this year no further increase?

Yoichiro Yatabe

So this year, because we are still working on budget for next year, so we cannot comment in detail of that. Same time last year. So [indiscernible] price did go up significantly, but now they're stable. And then, the situation, a trend is different for raw material type. So last year, when the incident happened, Russia and Ukraine, I don't think we have that significant, like a difference. It will take place next year. But we'll have some of the increase and decrease depending on the raw material, but I don't think to the degree of when we had the breakout of the war. The fixed costs will increase and also the Forex will work not in your favor. So that means that you'll continue to work on controlling the cost and bringing down the cost with the launches of the new models. Yes.

Operator

Thank you very much, Kunugimoto San. So we are approaching the time we are supposed to finish. So this is the end of the Q&A session. And also this is the end of it. Thank you very much for your participation today despite your busy schedule. Thank you.

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Mitsubishi Motors Corporation (MMTOF) Q3 2022 Earnings Call Transcript