YOKOHAMA, Japan – Nissan Motor Co. CEO Hiroto Saikawa warned that his company’s earnings will drop to “rock bottom” before making any improvement but outlined plans to restore global operating profit margin to 6 percent and reboot the flagging U.S. business.
Saikawa’s dour outlook came on Tuesday as Japan’s No. 2 automaker reported a 45 percent plunge in operating profit for its fiscal year ended March 31. Net income dropped 57 percent.
And Saikawa, battling to reform Nissan in the wake of a corporate governance scandal triggered by the arrest of former chairman Carlos Ghosn, pulled no punches about the outlook.
Operating profit will erode by another 28 percent to 230.0 billion ($2.08 billion) in the current fiscal year ending March 31, 2020, while net income almost halves again, dropping by 47 percent to an expected 170.0 billion ($1.53 billion), Saikawa said. Operating profit margin will dwindle to 2.0 percent, from 2.7 percent in the just-ended fiscal year.
“We would like to hit rock bottom in 2018 and 2019 and reverse the trend in the following years,” Saikawa said during the carmaker’s financial results announcement.
“Now is the time to take bold action,” Saikawa said.
Looking ahead, Saikawa promised things will improve by the fiscal year ending March 31, 2022. But he also scaled back initial targets for that period.
Recovery plan
Nissan now wants operating profit margin to recover to 6 percent by then, rather than the previous goal of 8 percent. Saikawa is also targeting revenue of 14.5 trillion yen ($130.84 billion) in that span, down from an earlier goal of 16.5 trillion yen ($148.89 billion).
In the just-ended fiscal year, Nissan’s revenue slid 3.2 percent to 11.57 trillion yen ($104.40 billion), as global retail volume declined 4.4 percent to 5.52 million vehicles.
To boost results, Nissan will embark on a restructuring program that will cut 4,800 workers worldwide in an effort to generate gains of 30 billion yen ($270.7 million).
In the critical U.S. market, Nisan wants to restore retail volume to a level around 1.4 million vehicles, from around 1.35 million it expects in the current fiscal year.
U.S. operating profit margin stands around 1 percent to 2 percent, Saikawa said. He wants to lift that by 5 percentage points by slashing fleet sales and incentives.
“We want a recovery in the U.S. operation, which used to be a big source of profit,” he said. “In the past, we overstretched to grow our business. Such surgery should be done fast.”
Nissan had warned that results would be ugly.
In April, the Japanese carmaker slashed its profit outlook for the second time in two months, partly due to quality problems. Nissan blamed the twin problems of falling sales and rising warranty costs in the U.S. market, the carmaker's traditional profit center.
Profit hit
As part of the full-year report, Nissan also booked a 9.23 billion yen ($83.3 million) charge for the deferred compensation allegedly owed Ghosn.
That amount, covering the 2009-2017 fiscal years, is the crux of two of the four indictments against former the chairman, who is free on bail in Japan.
In those cases, prosecutors accuse Ghosn of falsifying official company financial filings by failing to report the income as a future liability against the company.
Ghosn maintains his innocence saying the compensation in question was neither finalized, nor disbursed. Therefore, he argues, there was no obligation to report it.
Like its Japanese rivals, Nissan is being buffeted by slowing demand in the key markets of the U.S. and China, as well as by uncooperative foreign exchange rates.
The Japanese yen’s appreciation against the U.S. dollar and other currencies took a 65.4 billion yen ($590.1 million) bite out of operating profit in the just-finished fiscal year, while rising costs for raw materials and tariffs dented results by 84.7 billion yen ($764.3 million).
Higher investment in product and technology depressed results by 60.5 billion yen ($545.9 million).
And high quality outlays and deteriorating sales performance combined to cut another 46.0 billion yen ($415.1 million), hurt by sliding sales in North America and Europe.
Nissan faces the additional headwind of trying to reposition the brand in the U.S. to move it away from its discount image by reining in incentives and fleet sales. Executives have said improved profitability is taking more time and money than expected as it struggles to cut back marketing expenses at a time when demand has peaked and customers are seeking deals.
To shore up profits in North America, Nissan said this year it would cut 700 workers from a factory in Mississippi amid slowing sales of trucks and vans.
Patience please
In the crucial North American market, regional operating profit sunk 64 percent to 72.1 billion yen ($650.6 million) in fiscal year, as retail volume slid 9.3 percent to 1.90 million vehicles.
Saikawa called for more patience with what he calls the “normalization of sales.”
Nissan Group retail sales in the U.S. declined 6.3 percent to 1.49 million vehicles in calendar year 2018 in an overall market up 0.6 percent. The group’s U.S. volume fell 12 percent in the first three months of 2019, worse than the overall market’s 3.2 percent retreat.
Saikawa is trying to pivot the company away from profit-draining fleet sales and incentives in the U.S. in an attempt to shore up brand value and margins.
Saikawa has said Nissan is prepared to sacrifice some volume to bolster margins. Early last year, the company began pulling back fleet deliveries, culling bloated inventories and easing pressure on dealer sales-incentive programs, even as the U.S. light vehicle market softens.
In the January-March period, average spiff spending on Nissan and Infiniti brand cars by Nissan North America Inc. dropped 6.1 percent to $3,750. But outlays were still above the industry average of $3,574 per vehicle, according to figures from Autodata Corp.
Average industry outlays declined 4.6 percent in the quarter.
The Nissan brand’s incentives fell 8.5 percent in the January-March quarter, from a year earlier, to an average of $3,393 per vehicle. Average spending at Infiniti increased 8.8 percent to $7,192, according to figures from Autodata Corp.
By contrast, average U.S. spiffs at Japanese rivals Toyota, Honda, Mazda, Subaru and even Mitsubishi were all below Nissan’s in the January-March period. Each of those makers, with the exception of Honda and Subaru, also managed to dial back incentive spending in the quarter.
Blaming Ghosn
Saikawa blamed Nissan’s dire balance sheet on the strategies of his predecessor Ghosn.
He said Ghosn recklessly pursued volume by stoking sales with incentives and fleet sales and neglected investment in new product for key markets such as the U.S. by diverting funds into plants and a new Datsun brand for emerging markets.
That has now saddled Nissan with worldwide overcapacity at its factories, Saikawa said.
“Most of the problems that I presented today are the negative legacy coming from the old leadership,” Saikawa said. “We would like to make recover happen as soon as possible.”
Ghosn, who saved Nissan from the brink of bankruptcy in 1999 and combined it with Renault and Mitsubishi into the world’s largest automotive group, sees it differently.
In a video message recorded last month, the day before he was sent back to jail following his fourth arrest, Ghosn blasted Nissan for “absolutely mediocre” performance. He cited a string of profit warnings, declining share price, lack of leadership and “many scandals.”
“For somebody like me, it’s sickening,” Ghosn said, decrying Nissan’s current state.
Indeed, before his first arrest on Nov. 19, Ghosn was so disenchanted, he even planned to remove Saikawa as CEO, people familiar with his plans told Automotive News in December.
But Nissan was already in a downward trajectory during Ghosn’s last year as CEO, when he shared leadership with Saikawa. Operating fell 6.4 percent in the fiscal year ended March 31, 2017, and Ghosn missed both headline targets of his Power 88 mid-term business plan.
Operating profit margin came in at 6.9 percent, instead of 8 percent. And global market share actually declined to 6.1 percent that year, instead of expanding to the targeted 8 percent.
Nissan’s share price is down. But its biggest slump came in the wake of Ghosn’s arrest.
