Tata Motors Ltd (TTM) 2018 Q2 法說會逐字稿

Thank you. Good morning, good afternoon, and good evening to everyone who's taken the time to join us on the call. I know you're all busy, like ourselves, so will try and go as quick as I can through the presentation. Got a bit of time for Q&A at the end. I'll reference the page numbers of the presentation that's up on the Internet, on the website.

Turning to Page 4. Just highlighting that we did 150,000 units of retail sale in the second quarter of the fiscal year, and that was up 5% on the same quarter a year ago, led by the introduction of the new Range Rover Velar. And Slide 5 has some of the financial figures that go with that. That volume increase mirrored in the wholesale volume increase helped drive revenue up to over GBP 6 billion, so a year-over-year growth in the revenue in the quarter. We saw an increase in profit before tax to GBP 385 million versus GBP 280 million in the same quarter a year ago. And that also brought with it a slightly stronger -- we've memo-ed that both the EBITDA margin and the EBIT margin on the page for the quarter, just to help show the translation of the slightly stronger EBITDA margin also into the EBIT, which is good to see. And the 6 month figure is, obviously, [built] on the 1 figure. So I probably won't discuss that [for] the record really.

Slide 6 has the sales by geography here and this does reflect some trends in marketplaces which are less positive as well as some positive factors here. So the overall, of course, up 5%, as I talked about, and the U.S. market, the U.S. market to be honest has been down through October. It's down year-on-year, overall, about 2%. In the quarter, we were up 5%, so that's good. But it is relatively more challenging in the U.S. market, I would say, given the overall market being lower. The U.K. market, our sales were down in the quarter by about 4% and that does reflect the industry overall was down 9% in the quarter. And that reflects a continuing trend that, frankly, we've seen for us since April. And we expect to continue, so definitely more challenging conditions in the U.K. Europe sales were lower and we think that's partly the result of consumer uncertainty around diesel engines. On the positive side, our China sales were higher, so obviously, we were pleased to see that. And overseas sales were flat, which -- at the best I could say about that is, I suppose, it reflects an absence of the decline that we've seen over the previous few quarters. But there is some indication that some of those markets, the economic situation in Brazil and Russia, little bit more positive than it's been this time a year ago. But not necessarily yet reflected in sales.

We included on Slide 7, just to give you the very latest information, our picture of October retails. They were very slightly up, only 0.2% on the same October a year ago and as you can see, reflect the trends that I just talked about with U.S., Europe and the U.K. all down year-over-year, broadly for the reasons I've just described. And with China, where the market is -- to be honest, China market is relatively flat but we have been able to continue to grow our sales. And in overseas, you see some of the volume growth that maybe the -- probably one swallow doesn't make the summer in overseas but you see the positive development there [that's good to see]. That's the market position in terms of the profitability development. Slide 8 has the bridge versus the same quarter a year ago, GBP 280 million growing to GBP 385 million. I think you can see there the positive effect of wholesale volume being up 7,000 units, which really mirrors the retail increase. And that was led by the Range Rover Velar that we launched, which sold -- I'm just trying to see how many in the quarter, around about 16,000 units in the quarter. So that's the main reason for the increase, more than explains the increase. The net pricing represents higher incentive spending. That's been a trend we've seen in these results. Now this is probably the fourth quarter in a row we've seen an increase in the variable marketing expenses. We respond to more competitive market conditions. On the one side, it makes achieving the volume that bit more challenging, and on the other side, it also brings with it the cost of fighting for market share and responding to competitive actions, and we see that in that net pricing of GBP 69 million. We've worked hard on our cost reduction, so you the benefit of that in the material and operating costs. You see the growth in depreciation, amortization that I expect to continue as a result of the investment we're making in all of the new products. And in this quarter, we have a positive on foreign exchange and commodities. I think, to be honest, most of that is a onetime effect or a nonrecurring effect, let's put it that way, relating to the revaluation of foreign-exchange and commodity bounties due to the rate movement in those underlying instruments. But anyway, that's given us a positive. And underneath, you can see the impact on the EBIT margin development, which was positive. Still lower than we would wish, it's fair to say, in the quarter but at least, it's up year-on-year and also of course, up versus the first quarter. Slide 9 has the cash flow in the quarter, which was just about breakeven, net of the products investments with positive contribution from working capital. And within the quarter, we also, as you all know, did the further financing, and that helped us maintain...

Next quarter. That was in Q3.

Oh, it was in very early October, sorry.

So it's not in here yet.

Thank you, Ben. My memory is failing me. Either way, the liquidity remains healthy. Slide 10 and 11 [you see] products that we've been investing in. We've talked about the Velar. But to look forward to in coming quarters, we're presently launching a long wheelbase version of the XE in China. And we are presently launching the Jaguar smaller crossover, the E-Pace. And we're on the cusp of launching both a refresh of the Range Rover Sport and the Range Rover, and both of which will have a plug-in hybrid derivative for the first time. Most of those model launches will have -- we'll see the first benefit of that in Q4 rather than Q3. But they do represent the culmination of things we've been working on for a while, so I'm looking forward to that development, albeit more in Q4 than in Q3. Slide 11 talks to the strategic aspects that we're very aware of and investing in for the medium-term around autonomous features, around more consumer features in technology, around electrification, which obviously is a big theme for the automotive industry, ourselves included. I've talked about the plug-in hybrids on Range Rover, Range Rover Sports already and we're really looking forward next year to the launch of the Jaguar I-Pace. That's more for the following fiscal year. And that's echoed a bit on Slide 12. Together with the fact that all of our vehicles will offer electric options from 2020, whether that be a mild-hybrid or a plug-in hybrid or a full-battery electric vehicle. So very exciting time in front of us in terms of electrification.

And overall, just before we stop and start doing some Q&A. Looking ahead, our strategy remains as we previously discussed, to seek to drive sustainable profitable growth. We're investing in those products: the technology, the manufacturing capacity. I think it is the case that I've given you a sense of that the automotive environment is more challenging now than it was this time a year ago. That's got both short-term challenges in terms of softer markets in the U.K., for example, the U.S., the diesel issues in Europe. And also of course, there is the medium-term uncertainty around Brexit or the shift to electrification. But from our point of view, we remain very focused on continuing to invest and launch our new vehicles. Those are the best antidote to those more challenging market conditions that we see right now. And in the shorter term, as we previously have said, you know I do expect those margin pressures we saw last year, including that higher incentive spending to continue in FY '18. I should also say, I do expect the profitability by quarter to continue to ebb and flow, reflecting seasonality and launch timing. And just to point out a specific, the prior model Range Rover and Range Rover Sport run out in Q3 and the new models start to run in, in Q4. So that is something to look forward to in future quarters, right.

With that, I'm going to stop, as I promised, I tried to keep it short and hand over to Q&A.

(Operator Instructions) We have our first question from the line of Sonal Gupta of UBS Securities.

Just to, I mean, given that you have talked about your October volumes in the presentation as well. I mean, the main issue that I see is that we've seen in a decline in U.K. in September and October despite the Velar launch. And same is the case in October in the U.S. that despite the full benefit of Velar launch and the new Discovery launch, we're not seeing year-over-year volume growth. So I just want to get some comments around that, I mean, is the market condition significantly weaker than what you expected? And secondly, we were expecting clearly, the new Discovery to also do very well. But till now, we haven't seen that in the numbers so are there any factors? If you could just talk about...?

I mean, I think, the short answer is yes, we do see market conditions are more challenging than what we expected. I think when we had -- a couple of calls ago, I did say, we did expect the U.K. market which had peaked last year to be somewhat lower this year than the prior year. But it's fair to say the market is lower than our expectations, lower again if you like than our expectations of it being lower. And I think that is having an effect on our volumes. In particular, we have a very strong market share in the U.K. especially on the Land Rover side of the business and therefore, when the market is down, it is going to impact us directly. In the U.S., overall, the market again, was -- peaked last year. We expected it to be somewhat lower. It is somewhat lower. In particular, in the U.S., the sedan market is particularly lower. The sedan market in the U.S. is down about 10% October year-to-date. And that is impacting us on the Jaguar side of the business in particular, in terms of the volume. So which is also a feature elsewhere. So yes, we see more challenging market conditions and that is one reason that the new products haven't necessarily caused the volumes to be bigger in October than the overall volumes. I think on the Velar and the Discovery in particular, both have had strong receptions from the automotive media and also from customers. And I would say it's early days for both new products. Obviously, one would've wished to have launched them into stronger markets I think it's fair to say. But the products themselves are super new vehicles that have very strong customer benefits. So I hope in the fullness of time we'll see that volume growth sort of shine through on top of the base level that we have.

All right. So just to carry -- follow-on on that, I mean, it seems like there is a lot of cannibalization with the Velar, with some of the other models like the Range Rover Sport. So I mean, I know this is just the first or second month. So could you just comment on that? I mean, do you think there is a cannibalization? Or do you just think that because of the market weakness...?

We expected there to be some substitution between Velar, Range Rover Sport and Evoque, given as it sits between them. I mean, for example -- but I think that there is an effect there. But we did expect that effect. And what I'd say the Velar very much sits between 2 quite different price points. The Evoque starts at around about GBP 30,000 in the U.K, The Velar starts at around about GBP 46,000 in the U.K, and the Range Rover Sport starts at GBP 57,000 in the U.K. So it is the case that the Velar very much sits in between the 2 vehicles. So yes, we see a bit of substitution. But I don't think we see more substitution than we necessarily expected. And as I say, it's also the case, of course, that we are coming to a model changeover on Range Rover Sport and Range Rover. So I think, perhaps, we see some modest effect of the model changeover that's about to happen on Range Rover, Range Rover Sport having an effect on the retail sales rate of Range Rover Sport in particular. As I say, I would expect that to continue through Q3, as we go through the launch of the vehicle and then, hopefully, we would see some positive development from Q4 with the '18 model year of both those vehicles.

Your next question is from the line of Binay Singh of MS.

My first question is on the Europe car market. We've seen your competition offer various diesel-linked scrappage schemes, which you've not participated at till now. So do you think those schemes have been successful? And as they end on December 31, we will see Europe also slowing down next year? And what are your thoughts on that? Linked to that, just a carry on from the first -- the question from the earlier participant, is it fair to assume that Discovery does not have any production issues now in terms of ramp-up? And my last question is on the working capital side. It's always been a very favorable cycle for JLR. We've seen extended payable days. Does that change with more engines being made in-house? That's it.

Great questions. On the working capital, broadly, no, that doesn't change very much because of the movement in-house of engines, not too much. That's the short answer. I could go into a longer answer but it would get very detailed. So let me just leave it at the short answer. On the effect of the production constraints, in terms of overall, no, I guess we have more, a little bit more headroom than maybe had previously in terms of capacity because, we've been investing in the capacity in order to relieve some of the constraints. Typically, in the past, our Range Rover, Range Rover Sport Solihull factory had been the place in which we faced the biggest constraint. Next year, this time next year we will start -- we will move production of the Discovery from Solihull to Slovakia. And when we do that, that frees up production capacity in Solihull. So overall, we will have more capacity in order to, hopefully satisfy demand for the new models that we're also launching in those factories such as the Velar that we just launched.

On the Europe car market -- hang on. Can I -- maybe if I just try and take the last point -- we do. On the Europe car market, I think that's a very fair question. And the truth is, I think there is bit more water to flow under the bridge before knowing exactly how the Europe car market will develop next year. I'm also hopeful that car manufacturers, including ourselves, can be successful in articulating the strong rationale which is that modern EU 6 diesel engines are as clean as their petrol counterparts and are cleaner than they've ever been before with modern EU 6 technology that basically reduces particulate emissions to a very, very small level and actually on the level of petrol. And therefore, I hope we can get that message across to politicians and city mayors and others who set rules for diesel engines. And therefore, we can also get that message across to customers because very much so, those modern diesels are tremendously clean and also are beneficial in terms of lower CO2 emissions than the equivalent petrol engines. And therefore, actually, objectively speaking, there's no reason for customers to hold off buying new diesel cars. But clearly, there is a -- it's hard sometimes to get that argument across in the press, and there is a fair amount of that to be overcome. But I'm hopeful we can kind of overcome that.

Just a follow-on on the question on that. So is it fair to assume that JLR is not offering any diesel scrappage unlike the competition?

I think we're looking at that very carefully, let me leave it at that. Not quite in the same aspect as the competition. But we're looking at it very carefully.

And will that -- is there a reason why Jaguar sales just losing a little bit of market share in Europe? Is that one of the factors for that?

I think that's probably less related to diesel. I think we just are seeing -- we are seeing more competitive market conditions in sedan segment in particular. I've talked about overall market conditions being more challenging, and they are. But if you like the place where that's most challenging, I think is in the sedan segments in which the XE and XF compete. And in certain of those segments, we're seeing our competitors offering extremely heavy incentive levels in order to support their sales in those segments. And to be honest, in some cases that causes us to think that we don't want to chase volume at any price, because it would be unprofitable. So there comes a point when we think: you know what, we'd actually rather maintain some margin than sell vehicles that lose money at a variable profit level. So I think there is an element to that in there, too.

The next question is from the line of Pramod Amthe of CIMB.

With regard to the EU CO2 new norms being announced for 2030. Are they tougher than what you expected? One. And second, what do you expect to reach those targets on CO2? What should be your mix of petrol, diesel now as this future by 2030? Any indication?

I think what we expect, undoubtedly, we are planning within the business for a major continued reduction in CO2 targets through 2025 and beyond through 2030. So that's what we are expecting and that's what we're also targeting internally. In terms of the things that we are doing in order to meet those targets, it's a blend of the things that I've -- that I probably talked about before. But without belaboring it, clearly, pure battery electric vehicles is part of it, plug-in hybrids are part of it, mild hybrids are part of it, lighter-weight vehicles, more fuel-efficient internal combustion engine technology, all those aspects and a couple of others in terms of our more aerodynamic vehicles, et cetera, are part of our plans to meet the more challenging CO2 targets in the future. So we're working very hard at that and that's part of the reasons we're investing heavily at the moment in those technologies. Such as we're launching in the next 6 months with the Range Rover and Range Rover Sport plug-in hybrids and then beyond that, the Jaguar I-Pace.

And can you indicate what is your diesel, petrol mix now? How it has moved over last few years? And how you expect to move in the next 5, 10 years? Any indication?

That's a very big question. Diesel, petrol mix, overall, is today globally around about 50-50 actually in -- across the world. Because in Europe, diesel mix is as -- and the U.K. diesel mix is as high as 90%. And in the U.S., for example, diesel mix is only 10% and in China, it's very, very small indeed. So different markets have different proportions. And the funny thing is it actually balances out about 50-50 for us globally right now. How do I expect that to change, is a great question. I think over time, one could expect certainly the mix of plug-in hybrids and battery electric vehicles to increase. And logically, one might expect those to increase at the expense of diesel engines. I think that's possible. But exactly how that pans out over time, to be honest, we could draw 3 or 4 different scenarios around, so I don't really want to speculate. But the 50-50 as of today globally for our business gives you a sense of where it is right now.

And with regard to your new arrangement with Magna for assembly of vehicles. You seem to be adding up more models there. Can you walk us through how to look at your margin profile with this contract manufacturing? What are the arrangements there in the next 2, 3 years down the line?

Yes. We've got total capacity reserved at Magna for around about 100,000 units, which we plan to do 2 vehicles with the first one being the Jaguar E-Pace, which we're obviously launching now. In terms of overall impact on our margin structure of that arrangement, there's obviously a cost in terms of the profit margin that Magna earns, which is obviously commercially confidential between us. But overall, in terms of the overall impact on our business mix, we're -- the benefit of using the Magna arrangement is that avoided for us investing in further capacity additions in Halewood, which would've been required in order to -- had we decided to launch the Jaguar E-Pace there. And as a result, that avoided investment sort of as an offset against the element of profit and overhead recovery that obviously, was within the contract for Magna. So when I cut through that, overall, I actually feel that the vehicles that we will produce at Magna have good underlying profit margins that are not dissimilar to those which we have elsewhere.

Your next question is from the line of Robin Zhu of Bernstein.

Earlier question as on the last call. China has announced their policy to have, to start enforcing fuel economy targets and EV credits and so on and so forth. My understanding is that the import business will need to start adhering to pretty strict fuel economy standards starting in 2018. Could you confirm that that's also your understanding? And where you stand given that the import mix is basically a bunch of Range Rovers and other pretty heavy vehicles? And if there is any sort of ongoing financial consequences that are likely as we move forward?

Yes, that's part of what we're planning for, Robin. And that's why we're launching plug-in hybrid derivatives of Range Rover and Range Rover Sport right now. And they are part of the solution to addressing that fuel economy fleet average target that the Chinese authorities are implementing as is the introduction of the Jaguar I-Pace. That's also a measure designed to help us meet the targets there. So yes, they are part of the plan that we have to meet those targets.

Got it. And just a quick follow up on that one. How confident are you that -- I mean these are difficult targets to meet. There is the alternative that you may choose to buy credits from somebody, be it your partner or somebody else. How confident are you that you can comply with the targets without having to buy credits? Or if there is the possibility that you might have to buy credits, whether there's been discussions around that with third parties?

You'd expect us to have had those discussions, yes. So yes, we are obviously very cognizant of the possibility of meeting through purchase of targets and you'd have expected us to have talked to people that we know around that. But I don't want to go very much further given the commercial sensitivities involved. But yes, that's an avenue also. And I think, how confident are we? That's another crystal ball question, Robin, because part of it is related to consumer demand and acceptance of those plug-in hybrid and battery electric vehicles. But clearly, intrinsically, we want to be compliant and without relying on having to purchase credits. And therefore, we'll be working hard to make those products successful in the Chinese market and elsewhere.

Thank you, ladies and gentlemen. Due to time restraints, no further questions can be taken. I now hand the floor back to Ken Gregor for closing remarks.

All right. I really appreciate the engagement. Lots of good questions and challenging questions, and I appreciate for the investors on the call, all your continued support of the Jaguar, Land Rover business. Thank you.