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November 01, 2019 04:36 AM

Mazda bounces back to black as better mix offsets slipping volume

Hans Greimel
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    TOKYO -- Mazda bounced back to profit in the latest quarter, as earnings from a richer mix of higher-margin products and scaled-back incentives offset slipping unit sales.

    The results showed a gradual improvement based on the automaker's strategy of expanding the price band of its offerings and rolling out more upscale features.

    In its earnings report, Mazda said on Friday that it booked an operating profit of 18.8 billion yen ($174.2 million) in the fiscal second quarter ended Sept. 30, reversing a year-earlier loss.

    Net income more than tripled to 11.4 billion yen ($10.6 million) in the three months.

    Revenue held flat at 857.7 billion yen ($7.9 billion) in the period, as worldwide retail sales declined 4 percent to 378,000 units, losing ground in North America and China.

    In announcing the results, Executive Vice President Kiyoshi Fujiwara said reduced marketing expenses and achieving better per-unit profit bolstered results, more than countering a slide in volume, a big hit from unfavorable exchange rates and climbing r&d expenses.

    "As we raise the entry price and offer better high-grade models, average transaction prices and revenue growth was achieved through this process," he said. "We held down incentives and we also improved the quality of sales. Those are the major reasons for this improvement."

    Mazda CEO Akira Marumoto in May unveiled a new mid-term business plan to lift operating profit margin to a sustainable 5 percent by the fiscal year ending March 31, 2025.

    The new plan also set a lower long-term sales goal than Mazda had earlier floated.

    Mazda now targets global sales of 1.8 million vehicles in the fiscal year ending March 31, 2025. It had earlier wanted to sell 2 million vehicles in the fiscal year ending March 31, 2024.

    Marumoto said he wanted to alleviate the pressure to use incentives to attain volume targets.

    Key to the strategy is gradually introducing newer technologies to slowly extend the upper boundary of the price range that Mazda vehicles can command.

    Mazda did that with the redesigned Mazda3 small sedan, for instance, by introducing an all-wheel-drive variant with the full model change, Fujiwara said. As a result, Mazda has seen robust demand for Mazda3s at the high-end of its price range, boosting profitability.

    On the flip side, however, volume has suffered with sluggish demand for low-end models.

    Mazda is already implementing strategies to bolster sales of entry-level Mazda3 models for the 2020 model year, Fujiwara said. But he declined to specify what actions are being taken.

    Either way, waning demand for sedans is making the Mazda3 a tough sell. The nameplate is Mazda's No. 2 seller in the U.S., but volume dropped 21 percent through September this year.

    Fujiwara said Mazda will focus more on pushing the new CX-30 compact crossover and achieving better sales of the CX-5 and CX-9, the brand's larger crossovers.

    Mazda expects more upshifts in brand image and pricing power with the introductions of the Skyactiv-X powertrain, a new plug-in hybrid system and an in-line, 6-cylinder engine.

    Some of those technologies will find a home in a new platform for larger vehicles that is slated to debut in the fiscal year ending March 31, 2023.

    Meanwhile, Mazda is trying to rein in incentives to boost the brand image.

    "A high residual value can be maintained," Fujiwara said. "We can encourage customers to replace with a new model in a shorter cycle."

    In the July-September period, Mazda reeled in U.S. incentive spending 8.2 percent to an average of $2,617 per vehicle, according to figures from Motor Intelligence. That outperformed the overall industry, which saw spiffs increase 4.7 percent to an average of $3,951.

    Still, North American sales fell 4 percent to 103,000 vehicles in the latest quarter. European volume advanced 2 percent to 69,000 units, and China sales slumped 15 percent to 55,000.

    The Japanese yen's appreciation against the euro, Australian dollar and other currencies lopped 26.7 billion yen ($247.5 million) off the quarterly operating profit.

    Marumoto, who took office in June 2018, says his highest priority is spurring growth in the U.S., the automaker's biggest market. To do that, he wants to focus on strengthening Mazda's U.S. dealer network and making the most of its growing partnership with Toyota.

    Mazda is trying to upgrade its dealer network before it opens a new plant it is jointly building in Alabama with Toyota. Slated to open in 2021, the $1.6 billion plant will add 150,000 units of capacity to Mazda -- all of which will be devoted to a new crossover for the U.S. Mazda expects U.S. sales to soar after that, with the plant enabling it to sell 2 million vehicles globally.

    Looking ahead, Mazda cut its outlook for the current fiscal year ending March 31, 2020.

    It now expects operating profit to fall 27 percent and net income to decline 32 percent. In May, it had predicted operating profit would increase 33 percent, while net grows 26 percent.

    Mazda blamed deteriorating foreign exchange rates that are taking a bite out of earnings and weaker than expected sales. Mazda sees now global sales dipping 1 percent to 1.55 million vehicles in the current fiscal year, on lower outlooks for all markets, including the U.S.

    It had early expected 4 percent increase global sales to 1.62 million units.

    Naoto Okamura contributed to this report

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