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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Hello, my name is [ Ms. ] Hishinuma. I am the CFO of Bridgestone. Thank you very much for participating in today's teleconference. I am going to report on the financial results for the first quarter of fiscal 2019.
I would like to explain to you that there are presentation materials available on our website. And this so, if you can have an access, please take a look. And after the presentations, we will be accepting your questions.
Page 2, business and financial performance for the first quarter as well as the consolidated projections for the first half fiscal 2019.
First quarter results for fiscal 2019 first, Page #4, business environments surrounding Bridgestone Group. The stronger USD versus the Japanese yen, euro, made a stronger Japanese yen versus the previous year. Raw material prices, natural rubber and crude oil like lower than in the previous year, tire demand. Although there were some signs of weakness such as for PSR, OE segment in Europe and North America, global tire demand remains almost flat.
Tire sales and growth for the first quarter of fiscal 2019, PSR. North America OE demand hovered low. So on the year-on-year basis, OE revenue total for PSR was 97%. On the other TBR, the OE North America, their sales was quite robust, 116%. So the global trend was quite favorable. ORR, be it for ultra large or large sized than the ORR tires, net double-digit growth, they're quite -- they're positive. The PSR high rim diameters of 18 inches, 105% on the global total, replacement segment in particular, 115%.
Consolidated results for the first quarter of fiscal 2019. Net sales was JPY 848.2 billion minus 1% year-on-year. Operating income, because of the raw material net price hikes as exemplified led by petrochem and the raw material charges, JPY 77.1 billion was the result. They're down by 23% here. But I would like to emphasize, that it was, more or less speaking, in line with the February announcement. Ordinary income, JPY 83.8 billion. We did have some nonoperating income numbers having affected this. Profit attributable to owners of the parent was JPY 60.3 billion, down by 5% year-on-year.
Let me take you through the variance analysis of consolidated operating income for the first quarter of fiscal year 2019 vis-à-vis the first quarter of fiscal year 2018. Operating income declined year-on-year due to factors such as the rising prices of petrochemical and other raw materials. As for price mix, volume, and et cetera, price and the mix had a positive impact on operating income, while due to a deterioration of emerging country currencies, negative impact of diversified products of business was incurred. Net effect was negative JPY 2.7 billion.
Page 8, please. Next is the results of geographical segment. Net sales remained almost flat year-on-year in all areas except for China and Asia Pacific. Operating income declined in Japan, the Americas, and China and Asia Pacific, where the operating income increased in EMEA, which expanded sales of high rim diameter tires or HRD.
Page 9, please. Next is consolidated projections for the first half of fiscal year 2019.
Page 10, please. I will first explain the business environment for the first half. As for currency exchange, the Japanese yen is expected to depreciate against the U.S. dollar and appreciate against the euro. As for raw material prices, natural rubber price is expected to stay around the same level as the last year, while crude oil prices are expected to slightly lower than the last year. With regards to tire demands, like in the case of last year, despite some weakness in PSR OE tires in the U.S. and Europe, the global tire demand is expected to remain unchanged year-on-year.
Page 11, please. Lastly, let me summarize the financial results for first quarter and the projections for the first half. For the first quarter, the trends of ORR tires and other tire sales were strong. But due to the impact of rising prices for petrochemical and other raw materials and the restructuring costs of the diversified product business, operating income declined year-on-year. The guidance announced on February the 15th is kept unchanged for Q1 and the first half. There are some highlights: PSR, HRD and ultra large and large ORR tires expected to maintain a strong sales trends.
For pricing, in response to higher petrochemical and other raw material prices, we are raising prices in some areas and are continuing to maintain their prices. We will stay focused on the restructuring of the diversified product business. That's all. Thank you very much.
Now we are ready to take questions from you. First we are going to start with questions from Mr. Matsumoto of SMBC Nikko Securities.
I have 2 questions. I'm going to just ask both of the questions, so if you respond on the -- at your convenience. Question number one, variance analysis of operating lead profit, price mix and volume. Thank you very much for giving us a qualitative explanation. But if any numbers that can be shared with us, how much from the selling price increase? Or how about the volume? As far as you mentioned country currency depreciation, diversified products -- or although you did not mention for what happened into the corporate elimination?
My second question, so your presentation was that vis-à-vis the plan, it was more or less in line about 1/2 of the planned ordinary income 40-percentile at its middle on the -- for the operating income. So I would like to know a little bit further. And the reason for that question is that having listened to the variance analysis, I would like to know a little bit further, for instance, on the ForEx and other factors.
And also Page #5, on the -- for the tire sales. Is it really as expected or in the sense of the strengths or the less strengths. So all in all, was it really in line with your expected tire sales? The replacement market sales was the period of your net profitability. And so by region, North America for instance, 94% for the TBR and 100% flat for PSR. So it seems that Q1 was not the strongest quarter for you. I can see that it was more or less common throughout the industry, but I am very interested in your particular case.
Thank you. So the first question, the price mix and volume. Let me try to share some numbers with you on the prices. Plus JPY 7 billion, roughly speaking, volume were plus JPY 3 billion about 1/2 of the price effect, positive in any case. And other than that, weaker emerging market currencies, unrealized gains and losses, or the negative for which was reported from diversified product areas, it was all negative. So all in all, on the net basis, minus JPY 2.7 billion that was the number that we reported.
Okay. So I heard you just say unrealized gains and losses was minus negative factor?
Yes.
Okay. So all combined is JPY 10 billion. And you had FX and diversified and unrealized, the factor and the rest?
Yes. The weaker -- the emerging market currencies are some 2 digit numbers. Even the effect of the unrealized, even the item not as much as from the -- our currency element. But anyway, it was yet another factor.
As to your second question about tire sales, all in all, as I said, the volume of sales was as expected or in line that was in the business plan that we shared with you back in February. But some designs of the weakness here and there, such as -- it was TBR, the business in North America.
In February, we saw the introduction of antidumping tax or the countervailing tax. And prior to that have netted us last minute in demand, and therefore under the imports from China. So -- and then we have to remember that we came out of that particular timing. Other than that, I guess, I can talk about Asia. On one hand, the businesses in Thailand and Indonesia were quite strong.
On the other -- in some other countries, such as in India maybe it was a little bit slower than expected. But we know the reason behind that, we think. For instance, there was a general election scheduled, and then the people were holding back from more robust purchases. But beyond the Q2, we are certain that it's going to come back.
The PSR, the interim market in North America, 100%, was in line with your expectation?
Well, let me repeat there to be -- more detail on the major brand on the sales growth, at the same time associated brands and they fell short of -- from the previous year results. All in all, [ 100 in 100 ] have no rest to report, and that we -- we report, and therefore in line with the plan.
Now the profits, JPY 77.1 billion operating income, with JPY 83.8 billion ordinary income. From the perspective of the profits, would you also say that it's in line with your expectation?
To respond for profits, the simplistic statement that I can make is that it's in line with our full year projection. Of course I am to repeat, once again, the effect of the petrochem raw material cost hike or the emerging country -- the currency depreciation, and we try to recoup those -- the effect that was higher selling prices was net 100% sold in Q1, but it's going to get better. Those are the spread in Q2 and beyond, further better than Q1.
Okay. And no change. And this is really for the first half projection?
Correct.
Thank you. Let us move on to Mr. Sakamaki of Daiwa Securities.
I am Sakamaki. I'm going to follow up on the last question, how your statement is that it's in line or within the plans? PSR in North America, 100%, 100% mean that it's flat from the previous year. But remembering the Q1 period for last year, there was an establishment with the TireHub for inventory adjustments are necessary, which pushed down the previous -- the first quarter hub net profit results. And so if anything come, you would have and I would have expected a stronger performance. And yet it was 100% exactly flat year-on-year. So what happened? And at the same time, SG&A expenses, it seems that vis-à-vis your first half, the forecast you have planned, it seems to have exceeded a little bit on those. So is it still in line?
And my second question, dividend -- the diversified product business. The first quarter had the plan cost for JPY 2 billion, yen plus. The first quarter this year, you were tendered to JPY 2.4 billion negative, meaning that in the, say, Q2 period you have to earn JPY 4.4 billion worth. Is it feasible and what's going on?
The first question I would like to answer first. North American PSR have the replacement market business in line with our initial plans. As I said a little earlier, in particular, Bridgestone brand or the so-called major brand sales grew further, whereas the other third brands or the associated brands fell a little bit, but in total 100%.
SG&A expenses you asked about, JPY 7 billion was the tune of negative -- the impact. But quickly let me say that there was the specific factor at play, and this has affected the overseas group company, and they were -- in line with the accounting method changes. The SG&A expenses had tended to be shown explicitly. These are grossing up, and it's what's necessary in contrast with the netted hub results on the hub, which are lowered under the previous method.
Okay. So what you are saying is that for SG&A expenses, you knew that this was going to change, I mean the accounting method change in the first quarter. But going beyond the Q2 period, is this going to get normalized?
This accounting change was not any part of our initial plans. So it had to be portrayed there to be quite explicit and noticeable.
Okay. In the tire sales, last year the establishment of the TireHub and the one-off -- the challenge was there. So how is it, the coming out of net -- the one-off in the circumstances, the sales did not grow any further? Is the effect net of the decline in the sales of third brands or the associate brands? Okay. So nothing to do with adverse changes in the distribution channels and parties involved in the distribution of your net products.
Your understanding is correct. Okay. And to your second question having to do with the negative that we reported for the diversified product business. I would like to point out that there are the 2 factors at play, the first of which has to do with restructuring of diversified product business in Japan, and also the diversified product or roofing materials of the business in the States.
As to the former, in Japan, the restructuring income that has been going on in line with the original schedules and that affected, as expected, our business performance in the first quarter. The U.S. roofing material business, the raw material charges, particularly, on the petrochem raw material -- the charges input cost that rose. This saw an -- that had an adverse impact net on the sales results. The operation tried to offset with higher selling prices, but it was not 100% offset. And also the sales volume, there was a little bit of issues remaining coming in the first quarter this year with the respect to the production operations. And they saw that pushed down having made available in the goods to sell. But had the overall situations, once again, really improved in the second quarter and beyond.
So what you say is that -- I mean for the diversified, the product business, it was a little bit, at least, a little bit behind your original plan in the United States?
Yes. And if we isolate only the North American roofing material business that is so. But all in all, it was in line with our expectations and plans.
Let us now move on to Mr. Yamaoka of Nomura Securities.
I am Yamaoka. My two questions. Question number one refers to PSR OE business both in North America and Europe, where there was a little bit of the feebleness witnessed. This business, particularly, having the North American PSR OE, was quite robust through last year. So what happened? Is that as affected by the auto assemblers, the production volume? In other words the assembled, the core units failed in the first quarter, which affected your business? Or is that anything having to do with the model -- the product model cycle of your products? Because -- and this is important, it must have had some impact on the overall OE profitability.
The second question, you've been talking about the ramp up on the auto production activities in North America, both for PSR and TBR tires. Now what is the current status in terms of the progress?
Question number one that I got from you on the PSR OE business in North America, that would show to the negative for the Q1 period. Demand coming from car companies, particularly centering on sedan type vehicle models, the assembled net of volume was lower than in the previous quarter. So that affected our business. So we treaded along the wisdom market demand, and that gave us the exact result that you show -- you saw and we showed it to you. So that's for North America. But conversely in Europe, the market demand, if anything, was negative year-on-year. But our sales of tires in that market was positive year-on-year. The ramp-up of production activities in North America, your second question, in line with our expectation and plans.
When you say that North American OE business turned out to be slower due to the reasoning that you have -- gave, so that then would have some effect on the global 105% for the HRD, high rim diameter, higher than the 8 inches tire business?
Yes, for the first quarter, in particular, that is so. But again, in my point of emphasis is that for the same reason, the particulars about the vehicle models, which I expected to come and stream and so on, the second quarter and beyond the business will come back in.
And my follow-up question then is that as the volume of sales in the OE segment fell, then that would have impacted in the first quarter this year the -- your capacity utilization order profits?
Yes, for the first quarter particularly speaking.
Okay. And the second question, your answer was that it's in line with your plans. That's both for the PSR and TBR production lines?
Yes, that is exactly so.
But the PSR replacement segment business at 100% or even TBR. But particularly so for PSR, I would like to know a little bit further. It -- you used to say that there was a shortage of supply, which in turn was attributable to some issues at the production front. So your interpretation of recurrent status is that it's in the model to normal operation. And on that basis, if supply is coming off the line then the result of sales is 100%?
My answer once again is that it's in total 100% of the previous -- the first quarter last year. But therefore, the North American replacement segment sales, particularly with the focus on the higher rim diameter tires, they were double-digit growth and that was accomplished. And at the same time with certain brand sales the sales fell, and in total 100%.
And then what about the yield, the available fund of production lines? So there is a no longer any concern about the available yield and expectable yield?
Your understanding is correct.
This question is from Mr. Kakiuchi from Morgan Stanley.
I'm Kakiuchi from Morgan Stanley. My first question is concerning diversified products in Japan, where financial results just announced are in line with the plan. Well, the company is focusing on the restructuring of the business as it's written in the presentation material. There was a news release made in the latter half of April concerning the renewal of the diversified product technology center on the Oklahoma plant there. What do you mean by focus on restructuring of the business? In terms of the end state of the ongoing activities, the company has been talking about the restructuring for some time now. But what kind of timeframe do you have when you said focus on restructuring? What does it mean? Could you elaborate on this along with national performance? That's my first question.
The second question is about SG&A, which was discussed earlier during the Q&A session, or impact of changes to accounting standards on the SG&A overseas. In your variance analysis, is there an independent impact from accounting standards on top of other factors? Or is the impact offset by other factors, which means no impact on a net basis. Is that the case? So that's my question.
Okay. Your question was about the focus on the restructuring of the diversified product business first. In 2021, it will have been 50 years since the start of the diversified product business under its name. And that's the time frame we have for the ongoing renewal of the Yokohama plant or the diversified product technology center that we have announced the other day, so that's part of the anniversary. So the time frame of the restructuring is year 2021.
In terms of financial performance, we expect an increase in restructuring cost again for the first half of this fiscal year compared with the previous year. But the cost is expected to decline slightly for the second half, and a full fledged recovery is expected in and after 2020. So that's the current plan we have.
Thank you. Are you also transferring production of certain products to other plants within the diversified product segment?
Yes. Between the group companies and the parent company, we are also promoting transfer and consideration of production activities.
Restructuring cost was already incurred in the second half of the previous year. So on a year-on-year basis, are you expecting lower manufacturing cost for the -- sorry, lower restructuring cost for the second half of this year?
Yes, that's what we expect. Regarding the impact of accounting standards and SG&A, the nature of the change was that we now reflect SG&A in both SG&A and the sales. In the waterfall chart, for example, there is a positive impact in price mix, volume, et cetera. And it is offset, so there is no impact on the consolidated operating income.
Next question is from Mr. Yoshida, Citigroup Global Markets Japan.
My first question is about mining tires or off-the-road tires. What was the trend like during Q1 this year? Could you give us some comments qualitatively? I remember that there was some inventory remaining at the end of December, which was expected to be resolved during the January-March quarter. The performance seems to be higher than the original forecast, at JPY 11.5 billion against the forecast of JPY 11 billion for the first half. Can I understand that this is an upside, or is it just in-line with the plan? Could you give us some color on this?
The second question is if you calculate the Q2 profit it would be JPY 88 billion, representing an increase of JPY 10 billion quarter-on-quarter. But if you look at the trend over the last 4 or 5 years, a Q-on-Q increase of JPY 10 billion is something that is never achieved in the last 4 or 5 years. What are the factors behind the Q-on-Q increase of profit by JPY 10 billion? Could you elaborate on this? So those are the questions.
First on ORR tire, as you pointed out correctly, some shipment was -- that we were expecting last year was carried over to Q1, and this explains part of the results of the JPY 11.5 billion against the plan. And this is one of the factors behind the upside.
Second, on the profit trend as mentioned during the presentation, we are trying to raise prices to absorb the impact of higher petrochemical and other raw material prices, and the depreciation of emerging country currencies, and therefore expect an improvement in the spread from Q1 to Q2. That's one factor. Also earlier, we talked about the sales trend in India being slightly weaker than expected, and the recovery in demand and sales volume is expected to recover after the election. That's another factor.
When you talked about India, were you referring to OE tires or replacement tires?
We were referring to replacement tires.
Next question is from Mr. Sanger from Deutsche Securities.
I'm Sanger. I have 2 questions. The first question is as follows, sorry for asking again. You have taken us through the financial results, vis-a-vis the first half forecast. But I'm more interested in the recovery in the second half, recovery of profitability from 12.6% over next 3 years. This is unprecedented. So can we really expect it to happen? Given the global macro trends today, isn't it difficult to do? How confident is the company in delivering on this? That's my first question.
My second question is about ordinary income. There was about JPY 5 billion. What does settlement received mean? Could you give us some more details on this? That's my second question.
The first question was about the recovery in profitability in the second half. Roughly speaking there are two factors, one is the price hike to absorb the impact of rising raw material prices and weakening emerging country currencies. This is expected to drive profitability for the second quarter and the second half of the fiscal year.
The other is the sales volume. Since last year, we have been faced with supply constraint, mainly with HRD tires. But the ongoing effort to improve supply capacity is expected to generate some positive outcome. On top of that, in some parts of Asia and China, we have been controlling sales volume in an effort to shift towards a better-quality business.
These reform efforts are expected to be completed within the first half and the profits should normalize from the second half. Sales volume is also expected to help increasing profitability. Those are the factors behind expected improvement in profitability in the second half.
Thank you, I understand.
Regarding the second question about ordinary income of JPY 5 billion, as you correctly pointed out, we received settlement from another company. That's how approximately JPY 5 billion was recognized. I'm afraid the specific nature of the payment cannot be disclosed due to the confidentiality obligation with the other party. That's my comment.
It seems that the company is reporting substantial ordinary income or extraordinary income this year. Is JPY 5 billion in line with your forecast? Can you confirm this point, please?
Yes. It is in line with our expectation.
If there is no more question, we would like to close the session. Thank you very much for your attendance out of your busy schedules today. [Statements in English on this transcript were spoken by an interpreter present on the live call.]