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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Hello. My name is Hishinuma, CFO at Bridgestone Corporation. I appreciate your attendance in this presentation today. So fiscal 2019, the first half financial results.
The table of contents. Starting with business and financial performance for the first half FY 2019. Business environment surrounding Bridgestone group. Currency exchange U.S. dollar weakened against Japanese yen, and euro strengthened against Japanese yen versus in the previous year.
Raw material prices, in particular, carbon prices remained high from the previous year.
Tire demand. In North America and European PSR-OE saw signs of weaker demand. Tire sales grows on unit basis year-on-year. PSR sales was globally 97% dragged by the stagnated demand for OE tires in North America, 97%.
TBR. Continuously, North American OE TBR sales move was quite favorable, but at the same time, had a sales dip in China or Asia Pac. So globally, 99% on the -- of the previous year basis.
ORR both for ultra-large and large-sized ORR tires, the growth rate was 5% because of funding these staggering ultra recognition from the sales.
PSR high rim diameter on the tires above 18 inches on a year-on-year basis. Globally, 105%, in particular 110% here of the previous year level in the replacement segment of the market. Consolidated results for the first half in fiscal 2019, net sales was JPY 1.7446 trillion with the operating income of JPY 158.4 billion, a dip in both net sales and operating income year-on-year.
Petrochem and other raw materials costs remained high and is robust for tire, and then diversified products did decline in trend. The value is not [indiscernible] is to follow.
The interim dividend payout on the Board of Directors meeting convened today was resolved that is more to be the per share interim dividend of JPY 80 whose payment will start on the 2nd of September. Analysis of consolidated operating income for the first half 2019 in all markets, and then we continue to make efforts to improve from the present conditions, but raw materials are negative factor. And also on the emerging country, the currencies such as in Latin American currencies, they weakened and they saw the negative effect was there. And also because of the sales decline including but not limiting to the diversified product business, conversion cost, the position worsened. We saw year-on-year JPY 41 billion decrease in operating income.
Financial results by geographic segments. Consolidated net sales, sales of ORR tires did well for the Japan segment, which boosted up the result.
In the Americas and EMEA comparable to the previous year, China or Asia Pac, in particular, declined in sales in China, pushing down the results.
Consolidated operating income. Japan, the Americas and China, the Asia Pacific because of the situations [indiscernible], the operating income worsened. However, the high rim diameter sales in EMEA increased and EMEA as a segment increased in the operating income. Balance sheet. On one hand, the bond issuance at JPY 200 billion. On the other hand, it continued share buyback to under which the upper limit of JPY 200 billion. So the ratio of total equity to total assets declined by 4.7 percentage point at 57.2%. Interest-bearing debt net was bigger than in the previous -- the first quarter. Cash flow by operating activities was almost JPY 200 billion. And because of investing activities such as the acquisition of TomTom, the free cash flow showed a certain negative number. Next consolidated projections for fiscal 2019. Beginning with the forecast of business environment. In terms of exchange rates, the Japanese yen is expected to appreciate both against the U.S. dollar and the euro. As for raw material prices, we expect higher natural rubber and lower crude oil year-on-year.
In terms of tire demand, we project weaker demand in North America and Europe PSR-OE to continue. Tire sales growth projections for fiscal 2019 for PSR and TBR on global scale, we expect the same level as in the previous year. For OE, sales in North America, PSR is projected to be lower year-on-year. But for replacement sales, we expect about the same level as in the previous year more or less. For ORR and HRD, 18 inches or above, as you can see, double-digit growth is projected. Consolidated full year projections. Net sales JPY 3.62 trillion, operating income JPY 375 billion, lower sales, lower profit year-on-year. We expect the yen to appreciate against the dollar and the euro year-on-year. So on constant currency, sales were higher both on consolidated basis and for the tire segment whereas operating income is slightly lower on consolidated basis and almost flat for the tires segment.
Profit attributable to owners of parent is projected to be about the same as in the previous year on expected gain on the sale of investment securities as we are trying to improve asset efficiency including investment securities. Dividends are projected at JPY 160 per share, no change from the February forecast.
Variance analysis on operating income at year-on-year comparison. We expect price improvement and volume increase to continue into the second half of the year. But given such factors as weaker currencies in Latin America and other emerging markets and a deterioration in conversion costs due to a decrease in sales volume in diversified products, we are projecting consolidated operating income to be down JPY 27 billion. On constant currency, a slight decline.
Projections by geographic segments. Higher sales in Japan and EMEA, lower sales in the rest. Lower operating income in Japan, the Americas and China/Asia Pacific due to exchange rate impact, but higher in EMEA owing to HRD sales increase and others.
This is the summary of first half results and full year projection. By sustaining the strong sales of ORR and 18-inch or above HRD tires as well as by managing appropriate price level, sales mix improvement and steady implementation of cost-reduction measures, we aim to achieve the business targets set for ourselves.
That concludes my presentation. Thank you for your attention.
Thank you very much. Now we are ready to start receiving questions. Please raise your hands.
My name is Sakamaki from Daiwa Securities. So first question to you refer -- is to the volume under which is one of the factors in the consolidated operating income analysis. So focusing on that in the second quarter, the volume was rather substantial -- noticeable, negative factor having dragged in the overall performance, it seems that in various, on this geographic segment, the volume is a factor. The -- was slow. And during the second quarter per se at least, it not reached in the market average. And so what happened, is my first question. And also on the second half, how it is likely to be. The increase of JPY 29 billion in the second half for the volume whereas in the first half was weaker somewhat. And how it will trend from the first half to the second half is my question.
Okay. So the volume question, I would like to answer. So you're saying that the volume on the negative was noticeable. I would like to say that on the quarter-on-quarter basis, it is true, there's some weaknesses there. The -- I mean -- excuse me, the quarter-on-quarter, the volume did increase. However, on a year-on-year basis, the weakness, they persisted. We did announce the price increases in certain geographic segments, and that might have [indiscernible] reactionary, the effect was negative. So under which, it pushed down, had a volume performance in those regions. And particularly saw on their 4-day low rim diameter tires, the volume decreases much affected by the price announcements. However, into the second half, the price hiked. We will stick to the market, under which we would push down the negative effect of that [indiscernible] to the volumes. So it will ease as a situation.
The second half, the JPY 29 billion increase year-on-year, how that will be. ORR, and please do note that there's an effect of the timing stagger for the recognition of sales. And the net timing income, which is staggered into the second half, which is positive in the second half performance.
PSR-OE, TBR replacement segment demand in Japanese and the segment is strong. And then in the Americas market, it is true that in the first quarter or first half, the sales volume have diversified products in the Americas market. This struggled a little bit. But having started already in Q2, the situation started to improve. So that momentum will continue.
In the Asian region, the second half of last year, China and Thailand, and we started having to improve from the -- this operations, which the prices commensurate that was the -- on the business funding. And so that resulted in the purpose for control [indiscernible] having to suppress that, having a little work to get better.
So I'd like to follow that up because I attended the conference made the presentation by Michelin who said that the industry as a whole is suffering from overcapacity. And so the choice for the company is between the volume or the pricing. I would say that -- it seems the Bridgestone, the strategy, is to focus on the pricing rather have the volume for volume sake.
And so is this severe into the second half? Do you have any ideas to overcome the situation in the second half?
Okay. The answer is that in the North America, the so-called third brand is a factor, which always has been in our mind. We would like the market to focus more on our major brand, namely Bridgestone. The sort volume has been suppressed, and therefore, other third brand category.
So were you just saying that market will remain to be severe in overall surroundings, therefore, the rest of the year?
Yes. For commodity growth of tires, that is our overall recognition of the market.
Then let's move on to the second question, which has to do with raw materials. Would you break it down further for natural rubber and so on? In Q2, I would dare to point out that raw materials is a factor. It pushed down having your results whereas on the other companies, I'm benefited from that. And into the second half, you show with us your projections and forecast. Again, the raw material as a factor is not going to benefit you as much. So is there any bottleneck?
So my answer -- the further breakdown of the raw material as a factor, the second quarter, natural rubber positive JPY 2 billion, others negative JPY 7 billion or net negative JPY 5 billion.
As I said, negative carbon prices, carbon costs affected this factor most significantly.
So again, I'll repeat that raw material for U.S. seems to be a negative factor more so than at other companies is there anything in particular, maybe unique procurement arrangements and whatnot?
I don't think there's anything unique to us. I also would point out that we're talking about raw material and the costs payable. So we procured from the global markets and the foreign exchange factor, and then for instance, if European currencies are weakened on the local currency basis, that would mean the raw material -- the prices payable that would -- they feel [indiscernible] headwind. So we say raw material as a factor, but it's not so simplistic and straightforward as we see this single number.
Let us move on to the next person.
My name is Yamaoka of Nomura Securities. My first question, again, had variance analysis in the operating income. Thank you very much for showing income that changes in accounting policies plus TomTom consolidation. I would like you to please go into further details, numbers, the background, first half as well as on the full year projections. So as I see the total SG&A, it seems that as you just sit down to your guidance on a full year basis, about 2/3 of that downward adjustment is explainable by this SG&A as a factor. So would you like to analyze that further for me?
Thank you very much. My answer is regards changes and accounting policies and TomTom consolidation.
Accounting policies in the Americas business operations conventionally -- and we netted out net income and expenses, for instance, in our car business, and that is what we used to do. Starting this fiscal year, there was income and expenses are shown with the gross numbers. So this affects our -- the operating income this year on the annual basis, it is some JPY 28 billion.
And then for the TomTom consolidation. As you know, on the TomTom, it's the newly consolidated company in our group [indiscernible] of this year. So TomTom's SG&A as far as for consolidated purposes and by [indiscernible], it is subject to goodwill amortization. And so we have to reflect that as we speak up of TomTom SG&A.
So JPY 28 billion on net -- does that mean that as we go to the others factor, then they would come back to you, it's a positive number. So our net is more or less flat.
Yes. That is exactly correct. Almost the same amount comes back to us, and there was a positive number in the others factor.
Okay. And then TomTom consolidation effect, so what I should do is that -- I'm looking on Page 14, for instance, what I should do is that JPY 41 billion is changes in accounting policies plus TomTom consolidation for year. And then if I were to subtract JPY 28 billion, which is the accounting policy changes, then I know what is in the TomTom effect. That is exactly so. But then the TomTom business operations, as I remember, the various data that you shared with us at the time of the acquisition of this entity, it seemed that TomTom did generated sales and profits. What happened? Is it getting risk?
No. I'm not saying that. The TomTom is duly profitable. They generate their own net positive profits. But if you do make this consolidated operating income and analysis, as I explained and you accepted, SG&A-wise and then there's the TomTom element, which is part of the negative, but then to happen that we received it back in the others factor.
So after all that you say that TomTom is the magnitude of effect, we [indiscernible] consolidated operating income is not that sizable?
I'd say yes.
Okay. The second question. If I were, I would like to pursue it further. You made downward adjustments to form the original forecast of JPY 410 billion to JPY 375 billion operating income that is to say. This is all by a factor in line with these various analysis, would you explain further?
Yes. The biggest factor after all is as you point out and -- it is true, volume. Volume North American TBR, the sales volume. As you know, this is from market where there hasn't -- there was the introduction from the antidumping carbon duties as far as countervailing tax. And relative before that, last-minute demand entered protest that resulted in the rather sizeable level from the delevered inventory, which, of course, affects our businesses.
Into the second half, we expect to have that in this situation we will get better and better so that by the final quarter, we'll be more or less back to the normal conditions. However, for the third quarter having this effect will remain somewhat.
Secondly, in Asia for volume during the first half because of general elections, the people were not buying as aggressively as otherwise. In the second half, maybe the recovery of the market in terms of the purchase performance by customers and by the market would not be as much as we had originally anticipated. And then also, it's in the volumes of sales decline that would worsen the conversion cost on that situation. We have to remember that. But there are some positives, which is to say that in Europe and the Americas, high rim diameter under the category, the larger in sizes, then that positive effect, and will be, if anything, bigger than originally anticipated. And that, of course, we will be include it in part of the other risk factor.
So you say after all that is volume, and volume being the largest factor affecting you on the full year performance.
Yes.
Let us move on to the next question.
Citigroup Global Markets Japan, my name is Yoshida. For ultra-large-sized ORR, it is not by merge, but you adjust that down to your guidance on a full year basis, and therefore, 115% to 110%. So you did mention that relatively minor factors such as the effect of the timing stagger? Or is there something that we should take note of which may be a sign of deceleration of this particular data market segment? I just like to know that.
And secondly, the focus by geographic segment. I'm looking at on the Page 15, operating income by the geographic segment. And if you go through the -- on the quantitative, the analysis, I would appreciate that particularly for Japan.
At question number one, ultra-large-sized ORR. As you show that we indicate under the performance by rubber weight and we saw ultra-large-sized ORR as a category. But even within that category, there has been changes. They form the emphasis on the 63-inch ultra-large-sized ORR tires to the slightly lower and the diameter -- rim diameter ultra-large category still. So the size has been changing under which pushed down the rubber weight for this category. So that is point #1. It's not as though the overall demand situation for this category is expected to change.
Now the second question from here, the operating income by geographic segment. Japan is a geographic segment. Currency exchange is a factor, which has been subject to review. But even bigger than that, it is the sales volume. There were some exports from Japan to the -- sorry, export markets under which they slowed down a little bit in their projection and of course, under the FX exemptions.
Also, SG&A, it's a little bit of a negative including logistic costs. It's bigger in amount that recently under planned for fiscal year. Out of this is for Japan. The Americas, the next geographic segment, volume. TBR tire sales volume. And also in the diversified product and business, the situation has just been back coming into the original under planned level that have been started already in second quarter, but it was not enough to offset the slower, the performance, in the first quarter.
Europe, this is the geographic segment where basic tone is stronger than the original plan owing to the improvement of the mix. The mix is better than what was announced back in February.
Finally, Asia, JPY 4 billion minus -- it is lower than the original projections. I talked about sales and volume situation, how -- although we had anticipated having the stronger recovery of the geographic segment, and the Asia maybe not as much in the second half. So that is our analysis behind this lower guidance for Asia.
Let us move on to the next person.
Kakiuchi from Morgan Stanley. My question number one, waterfall chart, operating income of various analysis. To the right, others as a factor for the first half, minus JPY 18 billion. For year, it's JPY 10.3 billion. I understand that it is the year-on-year analysis and also there are various sub factors. But I would like to know what's included in this others factor.
And my second question has to do with the recovery of the profit conditions of your diversified product business. Recovery, yes. But on a full year basis, this segment as a business has been subject to have net to the lower adjustment. So I'd like to know the situations the Japanese diversified product business and what is the pace of recovery, what is the current conditions and what would you expect the situation to be.
First, others. The breakdown, first half versus the second half. The major items would include the volume increase from the first half to the second half. And with this, the conversion cost will improve. And as was mentioned earlier, there is impact of mix, positive impact be greater than the February projection and unrealized profit in inventory. And for the first half, minus JPY 6 billion impact whereas for second half, no change. So these are the major items and added with some smaller items. All put together, we are projecting an improvement from the first half to the second half. And also an impact of consolidation of TomTom. For the second half, we will feel the effects on a full 6-month basis. For the first half, only 3 months. For the second half, full 6 months, and that's another positive.
The TomTom consolidation and also the Americas changes in the accounting standards. This positives you mentioned are in others?
Yes. Both are in others. So the positive in SG&A are included in the others. And as for the diversified products, as was mentioned earlier, for second quarter onward, things are proceeding in line with the forecast although the effect of negative in the first quarter would remain. As for chemical and industrial products for first half, in line with the projection in Japan. For second half, the business restructuring cost is to be incurred as planned. Some of the chemical and industrial products go to OEM. And with the decline in automotive production, we are expecting some negative decline.
Yamaoka from Nomura Securities.
I have a question on price. In what geographic areas, what activities are being carried out? And if possible, could you explain where the price hikes are taking root and where it's not and how they are reflected in your projection? Could you elaborate on that aspect?
And on a global scale volume, it's becoming more challenging. Do you still think that the environment will allow for the price hike? And while raw material prices are coming down, can you still implement price hike. In Japan, you are citing higher freights and transportation expenses for the price hike. Can you elaborate on that as well?
As for price hike, we have made announcements in different markets. For example, for North America primarily for TBR, we have already made an announcement. And also for Europe, again, primarily for TBR, we have made announcements, some announcements were made last year. And for Japan, as you know, price hikes starting in August. And in Asia, for example, in Thailand, price hikes started in August for trucks, buses tires as well as PSR. We have already made that announcement. Now in the various analysis, we are showing the price factors as well. And as for price, we believe that the impact would be in line with the projection made in February.
I see. Now looking at the current environment, demand is declining and raw material prices is declining. Conventionally, price hikes were raw material price-driven, but now there is a move to implement price hikes based on other factors. In fact, that is what you are doing for the Japanese market? What do you think of that movement as a company and as industry?
Well, prices, of course, are looked at on a market-by-market basis. Whether price hikes are well accepted or not, there's differences that are taken into consideration and are reflected in our projection. They are non-resource -- raw material cost-driven aspects. In Japan, we clearly stated logistics cost. But overall, cost impact is getting greater. And of course, we'll try to absorb that as much as possible, but the remainder will be transferred to the selling price. That is the basic approach. And that is true for Japan and, to a certain extent, in Europe and North America as well.
Now looking at the raw material prices, it really depends on how you make the assumptions. In terms of the first half versus the second half, our projection assumes higher raw material price for the second half than for the first half. The prices have not yet achieved the minimum cost basis in certain areas. And in light of that, over the medium to long term, we believe that the price will move towards the minimum cost base. And if not, we believe that it will move in that direction gradually, and that would be the basis of our second half projection including the price projection. So should we find that prices are not rising in line with the raw material price movement, then we will not be responding to these changes in a rigid manner, but we will take a more flexible response in line with the market movement. So the raw material price and the selling price are in line today when one changes that would, of course, affect the other.
Sakaguchi from Mizuho Securities. I have 2 questions, both related to the sales forecast for the second half. First is on North America. Mix, especially TBR replacement versus OE, you have been saying that because the demand for OE is more aggressive. Your production is geared towards that demand for TBR OE, I think your year-on-year projection is a decline. Can you explain the changes in the markets? And I think you were talking about the production constraint in the past? Has that been resolved? That's my first question.
My second question is on China/Asia Pacific. For second half year-on-year, you are projecting sales recovery. Earlier you said that it's not as strong as in the original forecast. But can you talk about the current situation in terms of China versus the rest of Asia, especially for the Chinese market? Last year, you deliberately controlled the sales volume. And based on that, can we expect a growth year-on-year for the second half?
First, North America TBR. It's not related to the production capacity constraint as was mentioned earlier. The delay inventory level is high due to the antidumping and countervailing duties being introduced hampering our sell-in. So it's not a matter of prioritizing the supply into OEMs or production capacity constraints. Those are not the factors.
And for Asia, second half volume. Yes, in China, last year, since around the second half as part of the sales reform efforts, we deliberately controlled the volume. And therefore, in China, we do expect a large growth year-on-year.
And regarding the price level, this started in the second half of last year, and the effect has all but subsided by the end of the first half of this year. So we expect recovery in the second half.
Looking at the Chinese market overall, what is the current situation? And what's your projection for the second half?
There is the effect of U.S.-China trade issue. And so in terms of production goods, we do see some decline in the movement of goods. And so maybe demand could be slower or smaller than the original forecast. But due to the factors that is specific to Bridgestone, we expect growth year-on-year.
Kakiuchi from Morgan Stanley again.
I have a question relative to the revision to the operating income or the revision to the forecast for lines below operating income. For nonoperating items, you are expecting deterioration by about JPY 10 billion and yet the revision to the net income is around JPY 10 billion. Is this something to do with the increase in gain on sale of investment securities? Could this be the tax effect?
As I stated during my presentation, including the investment securities and other property, plant and equipment, we are reviewing the asset efficiencies. And accordingly, we expect more extraordinary income more so than the original forecast. So it's not the tax rate issue or anything of that nature, rather it's the extraordinary income greater than the February projection. That's the major factor.
What was included in the nonoperating income in the original projection?
Some of it has been transferred to the extraordinary income, and that is part of the factor.
Sakamaki of Daiwa Securities again.
I have a question for clarification. I'm looking at the various analysis on operating income. You said that the volume change is the biggest factor. But since you have changed the format of disclosure, can you elaborate on the factors for the downward revision?
I think it's the volume, that's the big factor, but I just want to make sure.
And another question for Mr. Eto, if I may. In your original forecast to us, it appeared that the second half projection was more challenging than for the first half, and I think that is part of the revisions that you have made. May I ask why it is that you came up with rather challenging projection for the second half? And I think you were expecting debottlenecking in the production constraints, but as you made the revision, how much did you relax the projection for the second half? In other words, are there still elements of stretched goal in your revised projection?
I just want to make sure I understand your question. You are comparing the February projection and the August projection, and you want to know the factors for the change, correct?
Yes.
First, ForEx, about plus JPY 1 billion; raw material, depreciation, slight positive; price/mix volume, minus JPY 13 billion or so; price, minus JPY 1 billion compared to the February projection; volume, minus JPY 33 billion; and mix, plus JPY 21 billion, which includes the impact of changes in the accounting policies, minus JPY 28 billion. So the net effect is minus JPY 8 billion. The main factors are as was mentioned earlier, decrease in volume resulting in the deterioration of the conversion cost to be canceled out by the improvement in mix.
This is Eto speaking. In our February projection in terms of year-on-year growth, the second half projection appeared more ambitious at least for [indiscernible] wise. Now the way we develop our projection is, since we have the SBU system, each of SBUs will present the figures with the commitment to achieve that, and those will be added in our projection. And then we will look at some constraints on a global scale in terms of supply capacity; developmental capacities, et cetera, and make overall adjustment. But each SBU is responsible as initiative in deciding on the projection.
Looking at the results for the first half, some of the sales or the sales volume were short of the forecast. Would this continue or would this improve in the second half?
That was revisited, and we decided that we need to revise the forecast, in particular, for North America and Asia. That will be the backdrop.
Now the revised projection. Does that still have the element of stretched goals? To what extent can we really commit and achieve in the remainder of the year in 6-month period?
The leaders of each SBU made the commitment and came up -- came out with the revised figures, which is what you see there.
The first half, that's the result. It's a track record. So for the second half, to what extent are the profits achievable is the question?
Very broadly speaking, we are expecting an operating income increase of about JPY 60 billion. And this would come from, for example, the snow tire sales in Japan, which was almost new in the first half. So with the sales in the second half, there'll be an increment in the order of tens of billions of yen. And as CFO explained earlier, the recognition of unrealized profit in inventories will be reversed PL-wise between the first half and the second half. These 2 factors alone would add up to close to JPY 60 billion. And with some ups and downs, the net increase is JPY 60 billion. So in that sense, the revised projections were developed in a rather straightforward manner.
This concludes the earnings briefing for the first half. Thank you for your participation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]