© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
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.
Ladies and gentlemen, thank you very much for attending our online presentation of financial results for the First Half Fiscal 2020 by Bridgestone Corporation. We choose the style of online presentations. Please be aware that remote connection means are being utilized here. We will do our very best, but if there's any disruption in the quality of the sound, please excuse us.
Presenters: Representative Executive Officer, Global CEO, Shuichi Ishibashi; Representative Executive Officer, Global COO; Masahiro Higashi; Corporate Officer, Global CFO, Naoki Hishinuma.
So the 3 presenters from the corporation. At this juncture, I am going to hand it over to Naoki Hishinuma, our Global CFO, for the financial results presentation.
Thank you very much. My name is Hishinuma, CFO. Thank you very much for your attendance on the occasion of presentation of financial results first half fiscal 2020.
So I am going to present the material to you. Here is today's agenda. I am going to start with business and financial performance for the first half fiscal 2020.
So COVID-19 pandemic impact on our operations.
Market conditions. Emergent declarations by countries worldwide stagnated or suspended global economic activities, which pressed down the demand on tires. Into the month of June, some signs of recovery, however, ongoing caution is required still. Under such circumstances ORR and TBR tires replacement market had drop in demand, that was quite imminent. But at the same time, the continuation of relatively strong demand for high rim diameter tires, above 18 inches, demonstrating steady growth.
Tire productions. Given the government policies and demand declines, we suspended at certain plants centered in Europe and North America, the operations. But operations since then have resumed at all plants with operating rates being raised in a phased manner.
Supply chain. Shortened operations and reduced delivery frequencies, certainly. However, mindful of supporting society held at all sites in all countries and keeping safety first, as always. Deliveries and the maintenance of sales networks in almost all regions were there, thanks to the efforts by the operations.
And then in the first half this year, 2 points noteworthy. Point number one, crisis management. Cash-oriented management which turned to flexible funding measures and a rigorous review of cost and investment. In terms of the refunding policy, as we explained, mindful of the possible prolongation of the COVID impact, we enhanced liquidity. And under such circumstances, as you can see, high credit ratings have been maintained despite the impacts of global COVID-19 pandemic.
Cost and investment reviews. From mid-long term perspective adopted, we rigorously selected the investments. So where necessary, for our mid-long term future growth, we continue with investing activities, however, with rigorous selection and maximizing returns and cash flow. Operating expenses and investment are likely to be significantly lower than initial 2020 plan.
Reallocation of resources based on mid-long term business strategy. Prioritization of resource allocation into businesses promising guaranteed returns with focus on core business and clarification of businesses to receive resource allocations.
Now I would like to move entirely to the performance results through June. Business environment first. Currency exchanges. Stronger Japanese yen against U.S. dollar and euro versus the prior year. Raw materials prices, both for natural rubber and crude oil, were lower than in the prior year. Tire demand. Particularly, in Europe and North America had weaker global demand versus prior year due to the COVID-19. Huge drop, especially in the PSR by product and OE by channel, but REP segment held up very well.
Tire sales growth for the first half fiscal 2020. PSR and LTR, 72% over the prior year; TBR, 78%. Because of the OE assembly shutdowns, tire sales and growth suffered. However, as you can see, we did have a very good performance in certain areas, such as the PSR high rim diameters above 18%, quite strong, relatively speaking.
ORR tires sales. Ultra-large, large, small and medium-sized ORR tires, particularly in the replacement market, showed resilience.
Now on to the consolidated results for the first half fiscal 2020. Revenue, JPY 1.355 trillion, which was basically 20% down year-on-year. Adjusted operating profit, JPY 48.3 billion, was down from the prior year. And then as you can see, in the Q2 alone, JPY 1.6 billion minus. The profit attributable to owners of parent has impacted by nonrecurring items, such as impairment losses made in the red ink had to be recorded for the first half. This is really the first time since the Lehman Brothers failure. By the way, I do have the subsequent page to go through details of nonrecurring items.
Analysis of adjusted operating profit for the first half fiscal 2020. Business environment has been quite severe. And in that, we put emphasis on the preservation of same prices and the expense control. However, the raw material costs were better. However, the volume fell significantly. And also in Others category, conversion cost risen because of the lower production and the effect of COVID-19 altogether. So all in all, JPY 103.9 billion lower from the first half of 2019 to first half 2020.
Financial results by segment. All regions suffered from the impact of the COVID-19. So the sales volume was down substantially, particularly in Europe and North America, planned suspended operations for a while. So they're pushing down the revenue and the operating profit. Particularly so in Europe, Russia, Middle East, India and Africa segment, as you can see, they had to record red ink in the consolidated adjusted operating profit, all because of the negative environment.
Now starting today, we are going to review financial results by product. This page is for tire businesses, passenger tires and light trucks. JPY 629.2 billion revenue. And adjusted operating net profit ratio, this really affected the fixed cost burden as well as the suspended operations. We took a toll on the operations, 1.6% was the ratio.
Truck and bus tires, JPY 298.2 billion revenue with 5.1% adjusted OP ratio. Strength of the retread operation was quite supportive in the truck and bus category. So in comparison with the passenger tire category, the drop in operation was more limited in the truck business -- truck, bus tire business.
Specialty tires. Revenue, JPY 159.7 billion with OR tires, aircraft, agriculture machinery and motorcycle tires. As we can see, relative from the 2 other categories of the segment, the OP ratio of 16.2% showed relative resilience.
On to the next page, by product, here for Diversified Products Business. Revenue JPY 244.7 billion with adjusted operating profit of minus JPY 9.2 billion. Broadly speaking, Diversified Products Business comprises chemical and industrial products business, mainly in Japan, accounting for slightly over 40%. And a similar percentage for Diversified Products Business in Americas and a little above 10% for sports and cycle business.
Diversified Products Business in Americas with the focus on roofing materials, recently -- or at present is doing quite well on one hand. On the other, Japanese chemical industrial products business with lower-yielding products have presented the business portfolio issues, particularly so, therefore, in this first quarter, as you can see, the results in terms of the revenue was smaller.
Balance sheet and cash flow highlights for the first half fiscal 2020. Total assets, JPY 4.147 trillion. Accounts receivables was lower. This in comparison with December 31, 2019, roughly JPY 130 billion more. Equity ratio came down by 2.3 percentage points from December end 2019. So it was 52.7%. I'd say that the strength is preserved here. Free cash flow, expenses, investments and/or inventory, rigorous control was executed. So although the business environment continued to be quite tough, the positive free cash flow that was recorded at JPY 41 billion.
Now nonrecurring items for the first half fiscal 2020. Again, impacts of COVID-19, including impairment losses, as ordered and by governments and official requests impact of cancellation events and plant shutdown, not to mention business and plant restructuring expenses, such as the transfer of the unit bath business, which has been announced to you already. So altogether, JPY 28.5 billion worth of adjusted items were recorded for the IFRS in the adjusted operating profit. And also TireHub in the United States, which is a jointly controlled venture in the states, significantly impacted by the COVID-19. So JPY 17.3 billion was recorded as the impairment loss on TireHub sales.
Next, consolidated projections for fiscal 2020. Here's the assumptions of our business environment surrounding Bridgestone Group. Currency exchanges. Stronger Japanese yen against U.S. dollar and euro versus the prior year. Raw material prices, both for natural rubber and crude oil, are assumed to be substantially lower than the previous year. Global demand. Moderate recovery is expected in the near term after bottoming out in the second quarter. However, we dare to assume that there's contributed demand drop again due to the second wave of the COVID-19, which will be forecasted over the final quarter. However, this second wave impact, we assume, will be less than it has been from the first wave of the COVID-19.
Now based on all those assumptions, here's the projections consolidated for fiscal 2020. Revenue, JPY 2.700 trillion, which is on a year-on-year basis, the 20% or more decline. Adjusted operating profit is projected to be JPY 100 billion. Profit attributable to owners of parent -- by the way, the analysis of our adjusted operating profit will follow in subsequent page. Profit attributable to owners of parent has not been determined yet because it is difficult to reasonably calculate the result at this time due to the effect of the spread of COVID-19.
This is the variance analysis of adjusted operating income for fiscal 2020. While expecting such positive factors as the improvement of raw material costs and the effective cost containment, we are projecting that a large year-on-year decrease in volume will continue in the second half, probably because we've factored in the effect of the second wave of COVID-19. Continuing from the first half, we expect that the decline in sales volume and the accompanying worsening of processing expenses will cause a large decrease in profit for the full year, down JPY 235.7 billion year-on-year on a consolidated basis.
Lastly, but not the least, revision of the dividend forecast. We consider shareholder return as an important management item. Our basic policy is to work on improving operating results, while enhancing management foundation in preparation for future business operations. We are to carry out shareholder returns while maintaining an appropriate financial position and securing the internal revenues necessary for future growth investments. In determining dividend payments, we make comprehensive evaluation of such factors as business results and financial condition for the relevant fiscal year, medium-term earnings forecast, investment plans and cash flows. Based on these considerations, we strive to live up to expectations of shareholders by making stable dividend payments, targeting a consolidated payout ratio of 20% to 40%. And as for the current fiscal year, in light of challenging operating environment, indicated by loss attributable to owners of the parent recorded in the first half, we have decided on an interim dividend of JPY 50 per share. The year-end dividend forecast is undecided because the full year earnings forecast cannot be made at this point. Your understanding is appreciated.
That concludes my presentation. Thank you for your kind attention.
That was CFO, Hishinuma on the fiscal 2020 first half results.
Next, Shu Ishibashi, Global CEO and Representative Executive Officer, will go over the progress of mid-long term business strategy framework.
Hello, everyone. I am Shu Ishibashi, Global CEO and Representative Executive Officer. When we announced our mid-long term business strategy framework last month, I said that we will update its content and progress in a series of 3 announcements in July, August and September. Today, as part of that plan, following the first half financial results and the full year forecast explained by CFO, Hishinuma, I will talk about the progress and the background of the mid-long term business strategy framework using some data.
I will cover these topics in this order. Toward the realization of mid-long term business strategy framework, we will build our unique business model through our core business, the Tire & Rubber Business, and the growth business, Solutions Business.
The base for our entire business is the Tire & Rubber Business that produces and sells Dan-Totsu products. We will expand the Solutions Business that creates new value and sales value by collecting and utilizing various data from tires and mobility. In this slide, the upper chart shows the change in our group's operating profit and the lower chart shows our group's profit share in the tire industry over the past 5 years. Regarding our business performance over the past 5 years, although the sales are almost flat, operating profit went down by JPY 190 billion. The main factors, excluding the impact of foreign exchange loss or the high cost structure due to the recent increase in investment and operating expenses and the fact that pricing has not improved enough to eliminate negative headwinds in raw material price and inflation. Taking these points seriously, we will implement robust expense and cost structure reforms globally, including purchasing, logistics and restructure of production footprint and business and strengthen global price management.
As shown in the lower chart, the profitability of the tire industry has been decreasing. Although we have maintained high profit share with our global brand strength and expansion of high value-added product sales, we have strong sense of urgency in this situation.
Here is a breakdown of fiscal 2019 sales of our tire business by product category. Sales of passenger car and light truck tires were about JPY 1.7 trillion, with the operating profit margin of 10%. Sales of truck and bus tires were about JPY 800 billion, with the operating profit margin of 10%. Sales of mining, aircraft, agriculture and motorcycles tires were about JPY 400 billion, with the operating profit margin of 23%. High operating profit margins, mainly in mining tires, drive our profits.
These charts show fiscal 2019 sales breakdown of our Diversified Products Business. Chemical and industrial products make up about half of our Diversified Products Business. Historically, we have had a large number of businesses in this category and have continued new entries and withdrawals in product categories, such as electronic paper, EVA film, fender and bathroom unit business.
Diversified Products Business in Americas contributes to 38% of sales, and the sports/cycle business contributes 13%. Regarding our sports/cycle business, we announced our withdrawal from the tennis business in April. And we will continue to evaluate each business from the perspective of its contribution to the corporate brand and portfolio. We will continue to make bold moves and optimize our portfolio by clarifying what we do and what we do not do. As mentioned in July, we will first secure a strong solid position in this industry and then change the competitive structure entirely. Looking at this situation seriously, we are already implementing various measures for both core business and growth business.
In terms of rebuilding earning power in our core business, we will proceed with 2 pillars: reformation of expense and cost structure and operational excellence. These 2 are areas that we know can be optimized on a global basis. Based on the results from the past 5 years, we started from reforming expense and cost structure. We will take up one step further, including a thoughtful restructure of global production footprint, business restructure, cost reforms, strict selection of investments and thorough expense management throughout all SBUs.
Regarding operational excellence, we will focus on these 3 areas: first, strengthen Dan-Totsu product strategy; second, regarding the improvement of manufacturing, we are working on improving our ability to produce premium products based on the idea that to manage manufacturing is to develop people there. Returning to the basics, we will set appropriate KPIs globally and strengthen the foundation of manufacturing, including making maximum use of existing equipment and improving productivity. And third, in terms of strengthening sales in the premium category, we will enhance wholesale and retail price management and strengthened premium channels, including premium e-commerce.
The core of core business is Dan-Totsu products. To enhance premium product strategy, we started visualization to monitor our product competitiveness. In product development, we will implement commonality and modularity and reduce SKU, the stock keeping unit, based on the concept of simplification and differentiation. Replacing the conventional individual development, we will create additional value throughout our end-to-end value chain by promoting efficiency through commonality, sharing several tire components such as tire casing/ belt and modularity, combining common tire components with the competitive tire tread rubber and parents, which can be customized to market needs.
Currently, we are aiming to reduce the number of modules for passenger tires for the Japanese market, which now total 30 to 40 types by size to about 5 types by 2025.
In addition, it is important to utilize intelligence from the market for Dan-Totsu product planning and product development. By collecting real data through our strong field engineering teams in the markets and digital data of tire and mobility and providing them to engineering chain, we will strengthen our product strategy and product development as value spiral up.
To make these mechanisms work, in July, we reorganized the strategy department that integrates the functions of product strategy, field engineering, digital blending and solution planning and are working to strengthen the end-to-end Dan-Totsu product strategy.
Next is our Solutions Business as our growth business. This is a profit pool in the automotive industry comparing 2035 to 2017. The left side represents the profit pool in the current mobility business field. And the right side is that of the future, featuring mass and case.
Overall, the market profit is projected to multiply by 1.7x to reach USD 380 billion in 2035, which means the mobility business will become even more attractive. Although we anticipate negative impact of COVID-19 to continue until 2022, this trend will not change over the medium to long term. We will address this field with our Solutions Business while leveraging our strong core business. We have already developed a unique, sustainable Solutions Business model and have been implementing various Solutions Business globally. Of those SBUs which have strengths in each area leave other SBUs centers of excellence to expand such solutions globally with agility.
One of our core competence we built through the years is a real global channel network. We have been developing it as a solution basis in line with the evolution of our business. There are more than 10,000 stores of passenger car tires, approximately 3,500 stores of commercial tires and approximately 500 retread shops for trucks and buses in our network. Through this Dan-Totsu service networks, which provides Dan-Totsu products and Dan-Totsu services in combination of real and digital, we will expand our Solutions Business globally. Our Solutions Business related sales consist approximately 15% of group's consolidated sales in fiscal 2019. The Solutions Business related sales, which is different from the conventional tire product sales, includes retread sales, maintenance service sales in our equity stores, solution contracted sales of trucks, buses tire, aircraft tires and mining tire businesses. We will expand these areas of business as a growth business.
As shown in the left chart, our Solutions Business is in a more resilient position than premium, strong mining tire business. These charts show the operating profits of global TB retread and Webfleet Solutions. Even under the difficult first year of 2020, they showed solid results, retreads close to 20% and Webfleet Solutions, 25%. Expanding the composition ratio of the Solutions Business will lead to improvements of our earning power.
I am now going to introduce Mining Solutions business, which I did not explain in July as an example of growth business. Mines are one of the toughest environment for tires. In mining vehicle, with a vehicle weight of approximately 240 tons and a loading rate of approximately 360 tons, have a load of approximately 100 tons per tire. At mining sites, it is important to increase fleet availability and to transport more minerals per vehicles faster. On the other hand, operations differ by customers, based on the type of minerals, the scale of the mine, the number of vehicles in operation, the condition of the road surfaces, et cetera. Customers require, not just high performance products, but products with service components appropriate to their unique operation.
As we released today, we launched Bridgestone MASTERCORE, which is a Dan-Totsu mining tire product. It has been well received by customers in major mines all over the world who have already used it in test marketing and we will gradually widen our expansion to other customers. Bridgestone MASTERCORE is a Dan-Totsu new product with ultra-high durability based on the combination of our unique new technologies, including steel code and other materials, structure and processing engineering. Bridgestone MASTERCORE is equipped with the anti-rust steel cord, which applied a unique metal surface coating technology on its tire frame. This is the industry's first steel-coat surface treatment technology, innovatively improving the adhesive strength with rubber. By combining with a unique tire tread design, which include the tread surface, MASTERCORE has dramatically improved durability without sacrificing the other performance. It is these unique technologies, Bridgestone MASTERCORE can be customized to each customer's need and operating conditions of each vehicle by improving required tire performance without sacrificing the other performance. During the test marketing in mine customers, MASTERCORE provided sufficient tire performance without sacrificing other performances.
In Australia, it contributed to customers' productivity by enabling 6% larger load and providing 14% longer tire life. In Mexico, it made customers' vehicle run 5% faster. And in the United States, it helped loading 12% larger load.
In this way, MASTERCORE can offer a customized proposal. Because one MASTERCORE product can cover the performance of several existing products, we can reduce the number of products and SKUs and create more value through value chain. We launched MASTERCORE in 63-inch ultra-large tire products, and we will expand the tire size range.
Then let me talk about the Dan-Totsu Mining Solutions Platform. We completed the acquisition of the iTrack Solutions business from Transense Technologies, a U.K.-based company, on June 25. As part of the acquisition, approximately 40 digital experts from iTrack joined our group. In addition to the strength of MASTERCORE in the core business, we will further accelerate our Mining Solutions business with a strong digital iTrack Solutions Business.
iTrack is a next-generation tire monitoring system, especially designed for mining vehicle tires. In addition to tire data, such as tire temperature and air pressure that can be collected by all generation tire monitoring system, you can also collect vehicle's data such as location data and running speed data. A 24 hour, 365-day monitoring system based on the subscription contract. It can allow us to obtain and analyze this data in real time by providing customized service such as mine layout and vehicle operation according to the unique situation of each mining company. We will support mining companies by contributing to improved productivity and profitability.
We offer our solutions by partnering closely with customers through 52 sites in Dan-Totsu service network, covering global major mines to support mining companies all over the world. We have 2 mining solution centers in Australia, and iTrack monitoring center in U.K. and Chile, where they collect real on-time on-site data and connect them to our technical centers digitally to utilize in product development. Also 43 mines globally have already tested our Mining Solutions with MASTERCORE and evaluated its excellent performance.
The new Dan-Totsu product, MASTERCORE, will continue to contribute more to the core Tire & Rubber Business. And for the future, we will expand our Solutions Business with a strong real customer-focused on-site service in the powerful digital iTrack Solutions Business to holistically support the entire mining operation. We will strengthen the Tire & Rubber Business by connecting the data and knowledge obtained through the solutions to the engineering team and utilize this in product development. In parallel, we will create new value in the Solutions Business through improving our unique wear and durability prediction technology. In this way, we can continue to expand and accelerate the spiral up.
Then let me explain the direction of portfolio management. In July, I mentioned that we have started to review portfolio management from a new perspective. In order to implement optimal allocation of management resources, we clarify the role and position of each business from these viewpoints. First, focusing more on the capital cost. Now we are considering to add new critical criteria, such as ROIC, to current management index such as ROA, ROE and OP. And we will also focus on maximizing cash returns and strengthening profit base. We have been studying intensive resource investment and reallocation to the solid profitability areas: core business, retread and Webfleet Solutions to restructure the Diversified Products Business, possibly.
We will continue to build a system that strictly follow the results and returns of our investments, and we will establish rules, such as profitability and synergies between businesses for business divestitures. We will implement Agile PDCA cycle to achieve results towards building a new business portfolio.
Here is a midterm business scenario that includes what I have explained today. In 2020, we still anticipate macroeconomic impacts on the business, including the second wave of COVID-19. Crisis management is our top priority. Safety first is our core value. In addition, we will practice cash-oriented management to target sales scenario planning, strict resource management, asset management and positive free cash flow, particularly while there are still many uncertain factors. As explained by Hishinuma earlier regarding nonrecurring profit, including the direct impact of COVID-19, we will face issues head-on without delaying. In 2021 and 2022's first half, COVID-19 impacts are expected to remain. While continuing to prioritize crisis management, we will also promote rebuilding of our earnings power and strategic growth investment. We will improve profitability by robust reform of the expense and cost structure and operational excellence and will reform into a profitable, more resilient business structure by strictly selecting businesses with high probability of future profitability, on which we will concentrate resources.
Through these reforms, in 2023, we will expand Solutions Business, based on the strong Tire & Rubber Businesses and move forward towards a new growth strategy as a transformed new Bridgestone.
I will talk about updates at the second part of the midterm -- mid-long term business strategy framework with data and results next month at the opening of our corporate museum, Bridgestone Innovation Gallery in Kodaira. We will explain the progress of our strategy from the perspective of technology and innovation with a theme of innovation for solutions. We will determine the style of the event based on the situation of COVID-19 and will announce that shortly. Thank you very much for today and for your time, understanding and continued support.
So now that we have completed the presentations to you, we are ready to move on to the questions and answers.
We are going to start with Mr. [ Horikara ] from RK Inc. Tyre News Agency.
I would like to ask about the impact of COVID-19. I'm looking at the financial results presentation, Page #13, referring to nonrecurring items for first half and impact of COVID-19, I see JPY 23.8 billion. And also, the impairment loss and JPY 17.3 billion. So in total, it's more than JPY 40 billion. So my question to you, how would you expect the second half to be? And also from the standpoint of the Global CEO, what is your observation of the impacts of the COVID-19 in comparison with the Lehman Brothers failure?
Thank you for the question. Global CFO, Hishinuma, I'm sure, will be able to respond to the numbers. But from myself, my assessment of the impact of COVID-19 totally different for Lehman Brothers failure because starting with our customers, everyone working on the front line very large-scale and wide-ranging impact.
So as such, the impact coming from the COVID-19 is incomparably larger than the Lehman failure. And I'd say that crisis management, safety first, that is it. That sense is ever so strong on this occasion. And so be it employees, their families, or the customers, the safety-first is at most in my mind.
And also because it is as dire as it to take this critical situation into our opportunities for the future to try to pursue directly the essential issues.
Handing it over to Mr. Hishinuma.
Thank you. So I'm looking at Page 13 of my presentation, where we talked about the impacts of COVID-19, JPY 23.8 billion number that you quoted. Now what you see here is impairment losses and/or impact to plant shutdown and so forth and so on, the fixed cost burden. So those are the items that we show as impacts of COVID-19. But at the same time, due to COVID-19 demand declined, the drop in sales volume, the lower sales volume pushing up the conversion cost, the worsening of that situation. It's not included here. For instance, as I referred to in the waterfall chart on the production volume year-on-year, minus JPY 121 billion in total. Of course, it's very difficult to carve out the direct impact from COVID-19, but JPY 121 billion worth of negative impact on the year-on-year basis during this half because of the production volume dip.
And as to the conversion cost worsening, it's part of that Others category, in the part of JPY 59.9 billion. I'd say that quite roughly speaking, about JPY 50 billion refers to the worsening of the conversion costs in reference to the lower production volume. So broadly speaking, it's, of course, COVID-19. So we have to remember all of those. Now having experienced that and how we expect the second half to be, so what I did say in my presentation is how we assume that the second wave will come during the final quarter. And then I also said that, however, the impact that we would have to assume from the second wave should be less than from the first wave, maybe about 1/2 of that. I cannot be more exact, but that's my sense.
So let us move on to Ms. [ Onishi ] from Nikkei Business.
My name is [ Onishi ]. My question to you. So in reference to the first half, the profit attributable to owners of parent was negative, but you did secure the adjusted operating profit and also your projection on the point to the positive adjusted operating profit. So what's your assessment overall? And also Mr. Ishibashi, you keep talking about the emphasis on the Solutions Business. That strategy, is there any possibility that the strategic focus may have to be modified somewhat because of the coronavirus?
Thank you for the question. Let me take off that -- the second question. I talked about Webfleet Solutions or the retread operations. Retread operations in the area beyond zone B and zone C for the Webfleet Solutions, mobility solutions. And there, we were able to secure, despite all these difficulties, high level OP margins such as 20%, 25%. The strengths were proven under these difficulties. This sort of resiliency have opened those business activities and business model is there. What more I feel happened that is to be our point of focus to develop and grow. And so more certain, more promising the areas of business and gross business areas are to be on the focus continuously.
Back to the first part of your question. So the COVID-19 first started up in China, and then it started to expand to Europe. Back then, the global management team at Bridgestone Corporation, we had very intensive discussion to conclude that it's going to be under the cash flow management, cash management, free cash flow. So it's different from the normal approach, focusing on the top line and the bottom line boosting. So it's really cash management, resource management, and therefore, they became so very important, and therefore, the regulatory view of investment and expenses. And we did that by region. We did that on a global basis. And we came up with the plannings. By speaking of planning, we have plan B, C, D, as you'd imagine. And for each of the plans, we identified 10% down, 20% down and so on.
So it's that sort of meticulous planning process that we did go through. And as a result of all of that, we did have to succumb to the bottom line loss at the closure of the first 6-month period, which is heavily regarded. But I know that we dared to take on what we had to do, such as impairment losses and so on. So that's good. And also free cash flow is positive. Despite all these difficulties, I'd say that as good news, if anything.
Now for your projections, how you would expect the second half to be, I know different companies think differently. But in our global management team, we conclude that the assumption is that yes, there is going to be the second wave of COVID-19. So it's time for us to brace tight. So -- under these circumstances, rather than thinking about expansion of sales, the boosting of the bottom line, which makes sense under different circumstances, it's not that option that we should choose for now.
Now is the time for us to make sure that we brace tightly, so that even with these severe assumptions that we can fill the maximum.
So moving on now to Mr. [ Kizawa ] from Bloomberg.
[ Kizawa ] here. I have 2 questions. Question number one. Because, speaking of the impact of the coronavirus, mobility has been dampened indeed, be it by car or by airplane. What's your view of meeting when the total distance is moved in travel? And what's your expectation going forward? Question number two, having to do with the cash management. Do you have any plan in the area of financing or the funding?
Thank you very much for those questions. Mobility. Yes, globally, it's been shrinking so dramatically. But moving of what, are we talking about people movement or the movement of goods. As you say, it is correct. People have not been moving about, quite restricted. However, moving of goods, inclusive of e-commerce transactions, my global view is that the active movement of the relatively small goods and parcels, as well as there is a sense of inactivity for the movements of very large goods.
Now COVID-19 impact, our reading for now is that we will see impact and the impact will persist until the first half of 2022. So the severity will persist longer. However, thereafter, our future expectation is that people will start to move about and the movement of goods will become much more invigorated.
Now the second question about cash management. Under ordinary circumstances, it will be about JPY 400 billion worth from the cash at hand or liquidity. Earlier this year, in the spring season, we decided to borrow to the tune of JPY 200 billion, meaning that we have the outstanding balance of about JPY 600 billion of liquidity available. And I'd say that we have the sufficient amount available there to move into the second half.
I also would like to point out some details. This is Hishinuma speaking. Under normal conditions, it's about JPY 400 billion of cash at hand needed to carry out our business operations. However, as of the end of June, we counted more than JPY 600 billion worth of liquidity available to us at present. Therefore, I also agree with Mr. Ishibashi, our Global CEO, there's no concern of the liquidity available to us. And also, we do not have any new financing or the funding plans. But of course, going forward, if the effect of COVID-19 gets even more extended, that will become more serious, then we may have to think otherwise.
Moving on to the next person, who is Ms. [ Tanabe ] from Nikkei Newspaper.
This is [ Tanabe ]. My question refers to -- is that specialty tire category of your tire business, I would like to ask a question regarding that. Relative to passenger tires or truck and bus tires, in the first 6 months of the calendar year, or financial year, specialty tire performance did not dip as much in specialty tires than in passenger car tires or the truck and bus tires. Not necessarily numbers per se, but still, my sense is that your performance results, maybe were a little bit less than your competitors.
At this juncture, Mr. Ishibashi is asking the questioner to rephrase or repeat the question because it was not audible.
Now repeating the same question. The specialty tire business results at Bridgestone that was better relative to the passenger car or the truck and bus tires. But in terms of the peer comparison, maybe you were the most negatively hit by your competitors, like Michelin.
Okay. So that's what I wanted to hear, so you say the Michelin. In revenue terms that you are seeking my observation? I would like to respond to that. So we're talking about specialty tires, particularly speaking, ORR tires. That business is so profitable today as well. And at the same time, the Mining Business, their operations tend to be very volatile. And yet, there is a basic turn from sloping upwardly into the future. Now we have different sized tires, very big ones like ultra-large ORR tires with diameter size 4 to 5 millimeters. For that subcategory, there are 2 companies in the world and it's Bridgestone and that French company. So as long as Bridgestone is concerned, we have the MASTERCORE, the new launch, and also the Dan-Totsu, overwhelming -- overwhelmingly strong tires. So why not focus on that?
And our approach is to work together with those mining companies. So together with the operators, be it global big names like Rio Tinto and BHP, our choice is to work together with them to understand what their issues and problems are. And together with our operators, customers, we come up from the business solution. So that is the conducive to the maximization of the value that they have available in their operations and our sales and revenue will rise.
I also would like to answer from the CFO perspective. Yes, Michelin's specialty tire business came down by 14% in comparison with ours, which fell by 21%, it is that comparison that you're making. But specialty tire category of tire business comprises of various different types of the tires, like mining vehicles, for aircraft, motorcycles and agriculture machinery. Something like aircraft, the tire business, of course, in the aircraft -- in this sector, it suffered very much in during the first half. Demand was dramatically small. So depending upon the particular composition of the subsets within the specialty business, company's experience and performance may differ. So in our case, it has been in the aircraft tire business during first 6 months period that negative stood out more than in other subsectors.
The next question is Mr. [ Kamada ] from Nikkan Kogyo Shimbun.
[ Kamada ] from Nikkan Kogyo Shimbun. You have decided not to announce the full year forecast for profit attributable to owners of parent and keep it as undetermined, partly in anticipation of possible second wave of COVID-19 infection. But some of your peers in Japan have issued guidance, expecting profit on a full year basis. So why is that? Can you explain the reason why you have decided not to announce it?
Thank you for your question. Hishinuma will take that question.
As mentioned earlier, as for full year forecast, we anticipate another demand decrease during the fourth quarter. That is the assumption. And with that, as far as the adjusted operating profit is concerned, generally, by assuming the sales volume, we can make operating forecast, whereas if we are to factor in possible demand decrease, that affects the asset valuation, including fixed assets as well as valuation of the deferred tax assets. And at this point in time, it is hard to accurately project what the impact would be on these valuation items. And thus, we have decided to forecast only up to the adjusted operating profit and keep the rest undetermined.
From here on, we will take questions from analysts.
First is Mr. Sakamaki from Daiwa Securities.
Sakamaki, from Daiwa Securities. I'm looking at Page 4 of Mr. Ishibashi's presentation, recognition of issues, the upper right chart. You are to implement robust cost and expense structure reform and strengthening of global price management. For fiscal 2020, you are expecting a reduction by JPY 100 billion. And I suppose some would be the portion associated with the volume decrease, sales commissions, for example. So how much of this reduction would come from genuine structural reduction? And what part of that would remain in the next fiscal year as an effect? And could there be any further reduction possibilities in next fiscal year onward? And you didn't talk much about the price management. So can you elaborate on how you plan to implement the price management?
As for the specifics of cost and expense reductions, I'm going to defer to our CFO later. Now we have reviewed the results for the past 5 years and have noticed that expenses and costs have been increasing. So we had to take this opportunity, take advantage of this current situation affected by COVID-19 to drastically reduce cost and expenses on a global scale, and this will be the first phase. And based on this, we are to implement further reduction, which should become the new cost and expense foundation of Bridgestone, on top of which, we are to make strategic spending. That's the whole process that we have in mind. And although we haven't made major announcements, we will be restructuring production footprint as well as businesses, which would entail reduction in costs and expenses. And these will all be added up so as to improve on our structure and expense structure. That is the direction that we have in mind. So for the second half of this year and 2021, 2022, as shown in the scenario, shown at the last part of the presentation, we are to rebuild the earning power, which is a major challenge up to 2022. And this would be based on the expense and cost reductions as a main pillar.
As for the price management, on a global scale, we are thoroughly reviewing the retail and wholesale prices. Earlier, I mentioned that we have a network of retail outlets involving 10,000-or-so outlets. And we have a number of equity stores as well, where we can decide on the price ourselves and implement the merchandising plan, the best, better, good and fighting, while clarifying the price positions, generate appropriate value for the customers. And so retail price would have some indication in this matter. And for the wholesale price, we will be looking at the profit base of the distributors and maintain the balance between the sellout position and the wholesale level. So in that sense, from the market perspective, we are reviewing the price structure. We have started this effort. There are performance areas, touring areas, different areas of the tires. Some are doing well, others are not. And that has become clear. And so we are going to address them one-by-one. Those efforts are currently underway.
This is Hishinuma, CFO. Regarding the expense reductions, I think your question was how much was -- of that is the variable cost. I can't give you the details, but roughly speaking, around JPY 30 billion would be the variable cost portion, in line with the top line.
Next is Mr. Yamaoka from Nomura Securities.
This is Yamaoka, from Nomura. I have a question on your Diversified Products Business. I'm looking at Slide 6 of Mr. Ishibashi's presentation. You were showing a pie chart that shows the breakdown of this business. And in terms of operating loss being recorded or not reaching their holder rate, what businesses fall under that category? And also, how do you intend to improve on the Diversified Products Business?
The Diversified Products Business has a long history within Bridgestone. Primarily in Japan and the U.S., we are driving this business. But as you can see, currently, the net sales amount to close to JPY 600 billion, but the operating profit is JPY 200 million, rather bizarre situation. And at this stage, the survival of this business itself is at stake. And as you have correctly indicated, some are profitable, while others are not. And right now, in terms of the cost of capital, profitability, synergy with other businesses and in terms of brand contribution, since in B2C, we have sports and cycle business. So from all these perspectives, we are closely analyzing each business. Currently, given the current difficult situation, we have not yet decided on the details, and we will share with you once the plans are finalized. Examples would be the decision to withdraw from the unit, bathroom unit business as well as tennis business this year because profit was not expected.
And I can't give you the details today, but they are such challenging businesses. And the businesses where profitability is expected, which can leverage the core competence of Bridgestone, we want to continue with those businesses. And I think I can give you more details in September. But the chemical and industrial products business has been transforming with creative ideas. And along that spirit, we need to take up new challenges as well. One example is the rubber actuator project, which is an artificial muscle with AI, artificial intelligence function. This is really an exciting project that can support mobility of the elderly or women, reduce their burden. And in terms of production process, development of robots with more flexible gentle movement, all these possibilities are being pursued. So leveraging our core competence, expected to be profitable. And the social value to be provided to customers' businesses with such potentials would be proactively pursued.
A follow-up question. What will be the target profitability level that you expect from the Diversified Products Business, the overall criteria, if there's any?
As you know, ROA, ROE, operating margin, we do have such major targets. Currently, the situation is rather difficult, but ROA, 6%; ROE, 12%; operating margin of 10% are the key targets. And we have yet to develop the balance sheet per business. So it's not clear, but the operating margin of 10% would be the minimum that we expect. And that will be applied going forward.
Next is Mr. Yoshida from Citigroup Global Markets Japan.
Yoshida from Citigroup. I'm looking at Page 27 of your material, global business scenario. Back in 2019, 2018, the operating margin was around 10%. When can you expect to return to that level? What time frame should we keep in mind? The -- in terms of the expense reduction and its effect, it's kind of difficult to understand. So can you talk from the perspective of profit?
That's a very valid question. And in fact, that would be one important element that is to be included in the mid-term business strategy, business plan to be announced in February. Crisis management, identifying the essential challenges and implementing necessary measures and execute mid- to long-term strategies, those are the 3 pillars that we are working on. And within this scenario, there are so many details that have yet to be discussed further, defined and refined. For instance, the restructure of global production footprint and business, we are thoroughly looking into this, and there have been some candidates identified. Same for the business restructure. And all of them are being examined, same for the growth strategy. Investments into retreading or investments for the Webfleet Solution global deployment, all these are being thoroughly examined.
In July -- or rather in September, the global executive team will sit together in an effort to develop a more concrete plan. And within that framework, we'll be defining the top line and the bottom line targets for each fiscal year. That's the process. Unfortunately, at this point in time, we don't have such details for each year, fiscal years '21, '22 or '23 in terms of ROA, ROE or operating margin. We're not in that state yet. But that will be the major thrust, so that by 2023, Bridgestone will be transformed into a more leaner company. That's all I can share with you today.
Next is Mr. Kakiuchi from Morgan Stanley.
Kakiuchi from Morgan Stanley. I have a question on the second quarter results. The tire production in terms of the tonnage of rubber, according to your supporting material, totaled 240,000 tons, around 50% lower year-on-year and around 40% lower quarter-on-quarter, but your sales volume of tires didn't go down that much and the ORR sales didn't go down that much. So I suppose this big decrease in production volume was in relation to the inventory level, although the balance sheet shows that you are controlling this. So may I ask about your inventory level? And you are assuming that there will be a second wave of COVID-19 impact in the fourth quarter, but demand is currently returning. And I know nobody knows, but if there's no second wave, wouldn't there be opportunity loss if the demand does not go down that much, would there be opportunity loss in terms of production? That's my question.
I would like to respond to the question. There are management team which is following production and sales every week very closely. Especially for the second quarter, we will focus on cash. And as such, inventory has declined significantly. Automobile and truck manufacturers as well as the construction machinery manufacturers are facing volatile environment. We do have to supply responsibly for them. And thus, we will continue to have certain levels of inventory. But we are reducing the size. There are significant differences between areas and regions when looking at the global market. In that sense, we are carefully watching supply chain management more intensely now. For example, in the United States, since the latter half of June, there is a sudden increase in the sales of truck tires. Under these circumstances, we will provide support to cover the shortages from Thailand and Japan, for example. Because we have a very flexible supply chain in place, we will make sure that there will not be any loss of opportunity, which will require detailed sales forecast and production management as well as good business sense.
We are now keeping very close communication within our global team to manage the inventory level while not losing opportunities. We believe that this kind of approach is most important for us now.
Anything to add? Did that answer your question?
Well, now for the second quarter, I believe that production -- or rather inventory had declined significantly. Do you think the inventory level as of the end of June is controlled at on a profit level for each region?
Yes. I believe so.
Well, in addition, because you did not present the regional figures for the sales forecast for the entire year this time, it may be difficult to get the answer now, but are you looking at the potential impact of the second wave of COVID-19, not as for the individual regional scenario, but rather on a global basis?
Obviously, we are looking at things with so much unknowns, basic premises, while trying to formulate forecasts. There's various perspectives for each SBUs and area. But as a global management team, for the second half of the year, we incorporated the impact of the second wave of COVID-19, maybe end of fourth quarter. There would be different impact, depending on the region. For example, China is doing well now. While in the United States, not only the impact of COVID-19, but there seems to be a lot of uncertainties, including those in the political sphere. Europe continues to have difficult circumstances. Southeast Asia and Japan are doing relatively well. But because there are such differences, variations between SBUs, we are not able to yet come up with a very clear scenario for each SBU. As a result, we provided the global outlook. Anything to add?
I am Hishinuma. I believe that there's not really much to add in addition to what the CEO had already stated. Thank you very much.
We do still have some time for Q&A. Ms. [ Tanabe ] of Nikkei, do you have more questions?
Can you share with us the prospect of your capital investment from the term? I believe the amount of JPY 270 billion, which is a drop compared to the previous forecast. Where do the drops come from? And what would you be investing in? But the R&D remains the same, more or less.
For expenses, we will try to carefully limit and reduce what we can, but R&D is our core and life. The numbers reflect a strong effort to generate and secure resources for these expenditures, including those for future strategic investments. As of last year, we still had significant amount of investment for product -- production expansions. Some of these investments had already been ordered. But for those others, we have basically frozen our investment to expand production for now. We are now looking to improve productivity using existing facilities. In that sense, drop in investment related to production is large.
I am Hishinuma, CFO. Basically, it is as was just explained, for investment, production expansion or increased type will be frozen for now in view of the present demand environment. While, on the other hand, in addition to investment for highly profitable products, such as high rim tires, our investment plan will focus on safety, disaster prevention and the environment, which needs to be solidly maintained as our foundation.
Ms. [ Onishi ] of Nikkei Business, do you have any further question?
I would like to have several questions. Questions may be more on the shorter term, but in which region would the restructure of production sites be carried out? Can you tell us the direction? And the second question will look into a little longer span of time. Up until now, tire companies or businesses were based on the relationship with OEMs, which were oftentimes greatly influenced by their unit sales figures. But as you are enhancing your service business, what kind of company or business would you aim to be?
As for the restructuring of production footprint, we have, as I mentioned earlier, 50 such production sites throughout the world for tires. We are now analyzing every one of them at present. There are obviously many with small production capacity. There are also plants which joined us upon our acquisition of Firestone. Some of them are rather old. There are also some which cannot produce high value-added products, but only older, smaller and general purpose items. We are reviewing mostly these facilities now and -- although we will not be able to name specific plants or facilities now. As we draw more conclusions, we will be making announcements.
Now as for the OEMs for passenger cars, construction machinery as well as trucks, they are our extremely important customers. We talked earlier about resilient business. The tire business and the Solutions Business in the age of COVID-19, here, OE business is being really hurt strongly. Because our business supplies part to auto and truck manufacturers to match their production, we inevitably faced decline as well. Fortunately, we do have replacement business, where resiliency has given us quite a large support.
And when it comes to retread or Webfleet, the fleet management or the solutions, they become even more resilient and profitable business with high value-added. In that sense, as we gradually increase the weight of Solutions Business, we will be able to enhance our corporate integrity. But of course, the relationship we have with OEMs are very, very important for us. Although not an OEM, we did announce recently that we will create various values together with Japan Airlines. Similarly, although I will not be able to mention specific names, we are now looking at possibilities for creating new value suites, automobile, truck, construction machinery and aircraft manufacturers by sharing various new information. Our position as partner of manufacturer or supplier is, of course, a very important base of our business. But in addition, we are looking for opportunities to provide various proposals or create new values. In that sense, we are studying certain models with some OEMs which could serve as a starting point for future solutions. As business, in Bridgestone, the rate overall may go down, but the importance not only are the parts manufacturer, but the solution partner will become even stronger and in a very qualitative way.
Also, if I may add, when there is a big increase in the shared, such as case, new car sales will go down in numbers, as all of the auto manufacturers are saying. If so, the number of tires we supply to the OEMs will decline, but we do have replacement tires because in shared use, the operational rate and the usage rate will go up, the demand for replacements will increase. In that sense, it could be said that we will make shift in tires towards replacement and solutions in view of the demand structure.
Did that answer your question, Ms. [ Onishi ]?
We are almost at the end of this session. The next question will be the last question. Mr. Sakamaki of Daiwa Securities, do you have any question?
I would like to ask the final question. I would like to confirm your thinking regarding dividend reduction and the -- undecided end of the year dividend level. Is it undetermined or decided because the net profit is not yet determined? And if there is no second wave of COVID-19 and the business performance improves in the second half, can we assume that it would go back to the previous level? Or you talked about structuring earlier, are you possibly looking at concept of something like equal sacrifices? If you are to carry out bold reform, it may be necessary to have all stakeholders bear some kind of sacrifice. Please let me know about the thinking behind the dividend this time.
Thank you. I am Hishinuma. Will be reviewed and reduce the level of the dividend for the first half from previous JPY 80 to JPY 50. As I have explained, bottom line was in red, a very difficult circumstances. However, we came to a decision based on the comprehensive and balanced consideration in view of the basic policy regarding our dividends, that is to continue to provide stable dividends and also to be able to allow investment for the future growth and to maintain sound financial integrity.
For the year-end, at this point, the dividend is undecided because for the business forecast, we also stated that net profit is not yet forecasted or determined. We are unable to show the profit or the bottom line for the second half. Even for the adjusted operating profit for the first half, it was presented based on certain promises or foresight. As for the business performance, we said there could be changes depending on certain situation. Based on that, we disclosed undecided dividends for the year-end. So if the business environment improves with resultant good performance, then I believe we will revisit the dividend matters, including the kind of factors I described earlier.
Thank you for your participation. We would like to now conclude the Q&A session. With this, we would like to conclude the 2020 Second Quarter Business Performance Presentation for Bridgestone. Thank you.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]